Annual Report and Accounts 2020 Helping you live sustainably, simply and affordably A n n u a l R e p o r t a n d A c c o u n t s 2 0 2 0 C e n t r i c a p l c Group Snapshot At Centrica, we put customers and colleagues at the heart of everything we do, to add value for all stakeholders. Through our trusted brands, we deliver innovative energy and services solutions to help solve customers’ needs, supported by around 7,500 engineers and technicians. We are committed to creating a cleaner and greener future. And we are making big changes to help us get there. That means cutting customers emissions and our own to reach net zero. And because our people are the beating heart of our business, we will continue to champion inclusivity, develop future skills and invest in our local communities to create a better world for everyone. Read more about Stakeholder Engagement Pages 22 to 24 Read more about our People & Planet Plan Pages 28 to 32 Read more about Diversity and Inclusion Pages 29, 48, 52 and 62 Strategic Report 1 Group Highlights 2 Chairman’s Statement 4 Group Chief Executive’s Statement 7 Our Values 8 Our Strategy 10 Our Business Model 12 Key Performance Indicators 14 Business Review 17 Group Chief Financial Officer’s Report – Our view on taxation 22 Stakeholder Engagement 25 Section 172 Statement 28 People and Planet – Non-Financial Information Statement 34 Our Principal Risks and Uncertainties – Assessment of Viability Disclosure Governance 44 Directors’ and Corporate Governance Report 46 Board of Directors 49 Corporate Governance Statement 55 Committee Reports: – Audit and Risk Committee – Nominations Committee – Safety, Environment and Sustainability Committee – Remuneration Committee 84 Other Statutory Information Financial Statements Independent Auditor’s Report 89 100 Group Income Statement Group Statement of 101 Comprehensive Income 102 Group Statement of Changes in Equity 103 Group Balance Sheet 104 Group Cash Flow Statement 105 Notes to the Financial Statements 194 Company Financial Statements – Company Statement of Changes in Equity – Company Balance Sheet Notes to the Company Financial Statements 196 205 Gas and Liquids Reserves (Unaudited) 206 Five Year Summary (Unaudited) 207 Ofgem Consolidated Segmental Statement Other Information 219 Shareholder Information 220 Additional Information – Explanatory Notes (Unaudited) 222 People and Planet – Performance Measures IBC Glossary Unless otherwise stated, all references to the Company shall mean Centrica plc; references to the Group shall mean Centrica plc and all of its subsidiary entities; and references to operating profit or loss, taxation, cash flow, earnings and earnings per share throughout the Strategic Report are adjusted figures, reconciled to their statutory equivalents in the Group Chief Financial Officer’s Report on pages 17 to 21. See also notes 2, 4 and 10 to the Financial Statements on pages 107, 111 to 117 and 128, for further details of these adjusted performance measures. In addition, see pages 220 to 221 for an explanation and reconciliation of other adjusted performance measures used within this document. Group Highlights Group Operational Performance Group Financial Summary (Year ended 31 December 2020) Total recordable injury frequency rate (per 200,000 hours of work)(1) Group revenue(1) Adjusted operating profit from continuing operations 2020 2019 1.03 1.06 £20.8bn 2019: £22.7bn ▼8% £447m 2019: £650m ▼31% Internal carbon footprint(1)(3) (tCO2e) 2020 2019 38,368 55,145 Group adjusted operating profit(1)(2) £699m 2019: £901m ▼22% Statutory operating loss from continuing operations £(362)m 2019: £(783)m ▼54% Brand net promoter score (NPS)(1)(4) Group adjusted earnings attributable to shareholders(1) Statutory profit/(loss) for the year attributable to shareholders(1) 2020 2019 +13.8 +15.1 £378m 2019: £419m ▼11% £41m 2019: £(1,023)m Employee engagement(1) Group adjusted basic earnings per share (EPS)(1)(2) Statutory basic earnings per share (EPS)(1) 2020 2019 42% 43% 6.5p 2019: 7.3p ▼11% 0.7p 2019: (17.8)p Total residential customers(5) Group free cash flow(1)(2) 2020 2019 9,217k 9,440k £1,061m 2019: £966m ▲10% Statutory net cashflow from operating activities(1) £1,400m 2019: £1,250m ▲12% Group net debt(1) Net exceptional charge after taxation included in statutory profit/(loss)(1) £2,769m 2019: £3,181m ▼13% £1,356m 2019: £987m ▲37% (1) Includes Direct Energy which is now classified as a discontinued operation. See notes 3 and 12 to the Financial Statements for further information. (2) See notes 2, 4 and 10 to the Financial Statements for definition and reconciliation of these measures. (3) Constitutes a reduction of 58% in 2020 and 39% in 2019 against the 35% reduction target of property, fleet and travel by 2025 (baseline: 2015). (4) Aggregated scores across British Gas Home, British Gas Business, Hive, Bord Gáis Energy, Direct Energy Home and Direct Energy Business, weighted by customer numbers. (5) Total residential customers excludes Direct Energy customers (2020: 2,578k, 2019: 2,782k) to ensure that it remains forward looking, Customers is a driver of long term value. Sustainability Centrica Stories Online Report Find our more about our People & Planet Plan at centrica.com/sustainability Read more about our latest thinking, case studies and insights on the issues that matter at centrica.com/stories Read more about our Annual Report and Accounts at centrica.com/ar20 Explore online: Visit our website to find out more: centrica.com 1 Centrica plc Annual Report and Accounts 2020Strategic Report Chairman’s Statement “ We are clear about the things we need to do to continue the turnaround of our business. We have made good early progress in simplifying our structure, but these are just the first steps in a marathon.” Scott Wheway Chairman Changing Centrica It was a great honour and privilege for me when asked by the Board to take up the Chairman’s role in April. On accepting this responsibility, I had three priorities. Firstly, to ensure we navigated our way through the volatility caused by the impact of COVID-19, protecting our employees and customers. This, of course, remains critical for us. Secondly, to select and manage the transition to a new Chief Executive. I am delighted that we secured Chris O’Shea in this role. Thirdly, to face into and turbocharge our actions for turning around the Centrica business. In a nutshell, we are driving structural simplification to improve our efficiency and, ultimately, deliver growth in our customer-facing businesses. This has necessitated a year of significant change for Centrica. We have faced and taken ownership of the hard issues that have caused our business to decline over the past decade. Although it will take time and require further decisive actions, I am confident that we can create a sustainable future for colleagues, customers and shareholders. Our people went the extra mile during COVID-19 The Board appointed Chris O’Shea as Group Chief Executive in April. He is the right leader to navigate the Company through the COVID-19 crisis, ensure the Company’s financial resilience, drive the recovery as we come out the other end of the pandemic, and ensure the long-term welfare of colleagues and customers. COVID-19 is unlike any other global crisis that we have experienced in a generation. For the first time since the Second World War, the needs of the communities we serve have rightly had to take precedence over the financial performance of businesses, including Centrica. I am proud that our people rose to the challenge. Customer agents swapped call centres for their kitchen tables to help our customers, prioritising the vulnerable who needed extra support. Our engineers, essential workers, played a crucial role in ensuring that our customers had heating and hot water, even at times of maximum restrictions. Many of our colleagues went the extra mile, shopping for vulnerable customers, donating money, and using their skills to make face masks to give to NHS workers. The crisis also saw the launch of our collaboration with The Trussell Trust, to get food to people who needed it most. To date, our engineers have delivered the equivalent of four million meals to foodbanks across the UK. I want to take this opportunity to pay tribute to our colleagues. Like many essential workers, they have been brilliant. Through their dedication, agility and compassion, we have helped to support customers and communities during these challenging times. Simplifying the business Beyond the COVID-19 crisis, our business needed to move quickly to address the fact that our UK energy supply business has been declining for ten years. We have now radically simplified our business model. The modernisation of our terms and conditions was critical in enabling us to serve customers with the flexibility they expect in a modern, digital economy. Our workforce has shown great courage and adaptability in the changes we have needed to make, with over 80% embracing the new ways of working by year end. I am sad that a small minority has pursued industrial action, but I am certain that the changes we are making are key to our long-term sustainability and the interests of all our colleagues. 2 Centrica plc Annual Report and Accounts 2020Strategic Report The sale of our North American business, Direct Energy, allowed us to realise significant value for our shareholders. As well as materially strengthening our balance sheet, the sale will enable us to focus on our core home markets – the UK and Ireland. It remains our intention to exit from our exploration and production (E&P) business Spirit Energy in a way and with a timing that maximises value for our shareholders. As we look to simplify the Group further, focus on the customer and transition to a lower carbon future, we believe this is still the right strategy. As well as simplifying the structure of our business, some changes were made to the Board. I want to take this opportunity to thank my predecessor, Charles Berry, for his service to Centrica before having to step down for health reasons. I would also like to thank Iain Conn for his commitment during his tenure as Chief Executive. We also saw the departure of Executive Directors Sarwjit Sambhi, Richard Hookway and Johnathan Ford, and Non-Executive Directors Carlos Pascual, Steve Pusey and Joan Gillman. I thank them all for their contribution to the Company. We welcomed Carol Arrowsmith as a Non-Executive Director and as Chair of the Remuneration Committee. Carol brings extensive FTSE experience, particularly advising boards on executive remuneration across a range of sectors. Kate Ringrose was appointed Group Chief Financial Officer and joined the Board in January 2021. She brings a wealth of experience from a wide range of finance roles across Centrica. I am delighted to have both Carol and Kate join the Board. Difficult decisions We have had to make some difficult decisions to underpin the long-term strength of Centrica and to ensure that we emerged from COVID-19 well-positioned for the future. Unfortunately, one of these actions was to cancel the 2019 final dividend. We are also proposing not to pay a dividend related to 2020. I want to assure you that the decision was not taken lightly. However, the Board concluded it was the prudent thing to do given the prevailing uncertainties. The support that our shareholders have given us for doing the right thing during COVID-19 has been very welcome. I know that the shareholder experience has been incredibly challenging over recent years. The Board remains focused on positioning the business to deliver long-term sustainable returns to shareholders. Empowering our people The crucial changes we have made to the structure of our business mean that colleagues are more empowered to put the interests of customers at the heart of their decision making. Our people are central to our mission of turning around the business. Chris O’Shea is passionate about leading a people-centric revolution and rewiring the culture of the organisation to better reflect, serve and anticipate the needs of the customers we serve. Our new purpose of ‘Helping you live simply, sustainably and affordably’ has been worked up with input from a wide range of stakeholders, including – importantly – our colleagues. I believe it will act as a galvanising force for colleagues and an important signifier to all stakeholders of how our Company is evolving from the inside out. Working with governments and regulators The past few years, including the introduction of the UK energy price cap, have been a very turbulent and challenging time for energy suppliers, with most firms unable to make an economic return. We believe it is essential to work constructively in partnership with regulators and with government agencies to create a market that works for customers and also allows companies to invest with confidence in projects which will deliver appropriate long-term returns from the green investments that will be critical enablers of our net zero carbon future. At Centrica we are dedicated to doing this. Reaching net zero The 2021 United Nations Climate Change Conference (COP26) is scheduled to take place in Glasgow in November. This is an important moment in the global fight against climate change and a significant milestone in the UK’s journey to reach net zero. Centrica has a leading role to play. We are committed to decarbonising our energy system and supporting our customers with a range of services and solutions to help reduce their own emissions. We recognise the urgency to make net zero a reality, which is why we have enhanced our climate targets in line with science: • Centrica to be net zero by 2045 • Help our customers to be net zero by 2050 In 2020, we were once again identified as a world leader for strategic action on climate change by CDP, an international non-governmental organisation reporting to investors. This is the second consecutive year that Centrica has achieved a place on CDP’s prestigious ‘A List’ for our action and disclosure on climate change. This places us in the top 20 UK companies, and we are one of only 19 companies in our sector globally to have attained the highest standard. I am pleased that we are in the upper quartile of key Climate and Environmental, Social and Governance rankings. But we cannot rest on our laurels. We need to continue to make further improvements to maintain our leadership position, and the Board and I remain committed to doing this. As part of this, we will publish our net zero transition plan in 2021. Our journey has only just started We are clear about the things we need to do to continue the turnaround of our business. We have made good early progress in simplifying our structure, but these are just the first steps in a marathon. We believe that we should be our own biggest critic and we are far from satisfied about where we are. We will be driving very hard to transform ourselves both structurally and culturally towards efficiency and agility. We intend to keep a relentless focus on improving our core business and our customers’ experiences. If we continue to do this, I’m confident that – after too many years of disappointment and unacceptable performance – Centrica will start to rise to the expectations of our people, our customers, our shareholders and our wider stakeholders. Scott Wheway Chairman 24 February 2021 3 Centrica plc Annual Report and Accounts 2020Strategic Report Group Chief Executive’s Statement “ My role is to make my colleagues’ lives simpler, to help them thrive and succeed, and to remove the obstacles to them delivering for our customers.” Chris O’Shea Group Chief Executive You do not need me to tell you what a difficult year 2020 has been. The human tragedy of lives lost and the profound impact on our way of life has been felt by everyone and will not be forgotten. We have all had to adapt to circumstances which, at times, seem to have been changing on a daily basis. Centrica has been no different, and I have been humbled and inspired by how our colleagues have responded to the challenges we have faced both as a Company and as a society. It is an honour and a privilege to lead such a talented and caring group of colleagues. Beyond navigating the COVID-19 crisis, our focus as a Company is on creating value for all stakeholders. We have failed to do that in recent years, and for that I am sorry. I will do everything I can to restore shareholder value by halting our decline, stabilising the Group, and then delivering growth in both customers and profit. We will do this by focusing on our core markets and our undoubted strengths. It will not be easy to achieve, but I am confident we have the people, the market positions, the vision and the determination to succeed. It will take time, and there will be challenges, but we will rise to them. Why we must change The harsh reality is that over the past ten years we have lost two million energy customers and one million services customers in British Gas, over half our earnings, and more than three-quarters of our value. We have failed to adapt quickly enough to increased regulation, fierce competition and low commodity prices. Agile challenger brands have taken customers from us with low-cost business models and technology platforms that make the customer experience seamless rather than cumbersome. Their focus has been clear and unrelenting. 4 Rising to the challenge of COVID-19 Our priority when the pandemic took hold in March 2020 was to keep our communities warm and our colleagues safe. Our colleagues rose to the challenge with incredible commitment, dedication and agility. Our customer agents all quickly adapted to working from home and our customer service levels held up. Our service engineers continued carrying out essential work such as fixing boiler breakdowns while wearing appropriate personal protection equipment. This ensured we remained available to all our customers while prioritising those who needed additional support, including over 80,000 of the most vulnerable British Gas customers who were given extra help, either through advance credit or deferred payments. Centrica plc Annual Report and Accounts 2020Strategic Report Decline in British Gas Energy customers (m) 9.4 9.3 9.2 9.0 8.7 8.6 8.4 7.8 7.3 7.1 6.9 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Decline in British Gas Services customers (m) 4.7 4.3 4.0 4.0 3.8 3.7 3.6 3.7 3.6 3.7 3.6 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Focusing on our core markets and strengths • I am delighted that we achieved a compelling price of US$3.6 billion for our North American business, Direct Energy, which we sold to NRG Energy Inc. The sale, which completed in January 2021, has materially strengthened our balance sheet and removed a source of significant earnings volatility from the Group. I want to thank all the colleagues who helped build such a fantastic business and wish them well for the future. • We intend to sell our E&P business Spirit Energy. • We have postponed the intended disposal of our Nuclear generation assets until there is greater operational certainty. • Our acquisition of customers from Robin Hood Energy in 2020 and Simplicity Energy in 2021 shows that, as we focus our efforts, we will invest in good value acquisition opportunities as long as they are aligned with our strategy. In contrast, we created an unnecessarily complicated, top-heavy, bureaucratic structure, spending too much time doing business with ourselves rather than with our customers. We took on too much and we did not focus enough on what is truly important in successful companies – our colleagues and our customers. We cannot run Centrica in the same way if we want to reverse our decline and restore shareholder value. To win back customers, we must give them what they want, when they want it, and at a price they are willing to pay. So what have we done? It is clear to me that our culture needs to change. My role is to make my colleagues’ lives simpler, to help them thrive and succeed, and to remove the obstacles to them delivering for our customers. One of the first things I did when appointed Chief Executive was to speak to as many of our colleagues as I could to ask them what got in the way of doing their jobs and giving our customers what they wanted. These discussions highlighted the need to focus on our core strengths, simplify and modernise how we worked, and empower our colleagues. We decided: • To focus on our core markets of the UK and Ireland, so we completed the sale of our North American business, Direct Energy • To become simpler, so we removed four layers of management • To modernise our ways of working and improve our productivity, so we negotiated new terms and conditions • To empower our colleagues, so we stopped relying on management consultants This has created a more modern, simpler and leaner Group focused on delivering for our customers, with a leadership team which now has more business Managing Directors than functional leaders, something which has not been the case for a number of years. Our focus is on colleagues and customers. The proportion of our colleagues who are customer-facing is now substantially higher than it was at the start of the year. This is the foundation on which we will build a company which can succeed in the future and deliver value for all stakeholders. Changing our culture Removing unnecessary complications and layers will empower customer-facing colleagues and amplify the “voice of the customer”. Over the past year, I have been asking two key questions when faced with any decision and encouraging others to do the same: “Does it improve the customer experience, now or in the future?” And if not: “Is it required by law or regulation?” If the answer to both questions is “No”, then we have got to ask ourselves why we are talking about it. I believe that the answer to a company’s issues comes mainly from the people who know the customers best – our front-line colleagues. The culture I want to create is one where everybody has a voice and where answers to problems can come from anywhere. It is a culture where meritocracy rules, where everyone feels empowered, and where everyone can succeed regardless of their background. And it is a culture where a leader’s job is to make colleagues’ lives easier – to serve the customer and the front-line teams. Leaders serve staff – the opposite of the traditional company. This cultural transformation is underpinned by our ongoing commitment to create a diverse workforce and an open and inclusive working environment which truly values and leverages the benefits of that diversity. Businesses have a role to play by taking clear and decisive action, particularly in light of public sentiment that was expressed so clearly in 2020. For instance, we fully recognise that our workforce must better reflect the diversity of the customers we serve, and are actively looking to reflect this in our recruitment by trying different things. 5 Centrica plc Annual Report and Accounts 2020Strategic Report Strategic Report | Group Chief Executive’s Statement continued In early 2021 we established a partnership with the Corps of Royal Electrical and Mechanical Engineers to supplement our existing work with the armed forces and increase our recruitment of highly trained ex-services men and women. I hope this becomes a mutually beneficial partnership for many years to come. Reflecting on our 2020 performance Our results were relatively robust, given the external environment. We acted promptly to underpin the Company’s long-term strength, including reducing capital expenditure and restructuring spend and taking the prudent, but difficult, decision to cancel the 2019 final dividend. We were also one of the few companies in the UK to move quickly enough to cancel cash bonus payments for 2019 to all but our customer-facing colleagues. COVID-19 had a negative impact on business energy demand, led to higher bad debt provisions and restricted our ability to carry out as many in-home services as we wanted to. We were also impacted by falling commodity prices and warmer weather. After implementing a number of mitigating actions, overall adjusted earnings per share were down 11% to 6.5p. Statutory earnings per share were 0.7p, compared to a loss of 17.8p in 2019. Protecting existing jobs and creating future opportunities Although many customers cite price as a reason for leaving, the trigger is often disappointing customer service. We need to get back to basics and fix our relationship with customers by investing in better customer service. Only when we do that can we reasonably expect to deliver profitable growth both within our core markets and into adjacent markets. Old terms and conditions made our directly employed engineering team between 35% and 50% more expensive per customer repair than well-qualified contractors. As a result, we have not invested in creating as many new jobs as I would have liked. I regret the fact that we have had industrial action as a result of modernising our terms and conditions and I am truly sorry for the impact this has had on our customers. However, I am convinced the changes are the right thing for us in the long term and that we will be able to move ahead with our colleagues and customers and put this behind us. Our new terms and conditions will make us more competitive by improving productivity, and I am delighted that this means we are recruiting 1,000 new apprentices in British Gas during 2021 and 2022, creating new, highly skilled and well-paid British jobs, something our country needs now more than ever. By the end of this decade we will have created 3,500 new apprenticeships. Working in partnership to tackle climate change We give ourselves the best chance of solving the biggest challenges that society faces when governments, businesses and communities work together. This approach will help reduce carbon emissions and achieve net zero. Our strong and leading positions in energy, services and solutions will allow us to play a leading part in the collective efforts needed to achieve a low-carbon future which will benefit society and present huge opportunities to add value for our businesses. There is no silver bullet to achieve net zero, and a mix of technologies is required. We are expanding our range of low-carbon technologies and capabilities, and we will work with our customers to make the right decisions for them. In doing so, we will also do all we can to support the delivery of the UK Government’s ‘Ten Point Plan’ for a Green Industrial Revolution. 6 Our new terms and conditions for engineers • Standard 40-hour week • Market leading base salaries ranging from £29k to £40k pa • Private healthcare for everyone • Leading sick pay scheme, with 13 weeks full pay; 39 weeks 67% pay • Overtime at 133% of base pay • Profit share scheme • Productivity incentives, with uncapped earnings potential • Defined benefit and/or defined contribution pension What is “net zero”? The point at which there is either no carbon dioxide (CO2) being emitted or where any CO2 emitted is removed from the atmosphere. Renewable energy is undoubtedly part of the solution to the challenge of reducing carbon emissions. We continue supporting the growth of sustainable energy systems by providing route-to-market services (where we either buy the power from the owner or we sell it on their behalf), with 11 gigawatts of renewable capacity under contract in Europe. We also think it very likely that hydrogen will be part of the lower carbon energy mix in the long term, and are actively engaged in a number of hydrogen initiatives to support clean hydrogen as a future technology. There are huge opportunities for Centrica no matter which solutions are ultimately adopted. Looking forward to 2021 We recognise that this has been an extremely challenging time for our colleagues, and I would like to thank them for their diligence and professionalism during what have been unprecedented times. Colleagues and customers have told us they want us to be a customer champion, support a more secure future by solving problems for their homes and businesses, and help to create a more sustainable world. That is why our new purpose and guiding north star for our strategy is: ‘Helping you live sustainably, simply and affordably’. We intend to set out our longer-term growth strategy in the second half of 2021 when we will seek to demonstrate our businesses’ growth potential. 2020 has shown us just what we are capable of when we pull together and focus on what is important – the customer. This same focus and our newfound agility will drive the turnaround of the business, creating value for all stakeholders. Chris O’Shea Group Chief Executive 24 February 2021 Centrica plc Annual Report and Accounts 2020 Our Values Having the right values at the heart of Centrica is essential to our success. Care, delivery, collaboration, agility and courage are values we developed through conversations with colleagues across the business about what it means to be Centrica and what we need to value in order to be successful. By living our values, we will be better able to fulfil our purpose and help our customers live sustainably, simply and affordably. i S t r a t e g c R e p o r t Care Delivery We care deeply about our impact We do things right and deliver • The safety of our team and of others • We value delivering great service around us is paramount and customer outcomes • We respect others, and the trust they • We are rigorous, do things the right place in us way, and follow best practice • We want to make a difference to society • We appreciate the journey as well and those we affect as the results • We have a sense of responsibility which • We seek simplicity, efficiency and goes beyond our job continuous improvement Collaboration Agility Together we win • We enjoy working with others • We believe relationships and partnerships are fundamental • We are best when we work as a team • We seek out views and mutual understanding, even from our harshest critics We are nimble, curious and innovative • We don’t stand still and know when to change • We seek out new things which will make a difference • We are restless, always looking to do better • We embrace the ideas and perspectives of others Courage We step up and take responsibility • We pursue the right outcome, knowing it is rarely easy • We are prepared to stand for what we believe • We will challenge where we believe the path is wrong • We face into the challenge and grasp the opportunity Centrica plc Annual Report and Accounts 2020 7 Strategic Report Our Strategy Strategic context Our strategy is driven by our purpose to help our customers live sustainably, simply and affordably. As the pace of change continues to accelerate, we will respond by focusing colleagues and technology on helping businesses and households to use energy more efficiently and sustainably. Sustainability We are committed to a cleaner and greener future, and we are making changes in order to achieve this. We will reduce our own emissions to reach net zero and will help our customers to reduce theirs. Simplicity We are simplifying and modernising our business to allow us to put customers at the heart of everything we do with the aim of making their lives simpler and easier. Affordability Being able to reach net zero in an affordable way is core to our customers’ futures, so we are striving to provide energy, services and solutions that deliver value. Consumer market trends Customer needs Changes in our ways of living and working in response to COVID-19 Falling costs for battery, solar and wind, electric vehicle deployment accelerating, growing need for flexibility Hassle-free, empathetic, personalised and safe service Lower costs and greater efficiency Growing progress and government support for decarbonisation Role of data analytics, artificial Intelligence and automation increasingly important Responsible options (including green tariffs) and expert guidance to help them achieve net zero Solutions, not just products Corporates committing to clear decarbonisation targets Gas becoming global Trusted and credible counterparty Increased regulator and consumer activism, and high levels of competitive intensity Margins under pressure 8 Centrica plc Annual Report and Accounts 2020 Strategic Report Our approach Climate change is real. The need to reduce carbon emissions has been recognised by society and governments. We are committed to helping our customers on the journey to carbon reduction and ultimately net zero through providing low carbon energy and services innovation, increasing energy efficiency and enabling investment in renewable energy. To demonstrate our commitment, we have enhanced targets to deliver a greener future and will make Centrica a net zero business by 2045 and help our customers be net zero by 2050. We will: • Lead by example – electrify our fleet of vehicles by 2025 • Exit hydrocarbon production • Buy more renewable electricity for our customers • Support the development of hydrogen as a replacement for natural gas • Enable low carbon transportation and heating solutions • Continue to find ways to help our customers use less energy and reduce their carbon footprint i S t r a t e g c R e p o r t Our Group priorities In 2019, we evolved our focus on five key priorities to deliver our strategy and we align performance and risk management processes around these, including our Key Performance Indicators. Our Group Priorities are underpinned by safety, compliance and conduct. • Customer obsession • Operational excellence • Most competitive provider • Cash flow growth • Empowered colleagues Our near-term strategic objectives Our People & Planet Plan 1. Focus on markets where we have scale and leading positions, specifically the UK and Ireland 2. Simplify the organisation to free up colleagues to focus on customers and to reduce costs 3. Modernise our working practices to increase flexibility both for colleagues and for customers 4. Build the capabilities and culture we need for the future 5. Maintain appropriate balance sheet strength We have introduced our People & Planet Plan to create a more inclusive and sustainable future that supports our communities, our customers and each other. Our five global goals accelerate action in areas where we can make a difference which includes being a net zero business by 2045 and helping our customers be net zero by 2050. These near-term objectives are planned to result in a stronger core business and a robust balance sheet from which we can start to focus on our longer-term growth ambitions in the areas in which we have distinctive capabilities – energy supply, services and solutions, energy trading and optimisation. People: Supporting every colleague to be themselves to better serve our customers and communities Planet: Supporting every customer to live more sustainably Read more about our People & Planet Plan as well as the strong foundations that underpin it to ensure we act fairly and ethically on Pages 28 to 32 Centrica plc Annual Report and Accounts 2020 9 Strategic Report Our Business Model Our business model is designed to allow us to focus on meeting the changing energy supply, services and solutions needs of our customers, helping them transition to a lower carbon future while positioning ourselves to deliver returns for shareholders and meet our broader obligations to society. For consumers We want to make people’s lives simpler, by providing seamless, time-saving services that are affordable and sustainable. Understanding and satisfying consumer needs is critical to our success. For business As a trusted energy partner for our business customers, we provide the energy and solutions to help them operate more efficiently and sustainably to achieve commercial success. Energy supply • Gas supply • Electricity supply Energy supply • Gas supply • Electricity supply Home services and solutions Energy trading and optimisation • Protection products (central heating, plumbing and drains, home electrical, and kitchen appliance cover) • On-demand services (service, repair, and home improvements) • Aggregation and optimisation of distributed energy resources • Access to energy, capacity and flexible markets including demand response • Route-to-market and commodity risk • Installation of heating systems and management services electric vehicle charge points • Smart heating and energy management, remote diagnostics, and monitoring solutions In 2019 we set out a financial framework intended to enable us to deliver long-term shareholder value through returns and growth. We intend to develop a new financial framework over the course of 2021 that reflects changes in our business model and the environment in which we operate. In the immediate term, our core aim is to maintain a strong balance sheet and as such we will target a net debt/EBITDA level that is sustainable and consistent with investment grade credit ratings. We will also continue to focus on free cash flow generation, maintaining a tight control on operating costs, restructuring spend and capital expenditure, while looking to reduce the volatility of earnings and cash flow. Business services and solutions • Design, install, maintain and service a wide range of technology solutions • Energy resource management and monitoring • Operational insights from energy data to help with preventive maintenance Our previously stated dividend policy is to pay a progressive dividend linked to growth in earnings and operating cash flow, with dividend cover from earnings in the range 1.5-2.0. Having taken the decision to cancel our 2019 final dividend in response to the COVID-19 pandemic, we intend to recommence dividends to shareholders when it is prudent to do so. In addition, the risks to achieving the Group’s strategy are monitored and reported regularly. For more information on managing our exposure to risk, see Our Principal Risks and Uncertainties on pages 34 to 42. Our strategic framework Group financial framework 10 Centrica plc Annual Report and Accounts 2020 Our Businesses In 2020, we accelerated our focus on simplifying and modernising Centrica, to allow us to put customers at the heart of everything we do. The disposal of Direct Energy has simplified the Company and will allow us to focus on our core markets of the UK and Ireland. The Company now operates with five customer-facing businesses, which will continue to focus on the areas in which we have distinctive capabilities – energy supply, services and solutions, energy trading and optimisation. We also currently have an Upstream division which includes our oil and gas E&P assets and our nuclear power generation business The heads of each of the five business units report directly to the Group Chief Executive. Read more about our customer-facing businesses Pages 24 to 26 Read more about our Upstream businesses Pages 27 to 28 i S t r a t e g c R e p o r t Our businesses are listed here: British Gas Energy supplies energy to residential customers in England, Scotland and Wales. British Gas Services provides services and solutions to residential customers in England, Scotland and Wales. Bord Gáis provides energy supply, services and solutions to residential and business customers in the Republic of Ireland. Read more about British Gas Energy at centrica.com/british-gas Read more about British Gas Services at centrica.com/british-gas Read more about Bord Gáis at centrica.com/bord-gáis Centrica Business Solutions provides energy supply to business customers in England, Scotland and Wales, and low-carbon energy solutions for business customers internationally. Energy Marketing & Trading is the trading and optimisation arm of Centrica, and is also responsible for managing commodity risk and sourcing energy on behalf of the Group’s energy supply activities in the UK. Upstream includes our oil and gas E&P assets, our 20% interest in the UK’s nuclear power generation fleet and the Rough field. We have announced our intention to sell Spirit Energy and our interest in nuclear. Read more about Centrica Business Solutions at centrica.com/cbs Read more about Energy Marketing & Trading at centrica.com/emt Read more about Upstream at centrica.com/upstream 11 Centrica plc Annual Report and Accounts 2020Strategic Report Key Performance Indicators Our Key Performance Indicators (KPIs) help the Board and executive management assess performance against our Group Priorities set out in 2019. Our Group Priorities Customer Obsession Operational Excellence Most Competitive Provider Cash flow Growth Empowered Colleagues Safety, compliance and conduct foundation Read more about Our Group Priorities Page 9 and Our Strategy Pages 8 to 9 Read more about Remuneration Pages 66 to 83 Read more about adjusted performance measures Pages 220 to 221 Group free cash flow (£m)(1)(2) Group adjusted operating profit (£m)(1)(2) 2020 2019 2018 1,061 966 1,029 2020 2019 2018 699 901 1,392 Free cash flow is the Group’s primary measure of cash flow. It reflects the cash generation of the business after taking into account the need to continue to invest. Free cash flow increased by 10% with lower EBITDA due to the effects of COVID-19 and lower commodity prices more than offset by a tight focus on capital expenditure, costs and working capital. Group adjusted operating profit is one of our fundamental financial measures. Group adjusted operating profit was down 22% predominantly reflecting reduced profit in Upstream and Centrica Business Solutions. Link to Remuneration Short-term incentive Link to Group Priorities Link to Remuneration Short-term incentive Link to Group Priorities Group adjusted basic earnings per share (EPS)(1)(2) Total shareholder return (TSR) by year 2020 2019 2018 6.5p 7.3p 11.2p EPS is a standard measure of corporate profitability. Adjusted EPS is used to measure the Group’s underlying performance against its strategic financial framework. Group adjusted basic EPS was down 11%, reflecting the reduced operating profit. Link to Group Priorities Centrica Total return index FTSE 350 Total return index 120 100 80 60 40 20 0 2017 2018 2019 2020 The Board believes that TSR is a valuable KPI to assess the Company’s performance in the delivery of shareholder value. The Company dropped out of the FTSE 100 with effect from 22 June 2020. Link to Remuneration Long-term incentive Link to Group Priorities (1) Includes Direct Energy which is now classified as a discontinued operation. See notes 3 and 12 to the Financial Statements for further information. (2) See notes 2, 4 and 10 to the Financial Statements for definition and reconciliation of these measures. 12 Centrica plc Annual Report and Accounts 2020Strategic Report Brand net promoter score (NPS)(1) Complaints(2) 2020 2019 2018 +13.8 +15.1 +10.0 2020 2019 2018 2,569 3,429 3,453 Everything we do is focused on helping our customers live sustainably, simply and affordably. While we’ve worked to improve key customer journeys to ensure a great customer service, our aggregated NPS decreased by 1.3 points. We are relentless in wanting to provide an excellent service that satisfies our customers and reduces complaints. COVID-19 restricted work undertaken which reduced customer contacts and contributed to a 25% drop in complaints per 100,000 customers. Link to Remuneration Long-term incentive Link to Group Priorities Link to Remuneration Long-term incentive Link to Group Priorities Process safety incident frequency rate (Tier 1 and 2) Total recordable injury frequency rate (TRIFR) 2020 0.00 2019 2018 0.08 0.06 2020 2019 2018 1.03 1.06 1.02 We prevent potential incidents where we source, generate and store energy with process safety. As we had no tier 1 or 2 events, our incident frequency rate per 200,000 hours reduced to zero. We are committed to having a strong safety culture because keeping our people safe is a core foundation of how we do business. Our TRIFR per 200,000 hours improved by 3%. Link to Remuneration Short-term incentive Link to Group Priorities Link to Remuneration Long-term incentive Link to Group Priorities Employee engagement(3) 2020 2019 2018 42% 43% 55% Our success is reliant on having a motivated and engaged workforce. While we took action on feedback from our annual employee engagement survey to improve performance, business restructuring continued to impact our score which dropped by 1% to 42% favourable. Link to Remuneration Long-term incentive Link to Group Priorities The KPI performance outcome associated with executive remuneration is set out on page 70. (1) Aggregated scores across British Gas Home, British Gas Business, Hive, Bord Gáis Energy, Direct Energy Home and Direct Energy Business, weighted by customer numbers. (2) Aggregated scores across British Gas Energy Supply, British Gas Home Services, British Gas Business, Bord Gáis Energy, Direct Energy Home Energy and Direct Energy Business, weighted by customer accounts. (3) Measured through responses to annual survey asking employees to rate their level of advocacy, pride, loyalty and satisfaction. Read more about our Group Priorities on Page 9 Read more about our non-financial performance on Pages 28 to 33 and 222 to 224 13 Centrica plc Annual Report and Accounts 2020Strategic Report Business Review Our main focus is on those activities where we have leading market positions and strong capabilities – specifically energy supply, services and solutions, and trading and optimisation – with a geographical focus on the UK and Ireland. British Gas customer satisfaction levels maintained and customer numbers stable in H2 British Gas Energy customers (’000) Cost per energy customer (£)(1) Energy complaints per customer (%)(2) Energy Touchpoint NPS(3) Adjusted operating profit (£m)(1) 2020 6,916 £106 6.1% 9 80 2019 Change (2%) 7,080 £111 (5%) 8.6% (2.5ppt) (2pt) (35%) 11 124 British Gas Services & Solutions Services customers (’000) Revenue per services customer (£) Cost per services customer (£)(1) Install and on-demand jobs (’000) Services complaints per customer (%)(2) Services Engineer NPS(3) Adjusted operating profit (£m) 2020 3,563 £359 £299 283 5.7% 66 201 2019 Change 3,685 £388 £331 337 (3%) (7%) (10%) (16%) 6.0% (0.3ppt) 6pt 12% 60 180 1. 2019 restated following the treatment of Direct Energy as a discontinued operation and the reallocation of corporate costs. 1. 2019 restated following the treatment of Direct Energy as a discontinued operation and the reallocation of corporate costs. 2. A complaint is an expression of dissatisfaction, in line with submissions made to Ofgem. 3. Measured independently, through individual questionnaires, the customer’s willingness to recommend British Gas following contact with an Energy call centre. • British Gas Energy customers fell by 164,000 or 2%, with nearly all the net losses coming in the first half of the year. – In the first half, some core sales channels were unavailable during COVID-19 related lockdowns. We also limited our activity in the fiercely competitive price comparison website market, as some competitors priced at negative gross margins and falling commodity prices helped unhedged smaller competitors. – The number of customers was broadly unchanged over the second half. This includes the impact of the acquisition of around 85,000 Robin Hood Energy customers in September and an increased focus on customer retention. • Energy Touchpoint NPS reduced, reflecting the impact of longer average call waiting times at points in the year, as we prioritised emergency calls and contact centre colleagues moved to home working. • Total call volumes fell, as we encouraged our customers to interact with us online to ensure we could prioritise calls from more vulnerable customers. This in turn reduced complaints. • Our continued investment in digital platforms meant we were able to handle the significant increase of digital contacts, with 64% of all transactions completed online in 2020 compared to 55% in 2019. • British Gas Energy adjusted operating profit reduced by 35% to £80m. – The reduction includes a roughly £40m impact due to warmer weather impacting energy consumption, the non-recurrence of a benefit in 2019 of approximately £30m from the renegotiation of a smart metering contract and the impact of the reduction in customer numbers and a changed customer mix. – It also includes a net negative COVID-19 impact, with slightly higher domestic consumption more than offset by higher balancing charges and an increase of around £40m in the bad debt charge. – These negative impacts were partially offset by cost efficiencies and a benefit from the non-repeat of the one-off default tariff cap related cost of £70m in Q1 2019. 2. A complaint is any oral or written expression of dissatisfaction. 3. Measured independently, through individual questionnaires, the customer’s willingness to recommend British Gas following an engineer visit. • British Gas services customers fell 122,000, or 3%. Nearly all of the net losses came in the first half of the year, as a reduced number of customer visits during the lockdown period resulted in lower sales opportunities. However, sales picked up in the second half and customer retention overall for core insurance products remained in line with previous years. The number of services products per customer increased from 2.14 to 2.22 over the year and reflecting this the number of customer accounts ended the year higher than at the start. • The total number of installs and on demand jobs for the full year was down 16% compared to 2019, although were only down by 4% in the second half of the year as lockdown restrictions were eased. Within this, boiler installations were down 27%, with partial recovery in the second half of the year as they were 15% lower than in 2019. • Reflecting this reduction in higher revenue installation jobs, revenue per services customer fell by 7% to £359. However, this change in mix also led to a lower cost per customer and when combined with the impact of efficiencies, the cost per customer reduced by 10% to £299. • We continued to fulfil over 97% of UK services essential breakdown appointments on the scheduled day despite the impact of the COVID-19 pandemic. Reflecting this, services complaints were slightly down year-on-year despite the impacts of COVID-19, and engineer NPS increased with customers indicating greater appreciation for the care and work carried out during the pandemic. • British Gas Services & Solutions includes the activities previously in Centrica Home Solutions. The number of Home Solutions active customers increased by 13% in the year to 1,357,000. • British Gas Services and Solutions adjusted operating profit increased by 12% to £201m. Services profit increased slightly to £256m (2019: £252m), with the benefit of cost efficiencies offsetting the impacts of COVID-19 in the year, including from lower boiler installations. The loss in Solutions reduced to £55m (2019: loss of £72m), largely driven by cost efficiency measures and the decision to focus activity on the UK and Ireland and exit all other markets. 14 Strategic ReportCentrica plc Annual Report and Accounts 2020 Customer service and retention improvements in Bord Gáis Energy Centrica Business Solutions heavily impacted by COVID-19 2019 Change Centrica Business Solutions Bord Gáis Energy Customers (’000) Complaints per customer (%)(1) Journey NPS(2) Adjusted operating profit (£m)(3) 2020 483 1.8% 38 42 500 (3%) 2.2% (0.4ppt) 7pt (16%) 31 50 1. Total consumer complaints of all types. 2. Weighted NPS for the main customer interaction channels. 3. 2019 restated following the treatment of Direct Energy as a discontinued operation and the reallocation of corporate costs. • Bord Gáis Energy customer retention improved; however the number of customers reduced by 17,000 or 3% in the year due to the impact of COVID-19 on services sales channels and a fiercely competitive pricing environment in energy markets. • Customer complaints improved to below 2% while Journey NPS showed significant improvement, reflecting an ongoing focus on improving the customer experience in part through investment in digital platforms. Customer adoption of self-service digital channels contributed to a 20% reduction in inbound contacts compared to 2019. • Bord Gáis Energy adjusted operating profit reduced by 16% to £42m, largely reflecting the impacts of COVID-19 on business energy demand and bad debts. Strong performance in Energy Marketing & Trading Energy Marketing & Trading Renewable capacity under management (GW) Adjusted operating profit (£m)(1) 2020 10.7 174 2019 9.9 138 Change 8% 26% 1. 2019 restated following the treatment of Direct Energy as a discontinued operation and the reallocation of corporate costs. • Trading and optimisation performance was strong in the year, in particular in LNG. • Energy Marketing & Trading renewable route-to-market capacity under management increased by 8% from 9.9GW to 10.7GW. • Energy Marketing & Trading adjusted operating profit increased by 26% to £174m due to the strong LNG trading performance and the decision in response to COVID-19 not to pay management bonuses relating to 2019 across Centrica, which resulted in an accrual release. This was partially offset by a loss from the one remaining legacy gas contract of £58m, compared to a profit of £3m in 2019. Energy small customer sites (’000)(1) Energy total gas and electricity volume (TWh)(1) Energy complaints per customer (%)(2) Energy transactional NPS(3) New Energy Services order intake (£m) New Energy Services order book (£m) Adjusted operating (loss) (£m) 2020 470 25.0 3.4% (22) 350 697 (140) 2019 470 25.0 Change 0% 0% 3.8% (0.4ppt) 4pt (11%) 5% nm (26) 392 663 (20) 1. 2020 includes 67,000 small business customers on British Gas’s low cost ‘software as a service’ third party platform. 2. Any oral or written expression of dissatisfaction where the customer claims to have suffered financial loss, material distress or material inconvenience. 3. Measured independently, through individual questionnaires, the customer’s willingness to recommend. • In Centrica Business Solutions Energy Supply: – The number of small business sites remained flat at 470,000 in the year. With the profile of these customers closely matching that of households, the intention is to migrate all these customers across to British Gas’s ‘software as a service’ platform over the next couple of years. – The total amount of energy supplied in the year was in line with 2019. A positive impact on volume from a number of new larger industrial and commercial customers was offset by the impact of businesses being closed during parts of the year due to COVID-19 lockdowns, which reduced full year demand by an estimated 12%. – Customer complaints and transactional NPS both improved slightly in 2020, with a particular focus during the year on increasing first time resolution rates. • In Centrica Business Solutions New Energy Services: – Order intake was 11% lower than in 2019, as companies delayed investment decisions on new technologies during the COVID-19 pandemic, exacerbated in the UK by Brexit uncertainty. However, order intake improved in the second half of 2020 and was 30% higher than in H2 2019. The forward order book of £697m was 5% higher than at the end of 2019. • Centrica Business Solutions reported an adjusted operating loss of £140m compared to a loss of £20m in 2019. – Business energy supply reported an adjusted operating loss of £55m (2019: profit of £54m), with broadly all the movement estimated to be due to COVID-19. The reduction in energy consumption resulted in reduced revenue, commodity hedges having to be unwound at a loss and higher energy balancing costs, which are estimated to have impacted profit by around £90m in total. In addition, higher provisions for customer bad debt increased the bad debt charge by £34m. – New Energy Services reported an adjusted operating loss of £85m (2019: £74m) including a £16m provision related to the transfer of US solar liabilities previously in Direct Energy. Excluding the impact of the US solar provision, New Energy Services adjusted operating loss was flat versus 2019 despite the significant challenges posed by COVID-19. 15 Centrica plc Annual Report and Accounts 2020Strategic Report E&P production broadly in line with expectations, Nuclear impacted by operational issues Upstream E&P total production volumes (mmboe) Nuclear power generated (TWh) Adjusted operating profit (£m)(1) E&P free cash flow (£m) 2020 48.7 9.1 90 170 2019 52.5 10.2 178 301 Change (7%) (11%) (49%) (44%) 1. 2019 restated following the treatment of Direct Energy as a discontinued operation and the reallocation of corporate costs. • Spirit Energy volumes were down 2% to 44.9mmboe compared to 2019, with natural field decline and lower Morecambe up-time only partially offset by the impact of new production wells at Chiswick and Chestnut, good production from the Cygnus field, and a first full year of production from the Oda field. Reduced capital expenditure compared to 2019 was also a factor in less new production coming on stream in 2020 and reflecting this, 2021 production is expected to be around 10% lower than in 2020. • Spirit Energy’s 2P reserves were 37mmboe lower at the end of 2020 than at the end of 2019, with the impact of production only partially offset by 9mmboe of positive revisions in Norway during the year. • Production volumes from CSL’s Rough field of 3.9mmboe were 42% lower than in 2019, reflecting the natural decline of the late-life field. • Centrica’s share of nuclear generation volumes of 9.1TWh was 11% lower than in 2019, as an extended outage at Hinkley Point B took the plant offline for most of the year. As in 2019, outages at Dungeness B and Hunterston B continued to limit nuclear output. • Upstream adjusted operating profit reduced by 49% to £90m. – Spirit Energy E&P adjusted operating profit decreased by 7% to £84m (2019: £90m) with the impact of reduced achieved gas and liquids sales prices reflecting lower wholesale market prices largely offset by lower depreciation resulting from previous impairments, lower dry hole costs, and reduced operating and corporate costs. – CSL adjusted operating profit reduced by 67% to £23m (2019: £69m) reflecting lower production due to the natural decline in the Rough field and lower achieved gas prices. – Nuclear reported an adjusted operating loss of £17m, compared to a profit of £19m in 2019, with lower generation volumes reflecting the extended outages at a number of power stations. 16 Strategic Report | Business Review continuedCentrica plc Annual Report and Accounts 2020 Group Chief Financial Officer’s Report “ My primary focus is on realising the cash generation potential of our businesses, continuing to strengthen and improve the efficiency of our balance sheet, and embedding the spend discipline measures we accelerated in 2020 – all with the ultimate aim of adding value for shareholders. I am excited at the opportunity to play a significant role to deliver the turnaround of Centrica and help our businesses realise their potential.” Kate Ringrose Group Chief Financial Officer Revenue • Business performance revenue arising from continuing and discontinuing operations reduced by 9% to £24.4bn (2019: £26.8bn). Group revenue from continuing operations included in business performance reduced by 6% to £14.9bn (2019: £16.0bn). • Gross segment revenue from continuing operations, which includes revenue generated from the sale of products and services between segments, reduced by 9% to £15.7bn (2019: £17.2bn). This was driven largely by the impact of lower commodity prices on Upstream achieved prices and British Gas retail prices, and lower demand for energy from businesses due to COVID-19. • A table reconciling different revenue measures is shown in the table below: Gross segment revenue £m 2020 Less inter-segment revenue £m Year ended 31 December Notes Continuing operations British Gas Bord Gáis Energy Energy Marketing & Trading Centrica Business Solutions Upstream Group revenue included in business performance Discontinuing operations Direct Energy Business performance revenue arising from continuing and discontinuing operations Less: revenue arising on contracts in scope of IFRS 9 included in business performance Less: Discontinued operations Group statutory revenue 7,887 820 2,917 2,131 1,918 15,673 9,483 25,156 Group revenue £m 7,885 820 2,742 2,123 1,379 14,949 (2) – (175) (8) (539) (724) – (724) 9,483 24,432 (2,700) (9,483) 12,249 Gross segment revenue £m 8,327 897 3,357 2,331 2,290 17,202 10,867 28,069 2019 Less inter-segment revenue £m (1) – (271) (9) (963) (1,244) Group revenue £m 8,326 897 3,086 2,322 1,327 15,958 – (1,244) 10,867 26,825 (2,964) (10,867) 12,994 17 Centrica plc Annual Report and Accounts 2020Strategic Report Operating profit/(loss) • Adjusted operating profit from continuing operations reduced by 31% to £447m (2019: £650m). The statutory operating loss from continuing operations was £362m (2019: loss of £783m). The difference between the two measures of profit relates to exceptional items and certain re-measurements. A table reconciling the different profit measures is shown below: 2020 Business performance £m Exceptional items and certain re-measurements £m Notes Statutory result £m Business performance £m 2019 Exceptional items and certain re-measurements £m Statutory result £m Year ended 31 December Continuing operations British Gas Energy Services Solutions Bord Gáis Energy Marketing & Trading Centrica Business Solutions Energy Supply New Energy Services Upstream Spirit Energy CSL Nuclear 4(c) 8 9 Group operating profit/(loss) Net finance cost Taxation Profit/(loss) from continuing operations Profit attributable to non-controlling interests Adjusted earnings from continuing operations Discontinued operations Adjusted earnings attributable to shareholders 281 80 256 (55) 42 174 (140) (55) (85) 90 84 23 (17) 447 (215) (42) 190 (25) 165 213 378 304 124 252 (72) 50 138 (20) 54 (74) 178 90 69 19 650 (251) (142) 257 (9) 248 171 419 (1,433) – 132 (1,301) 89 (1,212) (230) (1,442) (783) (251) (10) (1,044) 80 (964) (59) (1,023) (809) – 187 (622) 183 (439) 102 (337) (362) (215) 145 (432) 158 (274) 315 41 Adjusted operating profit • As initially flagged in our Trading Update in April and in the results for the first six months of the year, COVID-19 had a significant impact on adjusted operating profit in 2020. – The impact from COVID-19 on adjusted operating profit from continuing operations is estimated at around £250m before mitigating actions, with approximately £90m of the impact related to the combined effects of reduced overall energy consumption, the related sell back to the market of commodity not required in the first half of the year, and higher balancing costs. Of the remainder, around £80m gross margin was lost due to reduced services and solutions activity with only essential work undertaken during lockdown periods, and around £80m relates to increased customer bad debt. – Mitigating actions of approximately £150m meant the net impact of COVID-19 on adjusted operating profit from continuing operations was approximately £100m. The largest element of the mitigating actions was due to our decision not to pay senior management bonuses relating to 2019 performance, resulting in the release of an accrual made in 2019. The mitigating actions also included discretionary cost savings, while the Group received £27m under the UK Government’s Coronavirus Job Retention Scheme. Further detail on government support received during the year is provided in note 1(b). • In addition, warmer than normal weather negatively impacted the energy supply businesses by an estimated £40m and the remaining legacy gas contract in Energy Marketing & Trading lost £58m in 2020 compared to a small profit in 2019. However, we benefited from the non-recurrence of a one-off cost of £70m incurred in 2019 in British Gas Energy supply due to an Ofgem revision to the default price cap methodology to calculate supplier wholesale costs during Q1 2019. • Underlying performance from the customer-facing business units was resilient overall despite continued gross margin pressures in British Gas Energy supply, with benefit from efficiency initiatives in all business units and strong trading and optimisation performance, in particular in LNG. • However, lower commodity prices and lower nuclear volumes impacted the Upstream division. These were only partly offset by lower E&P depreciation and field write-off costs and tight cost control. As a result Upstream adjusted operating profit was £88m lower than in 2019. Group finance charge and taxation Finance costs • Net finance costs for continuing operations decreased to £215m (2019: £251m), with reduced interest costs on bonds, bank loans and overdrafts reflecting the impact of lower interest rates on floating debt. Taxation • Business performance taxation on profit from continuing operations decreased to £42m (2019: £142m) reflecting the reduction in operating profit. After taking account of tax on joint ventures and associates, the adjusted tax charge was £67m (2019: £141m). The resultant adjusted tax rate for the Group was 26% (2019: 35%), which reflects a change in profit mix within the E&P business away from the more highly taxed Norwegian fields which were loss making in 2020. • This included a deferred tax adjustment following the UK Government’s decision to cancel the proposed reduction in the future corporation tax rate below its current level of 19%, which increased the tax charge by £40m. It also includes a £29m PRT-related credit in the year. 18 Strategic Report | Group Chief Financial Officer’s Report continuedCentrica plc Annual Report and Accounts 2020 • An effective tax rate calculation is shown below: • The Group has shown the fair value adjustments on Year ended 31 December Adjusted operating profit from continuing operations before impacts of taxation Add: JV/associate taxation included in adjusted operating profit Net finance cost from continuing operations Adjusted profit before taxation Taxation on profit from continuing operations Share of JV/associate taxation Adjusted tax charge Adjusted effective tax rate 2020 £m 447 25 (215) 257 (42) (25) 67 26% 2019 £m 650 (1) (251) 398 (142) 1 141 35% Exceptional items • An exceptional pre-tax charge of £1,593m was included within the statutory Group operating loss from continuing operations in 2020 (2019: £1,123m) including: – A £644m charge relating to the impairment of E&P assets and goodwill, predominantly due to the reduction in near-term prices and long-term price forecasts. The charge also includes a £135m write-down of the Greater Warwick Area assets, reflecting significant uncertainty over field development. – A £525m charge relating to the impairment of power assets, including £481m relating to the nuclear investment largely as a result of a reduction in price forecasts and availability issues at the Hunterston B, Dungeness B and Hinkley Point B power stations. It also includes a £23m charge relating to gas-fired and battery power assets as a result of lower price forecasts and a £21m charge relating to a forced outage at Whitegate power station. – A £78m charge relating to the impairment of Centrica Business Solutions’ goodwill driven by reduced growth prospects in North America following the disposal of Direct Energy. – A £72m charge relating to the impairment of intangible IT assets following the decision to merge Centrica Home Solutions activities into British Gas and reduce the scale and breadth of offers. – £274m of restructuring charges relating to the Group’s strategic restructure and headcount reduction, including a £120m pension strain charge. With only residual costs for the roll-off of existing projects expected in 2021, this will be the final material exceptional charge relating to the Group’s restructuring programme which was planned to result in £2bn of annualised efficiencies between 2015-22 and has resulted in £1.2bn of exceptional restructuring costs since 2015. • These charges in total generated a taxation credit of £336m (2019: £130m) and there was a separate £63m deferred tax asset write-off associated with E&P activities, related to the reduction in price forecasts. As a result, total net exceptional charges recognised in continuing operations after taxation were £1,320m (2019: £993m). • Further details on exceptional items, including on impairment accounting policy, process and sensitivities can be found in notes 7(b) and 7(c). Certain re-measurements • The Group enters into a number of forward energy trades to protect and optimise the value of its underlying production, generation, storage and transportation assets (and similar capacity or off-take contracts), as well as to meet the future needs of our customers. A number of these arrangements are considered to be derivative financial instruments and are required to be fair valued under IFRS 9. these commodity derivative trades separately as certain re-measurements, as they do not reflect the underlying performance of the business because they are economically related to our upstream assets, capacity/off-take contracts or downstream demand, which are typically not fair valued. • The operating loss in the statutory results includes a net pre-tax profit for continuing operations of £784m (2019: loss of £310m) relating to these re-measurements. With the Group generally a net purchaser of commodity, the gain was due to both the unwind of out-of-the-money positions from December 2019, and a net positive revaluation of contracts due for delivery in future periods as commodity prices rose over the second half of 2020. These re-measurements generated a taxation charge of £86m (2019: credit of £2m). As a result, the total profit from net re-measurements after taxation for continuing operations was £698m (2019: loss of £308m). • The Group recognises the realised gains and losses on these contracts when the underlying transaction occurs. The business performance profits arising from the physical purchase and sale of commodities during the year, which reflect the prices in the underlying contracts, are not impacted by these re-measurements. • Further details can be found in note 7(a). Discontinued operations • The sale of Direct Energy was announced on 24 July 2020 and as such its activities are treated as a discontinued operation in the 2020 financial results. • Adjusted operating profit from discontinued operations increased slightly to £252m (2019: £251m), with a resilient result in residential energy supply and lower depreciation due to the cessation of depreciation from the announced date of the sale. These were offset by the impacts of lower volumes and hedging sell backs in periods of low business consumption during COVID-19 lockdowns. • Adjusted earnings from discontinued operations increased to £213m (2019: £171m) due to a lower tax charge arising from certain tax credits in the year. Adjusted EPS from discontinued operations increased from 3.0p to 3.7p. • After accounting for a post-tax exceptional charge of £36m (2019: credit of £6m), largely relating to disposal-related costs, and positive post-tax certain re-measurements of £138m (loss of £236m), largely due to the unwind of out-of-the-money positions from December 2019, the statutory profit from discontinuing operations after taxation was £315m (2019: loss of £59m). Group earnings Adjusted earnings • Profit for the year from business performance from continuing operations after taxation was £190m (2019: £257m). When including discontinued operations earnings of £213m, total Group profit for the year from business performance after tax decreased to £403m (2019: £428m) and after adjusting for non-controlling interests, adjusted earnings decreased by 10% to £378m (2019: £419m). • Adjusted basic EPS was down 11% to 6.5p (2019: 7.3p). Adjusted basic EPS from continuing operations was 2.8p (2019: 4.3p). Statutory earnings • The statutory profit attributable to shareholders for the period was £41m (2019: loss of £1,023m). The reconciling items between Group profit for the period from business performance and statutory profit are related to exceptional items and certain re-measurements. • The Group reported a statutory basic EPS of 0.7p (2019: loss of 17.8p) and a statutory EPS loss from continuing operations of 4.7p (2019: loss of 16.8p). 19 Centrica plc Annual Report and Accounts 2020Strategic Report Dividend • The Group is proposing no 2020 final dividend having also paid Balance sheet • Net assets decreased to £1,382m (31 December 2019: £1,795m), with the statutory profit in the year more than offset by the increase in retirement benefit obligations. 2020 Acquisitions and disposals • On 23 December 2019, the Group agreed to sell its 382MW King’s Lynn combined cycle gas turbine power station to RWE Generation. The disposal was classified as held for sale as at 31 December 2019. The transaction completed on 12 February 2020, resulting in the receipt of consideration of £102m, after adjustments for final working capital balances and after transaction costs. • Further details on assets purchased, acquisitions and disposals are included in notes 4(e) and 12. Events after balance sheet date • On 5 January 2021, the Group completed the sale of its North American energy supply, services and trading business, Direct Energy, to NRG for $3.625bn on a debt free, cash free basis. This is expected to lead to a profit on disposal of approximately £0.6bn. • Details of events after the balance sheet date are described in note 26. Risks and capital management • Whilst the nature of the Group’s principal risks and uncertainties are broadly unchanged from those set out in its 2019 Annual Report, the Group has actively responded to those risks heightened by COVID-19, with Centrica’s approach to risk management enabling a rapid mobilisation of resources to react to the challenges caused by the pandemic. The extent to which the Group may be impacted by COVID-19 will in part depend on the degree of government support, in the form of direct aid and stimulus programmes, which will be a factor in the degree of customer bad debt we may see. It will also create implications in how we respond to debt management for vulnerable customers and will impact the speed of recovery in the commercial sector. • Our top three Principal Risks are Political & Regulatory Intervention, Commodity Risk and Asset Production. Falls in commodity prices and asset valuations have heightened our risks associated with Commodity Risk and Access to Sufficient Market Liquidity. Capability of People, Processes and Systems risk is also intensified as we progress through our programmes of change. • Details of how the Group has managed financial risks such as liquidity and credit risk are set out in note S3. Details of the Group’s capital management processes are provided under sources of finance in note 24(a). Accounting policies • The consolidated Financial Statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. The Group’s specific accounting measures, including changes of accounting presentation and selected key sources of estimation uncertainty, are explained in notes 1, 2 and 3. no 2020 interim dividend. Group cash flow, net debt and balance sheet Group cash flow • Free cash flow is the primary cash measure of cash flow as management believe it provides relevant information to show the cash generation of the business after taking account of the need to maintain its capital asset base. Free cash flow is reconciled to statutory net cash flow from operating and investing activities in the table below. See the explanatory note in note 4(f) for further details. Year ended 31 December Statutory cash flow from operating activities Statutory cash flow from investing activities Statutory cash flow from continuing operating and investing activities Add back/(deduct): Sale and settlement of securities Interest received Movements in collateral and margin cash included in net debt Defined benefit pension deficit payment Free cash flow from continuing operations Discontinued operations free cash flow Free cash flow 2020 £m 957 (263) 694 (121) (7) (56) 175 685 376 1,061 2019 £m 970 (651) 319 (50) (11) (21) 235 472 494 966 • Net cash flow from continuing operating activities of £957m was broadly unchanged year-on-year (2019: £970m). EBITDA was significantly lower however this was largely offset by lower pension deficit payments and lower payments related to exceptional charges. • Net cash outflow from continuing investing activities reduced to £263m (2019: £651m), largely due to lower capital expenditure reflecting ongoing capital discipline during the COVID-19 pandemic and the receipt of a dividend from the Nuclear investment compared to no dividend in 2019. • Group total free cash flow was £1,061m (2019: £966m), including £685m of free cash flow from continuing operations (2019: £472m) and £376m of free cash flow from discontinuing operations (2019: £494m). The lower free cash flow from discontinuing operations reflects the impact of divestment proceeds received from the Clockwork home services portfolio sale in 2019. • Net cash outflow from continuing financing activities reduced to £466m in 2020 (2019: £1,058m) with no dividend paid to Centrica plc shareholders or Spirit Energy minority shareholders in 2020. Net debt • All of the above resulted in a £633m increase in cash and cash equivalents over the year, and when also including non-cash movements and exchange adjustments, net debt reduced by £412m to £2,769m, including cash collateral posted or received in support of wholesale energy procurement. • Further details on the Group’s net debt are included in note 24. Pension deficit • The Group’s IAS 19 net pension deficit increased by £438m to £601m in the period, with a reduction in the discount rate due to lower interest rates increasing obligations. The increase was partially offset by the effects of an increase in the value of the pension assets, inflation and agreed deficit payments. • Further details on the post-retirement benefits are included in note 22. 20 Strategic Report | Group Chief Financial Officer’s Report continuedCentrica plc Annual Report and Accounts 2020 Our view on taxation The Group takes its obligations to pay and collect the correct amount of tax very seriously. Responsibility for tax governance and strategy lies with the Group Chief Financial Officer, overseen by the Board and the Audit and Risk Committee. Our approach Wherever we do business in the world, we take great care to ensure we fully comply with all our obligations to pay or collect taxes and to meet local reporting and disclosure requirements. We fully disclose information on ownership, transactions and financing structures to the relevant tax authorities. Our cross-border pricing reflects the underlying commercial reality of our business. We are committed to providing disclosures and information necessary to assist understanding beyond that required by law and regulation. We do not tolerate tax evasion or fraud by our employees or other parties associated with Centrica. If we become aware of any such wrongdoing, we take appropriate action. We ensure that income and costs, including costs of financing operations, are appropriately recognised on a fair and sustainable basis across all countries where the Group has a business presence. We understand that this is not an exact science and we engage openly with tax authorities to explain our approach. In the UK we maintain a transparent and constructive relationship with Her Majesty’s Revenue & Customs (HMRC). This includes regular, open dialogue on issues of significance to HMRC and Centrica. Our relationship with fiscal authorities in other countries where we do business is conducted on the same principles. We carefully manage the tax risks and costs inherent in every commercial transaction, in the same way as any other cost. We do not enter into artificial arrangements in order to avoid taxation nor to defeat the stated purpose of tax legislation. We actively engage in consultation with governments on tax policy where we believe we are in a position as a Group to provide valuable commercial insight. The Group’s tax charge, taxes paid and the UK tax charge The Group’s businesses are subject to corporate income tax rates as set out in the statutory tax rates on profits table. The overall tax charge is therefore dependent on the mix of profits and the tax rate to which those profits are subject. Statutory tax rates on profits Group activities UK supply of energy and services 19.0% UK oil and gas production 40.0% Norway oil and gas production 78.0% Tax charge compared to cash tax paid UK (mainly petroleum revenue tax) Europe North America Total Current tax credit £m Cash tax paid/ (recovered) £m (116) (23) (7) (146) (34) 41 20 27 Netherlands oil and gas production United States supply of energy and services Canada supply of energy and services Denmark energy services Republic of Ireland supply of energy and services 21.0% 24.0% 22.0% 12.5% 50.0% For details on the Group’s effective tax rate see pages 17 to 20. Further information on the tax charge is set out in note 9 on Pages 125 to 127 Our Group Tax Strategy, a more detailed explanation of the way the Group’s tax liability is calculated and the timing of cash payments, is provided on our website at centrica.com/responsibility/ our-approach/responsible-tax 21 Centrica plc Annual Report and Accounts 2020Strategic Report Stakeholder Engagement Stakeholder expectations are rising. They want us to deliver a better service and improved solutions, while contributing positively to society and the environment. Maintaining constructive relationships with stakeholders is therefore crucial as it ensures that our strategy is informed by their views. This helps us create better outcomes for society and our business, which ultimately enables us to help our customers live sustainably, simply and affordably. While our Directors are often responsible for making key decisions as a result of engagement with stakeholders, associated action can be delegated to senior leaders who are best placed to ensure the desired outcome is delivered. These pages set out some of the ways we’ve engaged key stakeholders on material issues and how they’ve informed our decisions during 2020. Customers Colleagues Listening to customers helps us to understand their preferences so that we can be truly customer-focused and deliver what they need and want across issues such as customer service, energy efficiency, new products and pricing. Various methods of engagement are used including focus groups and surveys, as well as proposition and usability testing. Feedback from colleagues is essential for developing a workplace where everyone is motivated and able to be themselves and deliver for our customers. Issues discussed include reward, development, inclusion and business transformation. Feedback was sought through channels such as townhalls, surveys, performance reviews and structured engagements with trade unions. Our new purpose The Board wanted to refresh our purpose to reflect who we are today and provide a stronger vision for the future – something that would speak to the heart of what our customers want, inspire and galvanise our colleagues to give their all and act as a north star for our strategy, while driving positive impact for stakeholders over the long term. And so we set out on a journey to co-create it with stakeholders. We had more than 300 conversations with customers and colleagues who told us that they wanted us to be a better customer champion, support a more secure future by solving problems for their homes and businesses, and help to create a more sustainable world. Using this feedback, over 3,600 customers and 3,200 colleagues selected our new purpose to be: ‘Helping you live sustainably, simply and affordably’. Navigating change We engaged with colleagues and trade unions to ensure their views were considered during our business transformation. Members of the Board held multiple townhalls attended by around 17,000 colleagues to openly discuss why we need to become a simpler and more cost-effective business, and why we need to standardise our terms and conditions (T&Cs). The Board recognises that while it’s tried to ensure the new T&Cs are fairer for everyone, a degree of compromise between differing views was required as the consultation drew to a close after 300 hours of negotiation. We made significant concessions including consolidating London weighting into base pay for engineers who would no longer be eligible for this benefit, and supporting colleagues through change by offering transition payments to those who would see benefits decrease. While we made great progress with trade unions and the majority of colleagues accepted the new T&Cs which protected base pay and pensions, GMB union leaders felt the concessions did not go far enough and this regrettably resulted in industrial action. We engaged in further talks with GMB under the auspices of Acas and on the 21 February, we reached an agreement that could be put to GMB Shop Stewards to progress through their agreed internal processes. We’ll now move forward and work together through Acas to collectively overcome any remaining challenges, with the aim of rebuilding trust and developing positive and productive working relationships for the future. Read more about our purpose on Page 8 Read more about how we engaged customers on Pages 6, 13 and 32 Read more about our business transformation on Pages 2 to 3 and 4 to 6 Read more about how we engaged colleagues on Pages 5, 29, 32 and 52 22 Strategic ReportCentrica plc Annual Report and Accounts 2020 Investors Shareholders and debt holders provide funds that help us run and grow our business and they expect a sustainable return. The Directors are conscious of the need to act fairly for all types of investors so when we update on our strategy, financial and operational performance alongside our Environmental, Social and Governance (ESG) issues, we aim to reflect the view of all types of investors to ensure its relevant and fair to them. We regularly engage investors through activities including investor roadshows, meetings and the Annual General Meeting (AGM), as well as responding to information requests and assessments from ratings agencies. Climate change Climate change is increasingly important to investors and we’ve held meetings specifically on this topic with a number of our largest shareholders. Our Group Chief Executive and Group Chief Financial Officer additionally held a roundtable with Climate Action 100+ (CA100+), who represent over 500 investors managing US$52 trillion in assets. CA100+ supported our sign-up to the Task Force on Climate-related Financial Disclosures (TCFD) and encouraged the Board to strengthen its net zero commitment as well as publish its net zero transition plan later in 2021. We continue to proactively engage CA100+ on a range of issues including policy advocacy, our strategy for a just transition and embedding climate change in remuneration arrangements. Government and regulators The Directors recognise the importance of a favourable regulatory environment where government or regulatory policy is developed in the interests of customers, and reflects an understanding of our impact on the community and environment. We share our expertise through extensive participation in consultation processes and regular meetings, to support policy development around topics like market design, employment and decarbonisation. Electric vehicles With transport being the most polluting sector in the UK, electric vehicles (EVs) are essential in driving us towards net zero. While we fully support the UK Government’s ambition to adopt a low carbon transport system, we felt the shift could be accelerated and advocated to bring forward the ban on all new combustion engine vehicles being sold from 2040 to 2030. We discussed with the UK Government how this might be possible – from how our capabilities could help ramp-up the charging infrastructure, to how increased flexibility could reward customers for balancing the grid and keeping charging costs down. Following engagement from us and others, legislation was subsequently brought forward to 2030 although some hybrid vehicles will be allowed until 2035. Grid flexibility Harnessing technologies like storage and demand-side response in an open and competitive market for electricity flexibility, is critical to delivering net zero at the lowest cost for customers. After extensive engagement from ourselves and others about this topic with the UK’s energy regulator, Ofgem, an obligation was introduced for Distribution Network Operators to procure flexibility before undertaking costly investments to relieve network constraints. This should encourage the continued growth of grid flexibility and ensure the existing infrastructure is fully utilised. Read more about our People & Planet Plan’s net zero goals on Pages 30 to 31 Read more about how we engaged shareholders at the AGM on Pages 26 and 53 Read more about EV’s on Page 30 Read more about engagement with government and regulators on Pages 3 and 36 23 Centrica plc Annual Report and Accounts 2020Strategic Report Suppliers Communities and NGOs The Directors fully support collaboration with suppliers to reduce risk in our supply chain and maintain high standards of business conduct, which benefits communities and the environment. We interact with suppliers in many ways such as tendering, surveys and site inspections. We seek to work with suppliers that are aligned to our values, with engagement covering topics like payment practices and strengthening social and environmental compliance. We’re passionate about sharing our expertise and working alongside charities, non-governmental organisations (NGOs) and community groups to create stronger communities. Through collaboration, the Board is armed with a greater understanding of community issues and has full regard of their views, as well as the likely consequences their decisions will have on them – from helping to tackle urgent social issues, to fighting climate change. Maintaining supply Members of the Board recognised the unprecedented strain suppliers were under when COVID-19 hit, so the Company asked key suppliers how it might be able to help mitigate the immediate challenges. An example of this engagement involved the approval of an advanced payment to a personal protective equipment (PPE) provider, which gave their supplier the additional cash flow needed to pay employees for the unplanned increase in manufacturing. As a result, we not only helped protect wages in our supply chain but we also maintained essential supplies to serve our customers safely. Stronger communities COVID-19 ignited a desire for colleagues to get involved with the emergency response. Through engagement with colleagues and community groups, it was realised that our scale and passion could make a meaningful difference to The Trussell Trust in meeting the rapid rise in demand for food banks at the start of the pandemic. With Director support, British Gas engineers volunteered over 58,000 hours and delivered four million meals to those most in need during April to July. Following positive feedback from The Trussell Trust, MPs, NGOs and colleagues, we’ve decided to continue our relationship and foster stronger links between our charity partners to provide more holistic support. Read more about our supply chain on Page 32 Find out more about how we engaged suppliers to safeguard human rights at centrica.com/modernslavery Read more about our investment in communities on Pages 29 and 32 Find out more about the impact of our Trussell Trust partnership at centrica.com/trusselltrust 24 Strategic Report | Stakeholder Engagement continuedCentrica plc Annual Report and Accounts 2020 Section 172 Statement The Directors must act in accordance with their duties under the Companies Act 2006 (the Act). These include a fundamental duty to promote the success of the Company for the benefit of its members as a whole. This duty is central to the Board’s decision-making processes and outcomes. In promoting the success of the Company, the Directors must also consider the interests of stakeholders and the other matters required by section 172(1) (a) to (f) of the Act. This Section 172 Statement describes how the Directors have taken into account wider stakeholders in their decision making and also the principal decisions taken during the year. General confirmation of Directors’ duties Centrica’s Directors are fully aware of and understand their statutory duties under the Act. The Board has a clear framework for determining the matters within its remit and has approved Terms of Reference for the matters delegated to its Committees. When making decisions, each Director ensures that they act in the way they consider, in good faith, would most likely promote the Company’s success for the benefit of its members as a whole, and in doing so have regard (among other matters) to section 172(1) (a) to (f) as described below. (a) The likely consequences of any decision in the long term The Directors understand Centrica’s business and the evolving environment in which it operates, including the challenges of a highly-competitive marketplace, regulatory intervention and climate change. Centrica’s new Purpose, “helping you live sustainably, simply and affordably”, its strategy and new simplified business and organisational structure are intended to strengthen the Company’s position for the long term by halting the decline in customer numbers and financial performance, stabilising the Group and positioning it for future growth. The Directors recognise how our operations are viewed by different stakeholders and that some decisions they take may not align all stakeholder interests. The Directors have taken decisions during 2020 that they believe best promote Centrica’s long-term success for the benefit of its shareholders as a whole. (b) The interests of the company’s employees The Directors recognise that employees are fundamental to the future growth and success of the Group. That success depends on attracting, retaining and motivating employees. The Board and management actively engaged with employees around these issues throughout the year and more information about employee engagement can be found on pages 22 and 52. (c) The need to foster the company’s business relationships with suppliers, customers and others In addition to shareholders and colleagues, the Directors recognise the benefits of engaging with a broad range of stakeholders including suppliers, customers, governments, regulators, communities and NGOs. Developing and delivering our strategy depends on building and maintaining constructive relationships across these stakeholders. The Safety, Environment and Sustainability Committee (SESC – formerly SHESEC) receives regular updates on stakeholder engagement activities and further information on stakeholder engagement can be found on pages 22 to 24. (d) The impact of the company’s operations on the community and the environment The Directors appreciate that collaboration with charities, NGOs and community groups helps to create stronger communities and provide insights that enable the Board to understand Centrica’s impact on the community and environment, and the consequences of its decisions in the long term. (e) The desirability of the company maintaining a reputation for high standards of business conduct Centrica aims to meet the changing needs of its customers and enable the transition to a lower carbon future. The Board periodically reviews and approves frameworks, such as Our Code which sets out our minimum expectations for all those we work with or alongside; it is the cornerstone of our ethics and compliance programme. The Board also annually approves the Modern Slavery Statement, to ensure that its high standards are maintained both within Centrica and its supply chains. Additionally, the Company has relaunched its responsible business ambitions under our People & Planet Plan, details of this can be found on pages 28 to 33. (f) The need to act fairly as between members of the company After weighing up all relevant factors, the Directors consider which course of action best promotes the long-term success of the Company, taking into consideration the impact on stakeholders. In doing so, the Directors act fairly as between the Company’s members. However, the Directors are not required to balance the Company’s interests with those of other stakeholders, and this can sometimes mean that certain stakeholder interests may not be fully aligned. Culture Centrica’s culture is set from the top and embedded in all we do. For more information on our culture, see the Chairman’s Statement on pages 2 to 3, the Group Chief Executive’s Statement on pages 4 to 6, and the Directors’ and Corporate Governance Report on page 45. Stakeholder engagement Engaging with stakeholders is fundamental to our business success. By listening to and collaborating with our stakeholders, we can grow our business and deliver for our customers and society over the long term. Further details of our stakeholder engagement can be found on pages 22 to 24. Principal decisions The Board is responsible for overseeing meaningful engagement with its stakeholders, having regard to their views when taking principal decisions. Principal decisions are those which are material to the Group, and significant to any of our key stakeholder groups. Further information on these decisions are included in the table on pages 26 and 27. 25 Centrica plc Annual Report and Accounts 2020Strategic Report Strategic Report | Section 172 Statement continued Consideration of stakeholders and outcomes For each of the principal decisions made by the Board, we provide a description of: • how stakeholder interests were considered and what influence this had on the decision; • the impact on risk management and the Company’s principal or emerging risks; • the consequences for the Company’s long-term success; and • the impact on affected stakeholders and (where relevant) the environment. Principal decisions considered by the Board Cancellation of the proposed final dividend 2019: On 2 April 2020, Centrica announced that the 2019 final dividend payment of 3.5p per share, due to be paid in June 2020 following shareholder approval, would be cancelled as a result of the uncertainties arising from the COVID-19 pandemic. Stakeholders considered Engaging with and considering stakeholder interests • Shareholders (directly impacted by the decision) • All stakeholders (indirectly impacted as their interests are in the longer-term viability of the business) The Board considered the impact on shareholders of withdrawing the recommendation to pay a final dividend. Due to the financial impact of COVID-19 and related economic weakness, the Board considered that the decision to withdraw the recommended dividend payment was prudent and would be in the longer-term interests of the Company and all stakeholders. The decision was taken by the Board as part of a broader course of actions in line with the Board’s commitment to maintain a strong balance sheet. Mitigating actions taken included reducing 2020 cash expenditure, with reductions in non- essential operating costs and the delay of capital and restructuring projects. In addition, the Company reduced consultancy spend, stopped pay increases and limited bonus payments. Overall, shareholders were generally supportive of this decision. Effect of engagement with stakeholders on Board decisions and impact of decisions on risk The actions taken to withdraw the final dividend payment for 2020: (i) strengthened the Company’s balance sheet, mitigating against the risk that it would not be able to withstand the difficult market environment arising from the COVID-19 pandemic; and (ii) ensured that the Company could maintain a strong cash flow in the short term whilst protecting the Company in the longer term. Further information is provided under Access to Sufficient Market Liquidity Risk, in Our Principal Risks and Uncertainties on page 37. The Board decided to hold both the 2020 AGM and GM as closed meetings in order to protect the health and safety of our shareholders and colleagues. This was in accordance with guidance issued by the UK Government. The decisions taken by the Board were designed to prioritise and protect the health and safety of our employees and our shareholders in the face of the global public health risk. Holding the 2020 Annual General Meeting (AGM) and General Meeting (GM) for the Disposal of Direct Energy as closed meetings • Shareholders (directly impacted by the decision because under normal circumstances general meetings allow shareholders to attend in person, to vote at the meeting on a poll and hold the Board to account through Q&A and discussion) • Colleagues (affected by safety concerns of not having a closed meeting) Remote working, furlough of certain employees and ensuring protection of our colleagues • Colleagues (directly impacted by either being furloughed or working remotely) • Customers (directly impacted by the initial change in the provision of services) In both instances, shareholders were strongly encouraged to exercise their votes by submitting their proxy forms. Shareholder contribution to these meetings is valued by the Board, and shareholders were invited to submit questions in advance of the meetings. The Board’s responses to questions raised by shareholders are available on the Company’s website. In order to protect our colleagues during the COVID-19 pandemic, the Board agreed that, where possible, employees should work remotely. In addition, a number of employees were furloughed under the UK Government’s job retention scheme, protecting their roles. The majority of our colleagues continued to provide services to our customers, with priority going to those vulnerable customers who needed extra support. Sale of Direct Energy: In July 2020 the Board approved (subject to shareholder approval) the agreement to sell the North American energy supply, services and trading business, Direct Energy, to NRG Energy, Inc. for US$3.625 billion in cash (equivalent to approximately £2.85 billion) on a debt free, cash free basis (the Disposal). • Shareholders (directly impacted because they were asked to vote on the Disposal) • Colleagues (directly impacted by the outcome of the decision made by shareholders to sell part of the business) • Customers (indirectly impacted as a result of change of ownership) • Government and regulators (directly impacted because the Disposal was subject to US regulatory approvals. The final approval was received in November 2020) • Suppliers (indirectly affected due to changes in company ownership) The Board considered that the Disposal provided Centrica with an opportunity to realise significant value for our shareholders at an attractive valuation. This disposal is aligned to our strategy to become a simpler, leaner business and in addition will materially strengthen our balance sheet and remove a source of earnings volatility from the Group. Combined with our focus on completing our intended exits from Spirit Energy and Nuclear at the appropriate time, the Board expects this to lead to a more predictable and high-quality earnings stream moving forward. The Disposal was subject to shareholder approval at a GM of the Company. Approximately 99.9% of those shareholders voting at the GM (approximately 64% of the Company’s issued share capital) voted in favour of the Disposal. 26 The Board was mindful of the impact of these decisions on our employees. In this respect we conducted campaigns that discussed the importance of mental health and encouraged use of our mental health suite. Further information is provided on page 32. The Group’s actions also ensured that our customers had heating and hot water, even at times of maximum restrictions, while the health and safety of both employees and customers remained a priority. Further information is provided under Capability of People, Process and Systems and Legal, Regulatory & Ethical Compliance Risk, in Our Principal Risks and Uncertainties on pages 38 and 39. The proceeds received from the sale of Direct Energy have significantly strengthened the balance sheet, reduced the Group’s net debt including the pension deficit and the potential cash and collateral calls needed following a credit downgrade. The Disposal is an important step in the turnaround of Centrica, allowing us to become a more focused energy services and solutions company in our core markets of the UK and Ireland. Further information is provided under Access to Sufficient Market Liquidity Risk, in Our Principal Risks and Uncertainties on page 37. Centrica plc Annual Report and Accounts 2020 Principal decisions considered by the Board Stakeholders considered Engaging with and considering stakeholder interests To undertake a significant restructure of the business designed to create a simpler, leaner Group focused on delivering for our customers • Colleagues (directly impacted by redundancies and changes to ways of working) • Customers (directly affected by bringing colleagues close to customers to improve customer service) Update of employee Terms & Conditions (T&Cs) and collective arrangements: • Colleagues (the Company consulted directly with employees and Trade Unions) • Customers (directly affected by creating a more modern flexible workforce to improve customer service) As part of its decision to create a simpler, leaner business, the Board took the decision to modernise employee terms and conditions. In the UK, Centrica had over 80 different employee contracts, each with multiple variants. The modernisation of T&Cs provides our colleagues with more choice and ensures Centrica has more flexibility to meet the changing expectations of its customers while improving the quality of its services. Board changes • Colleagues, shareholders and customers (all indirectly affected by the individuals appointed to the Board, which has responsibility for the direction, management, performance and long-term sustainable success of the Company.) • Shareholders (annually (re-)elect the Directors at the AGM) Following a strategic review, a decision was taken by the Board to have fewer customer- facing business units, all of which will report directly to the Group Chief Executive. The revised operating model is expected to accelerate the delivery of targeted cost savings and lead to a reduction of approximately 4,000 roles across the Group, (excluding from the divestment of Direct Energy), with over half of these departures from management layers. The majority of the restructuring took part in the second half of 2020, following a consultation on the proposals with the Group’s employees. In addition, as part of this restructuring, around half of the 40 strong Senior Leadership team left the Group by the end of August 2020. Members of the Board and management held regular townhall meetings, attended by our colleagues, to discuss our proposals to standardise our T&Cs. After listening to our colleagues, and taking on board their feedback throughout the consultation process, with both employees and Trade Unions, many of our proposals were strengthened. Further details of the consultation process are provided on page 22. Despite the strengthened proposal, the GMB Union recommended that their members take industrial action during January 2021. This represents a small proportion of our workforce. The Board remains committed to the modernisation of T&Cs. During 2020, the Nominations Committee focused on succession planning and, specifically, refreshing the membership of the Board. This followed the reduction in Board size while adding new capability to support the overall Group restructure towards a leaner and more agile customer-focused business. Shareholders were consulted on key Board appointments during the year. All Directors are subject to re-election by shareholders on an annual basis. The Board now comprises the Chairman, two Executive Directors and five Independent Non-Executive Directors. This compares to a Board of 13 Directors on 1 January 2020, which comprised the Chairman, four Executive Directors and eight Independent Non-Executive Directors. The newly constituted Board sets the tone for the Group’s culture. Further details of Board changes during 2020 and 2021 to date are provided on pages 48, 62 and 63. Effect of engagement with stakeholders on Board decisions and impact of decisions on risk These actions, although difficult given the impact on our employees, were designed to allow the Company to focus on its customers, reduce the cost base of the Group, arrest the decline of the business and create a sustainable company for the long-term benefit of all stakeholders. Further information is provided under Highly Competitive Markets Risk, under Our Principal Risks and Uncertainties on page 39. The modernisation of employee T&Cs is an element of the Group reorganisation announced in June 2020. It is designed to place the focus on the customer and reduce the cost base of the Group. However, the Board recognises that there was a small proportion of employees who did not accept the new T&Cs. We continue the dialogue with our Trade Union representatives on this issue. This action mitigates the risk of operating in highly competitive markets, although it has increased the Group’s risk of industrial action being taken by a small percentage of our workforce. The Board considers this decision to be in the long-term interest of its stakeholders. Further information on the Highly Competitive Markets and Capability of People, Process & Systems Risks are provided on pages 38 and 39 in Our Principal Risks and Uncertainties. The Board believes that it has the relevant skills and experience to implement its strategy and deliver success to the Group in the long term. For further information see Capability of People, Process & Systems Risk, in Our Principal Risks and Uncertainties on page 38. 27 Centrica plc Annual Report and Accounts 2020Strategic Report Strategic Report People and Planet As society looks to rebuild from COVID-19 and as we emerge from years of business transformation, we have a huge opportunity to refocus and reshape our future to one that’s fairer and supports the environment. That’s why we’ve introduced our People & Planet Plan to create a more inclusive and sustainable future that supports our communities, our customers and each other. The Plan builds on progress made as part of our outgoing Responsible Business Ambitions and accelerates action through five global goals that are focused in areas that matter deeply to our business and society, and where we’re well-placed to make a difference. For our people, we’ve strengthened our goals to provide a more engaging and inclusive place to work so that we can support every colleague to be themselves and thrive, as well as better serve our customers and communities. And for our planet, we’ve introduced bolder goals to fight climate change so that we can support every customer to live more sustainably by providing services and solutions that help them be net zero by 2050, while working to become a net zero business ourselves by 2045. With this sharpened focus, we’re confident that we’re increasingly putting sustainability at the heart of our business which will empower us to better deliver our purpose of helping our customers live sustainably, simply and affordably, while contributing positively to the United Nations Sustainable Development Goals (SDGs). Whilst we’re on track with most of our goals now, we know that achieving our 2030 goals will be challenging and rightly so. Over the next decade, we’ll therefore harness the collective expertise of our colleagues and collaborate with key stakeholders such as governments, partners and local communities, to further shape our plans and drive forward necessary action to deliver the change we all want and need together. Explore a fuller list of our non-financial KPIs on Pages 222 to 224 Find out more about our People & Planet Plan, SDGs and SASB disclosure at centrica.com/sustainability Our People & Planet Plan Supporting communities, our planet and each other People Supporting every colleague to be themselves to better serve our customers and communities Planet Supporting every customer to live more sustainably By 2030, we want to: By 2045-50, we want to: • Create an engaged team that reflects the full diversity of the communities we serve • Recruit 3,500 apprentices and provide career development opportunities for under-represented groups • Help our customers be net zero by 2050 • Be a net zero business by 2045 Inspire colleagues to give 100,000 days to build inclusive communities Doing business responsibly Underpinned by strong foundations that ensure we act fairly and ethically – from customer service to human rights 28 Centrica plc Annual Report and Accounts 2020 People Colleagues & Communities Supporting every colleague to be themselves to better serve our customers and communities Key: Progress against goals On track Behind By 2030, we want to: • setting up a ‘Shadow Board’ of diverse colleagues to meet leaders and drive continuous improvement; • inspiring more leaders into reverse mentoring to grow the skills of diverse talent; and • mandating unconscious bias training for everyone to help ensure equality. Our efforts have been recognised by leading indexes such as The Times Top 50 Employers for Women and the Financial Times Top Diversity Leaders in which we featured in the top 100. By 2030, we want to: Create an engaged team that reflects the full diversity of the communities we serve(1) Recruit 3,500 apprentices and provide career development opportunities for under-represented groups We’ve repositioned our STEM (Science, Technology, Engineering and Maths) goals as the pipeline of people we wanted to reach wasn’t strong enough. We’ll now focus on building a more inclusive pipeline to improve entry into STEM careers for people from under-represented groups, including those from disadvantaged backgrounds. Having provided over 500 schools with lessons on energy and the environment via TechWeCan in 2020, we’ll broaden development opportunities in 2021 through initiatives such as our world-class apprenticeships and the Movement to Work programme which were paused during COVID-19. Progress against the goal will be reported in 2021. By 2030, we want to: 2020 Progress Inspire colleagues to give 100,000 days to build inclusive communities(3) 10,548 days (3) Baseline 2019. Volunteering is an inclusive way of building engagement while strengthening local communities. Between 2019 and 2020, our volunteering days rose by 230% to an all-time high. This was driven by the success of our new partnership with The Trussell Trust to help the foodbank charity deliver four million meals to those most in need during the pandemic. Being able to make a difference in our communities is empowering for colleagues and 98% of volunteers said they felt proud to work for us (read more on page 24). 2020 Progress Senior leaders(2) All company Female Ethnic minority Disability LGBTQ+ Ex-service 28% 13% 1% 1% 1% 28% 13% 1% 1% 1% (1) This means all company and senior leaders to reflect 47% female, 14% ethnic minority, 15% disability, 3% LGBTQ+ and 3% ex-service by 2030. (2) Senior leaders includes colleagues above general management and spans senior managers, the Centrica Leadership Team and the Board. Having an engaged and inclusive team where everyone feels motivated, valued and able to reach their potential, is key to helping us deliver for our customers. That’s why we’ve broadened our inclusion goals to more fully reflect the diverse company we want to be. These goals are ambitious but we feel that aiming high is the right approach to deliver progress. Boosting female representation will be particularly challenging given our large field engineer team is traditionally male oriented (see table below), and is a key reason why our female representation in 2020 was lower than we’d like. We’re seeking to address this through attracting more women into apprenticeships over the next decade. Following the Black Lives Matters movement, we listened to colleagues to truly understand how we can create a more diverse and inclusive place to work. As a result, we made a series of commitments to colleagues which included: • introducing bolder goals to accelerate inclusion (see above) and running a #CountMeIn campaign to encourage the sharing of personal information to better understand our workforce and target action; Our wider diversity breakdown Board of Directors Senior executives and direct reports Senior leaders All employees Field engineer operations(6) Gender(4) Ethnicity(5) 2020 2019 2020 2019 Female Headcount % 4 (44%) 44 (37%) 164 (28%) 6,530 (28%) 812 (9%) Male Headcount % 5 (56%) 75 (63%) 415 (72%) 16,670 (72%) 8,428 (91%) Female Headcount % 2 (17%) 35 (34%) 224 (29%) 7,420 (29%) 304 (6%) Male Headcount % 10 (83%) 67 (66%) 561 (71%) 18,507 (71%) 4,399 (94%) Ethnicity Headcount % Ethnicity Headcount % 1 (11%) 16 (13%) 75 (13%) 2,987 (13%) 559 (6%) 3 (25%) 11 (11%) 81 (10%) 3,126 (12%) 256 (6%) (4) Headcount as at 31 December differs from numbers referenced elsewhere in the Annual Report and Accounts due to different methodologies. To accurately reflect the full diversity of our workforce, we use overall headcount numbers rather than a headcount based on their full-time equivalent. In February 2021, female Board representation rose to 50%. Read more about Board diversity on page 52. (5) Based on 65% of employees in 2020 and 63% of employees in 2019, who voluntarily disclosed that they were from a Black, Asian, Mixed/Multiple or other ethnic group across the UK and North America, which constituted the majority of our workforce in 2020. (6) Of this, 4% of females are in engineering roles with the rest in support roles. 29 Centrica plc Annual Report and Accounts 2020Strategic Report Planet Climate Change Supporting every customer to live more sustainably Key: Progress against goals On track Behind By 2050, we want to: 2020 Progress Help our customers be net zero (28% reduction by 2030)(1) 18% reduction (1) Carbon intensity of our customers’ overall energy use including electricity and gas with a 2019 baseline normalised for divestments. Target aligned to the Paris Accord and based on science, corresponding to a well below 2°C pathway initially and 1.5°C by mid-century. With around 90% of our total carbon emissions coming from our customers, the biggest thing we can do to fight climate change is to help them use energy more sustainably. In 2020, our services and solutions enabled customers to reduce their emissions by 4.9% on average. To further accelerate progress, we set a new target that supersedes this and will help customers be net zero by 2050. We made good progress towards our new goal with the carbon intensity of our customers’ energy use reducing by 18% compared to 2019 – equivalent to 4.9mtCO2e or the annual emissions of 1.7 million UK households. This reduction was delivered through energy efficiency and optimisation solutions, alongside renewable and low carbon energy tariffs. To help our customers journey towards net zero in 2020, we: • launched a ‘Green Future’ renewable energy tariff which is one of the greenest tariffs on the market for green gas and renewable electricity; • continued to be a leader in developing a low carbon transport system by installing nearly 17,700 electric vehicle charge points since 2013, and joining forces with Volkswagen to deliver installations and tariffs at scale; • concluded our £19 million Cornwall Local Energy Market trial whereby over 200 homes and businesses generated, traded and stored renewable energy over three years, and is now a blueprint for a smarter, flexible grid that can support more renewables while avoiding expensive network upgrades; and • partnered to build the world’s first net zero industrial cluster in the UK by 2040 using hydrogen, carbon capture and storage technology. Our energy and carbon emissions Total carbon emissions (Scope 1 and 2) Scope 1 emissions Scope 2 emissions Scope 3 emissions(4) Total carbon intensity by revenue Total energy use Net zero fleet We’ve brought forward our target to electrify our 12,000-strong British Gas fleet by 2025 from 2030, and introduced plans to never purchase another combustion engine vehicle. We’ve ordered 3,000 electric vehicles (EVs) with Vauxhall, the largest commercial EV order of its kind in the UK, and will order more once availability allows. We also provided 2.6GW of flexible, distributed and low carbon technology and a route-to-market for renewables with 11GW under management. By 2045, we want to: 2020 Progress Be a net zero business (40% reduction by 2034)(2) 18% reduction (2) Scope 1 (direct) and 2 (indirect) greenhouse gas emissions based on operator boundary and normalised for acquisitions and divestments against a 2019 baseline, with target aligned to the Paris Accord and based on science. This differs from total carbon emissions set out in the table below, which includes all emissions at time of ownership. As part of our strategic transformation, we produce over 80% less carbon than we did a decade ago (see Strategy overleaf). Towards our new target to be net zero by 2045, our total carbon emissions(2) in 2020 decreased by 18% from 2019, with savings largely linked to less upstream generation and production as a result of COVID-19 and outages. Meanwhile our internal carbon footprint across property, fleet and travel declined by 30% largely due to reduced travel and property use during the pandemic. Savings were also achieved through low carbon fleet initiatives like installing GPS and ‘right sizing’ vehicles to smaller and more efficient models, delivering property efficiencies across lighting, heating and cooling systems, alongside savings arising from the restructuring of our business. This brings our overall reduction to 58% against our 35% target for 2015-25, and we’ll now retire this measure to focus on our new net zero goal. 2020 1,925,747tCO2e† 1,885,449tCO2e† 40,299tCO2e† 115,828,220tCO2e 92tCO2e/£m(5) 8,331,421,261kWh†(7) 2019 2,512,141tCO2e(3) 2,474,794tCO2e(3) 37,347tCO2e 127,209,632tCO2e 111tCO2e/£m(6) 10,095,173,370kWh(8) We report on an equity basis with practices drawn from WRI/WBCSD Greenhouse Gas Protocol, IPIECA’s Petroleum Industry Guidelines for Reporting Greenhouse Gas Emissions and Defra’s Environmental Reporting Guidelines. We will transition to an operational basis from next year. † Included in DNV GL Business Assurance Services UK Limited (DNV)’s independent limited assurance report. See page 222 or centrica.com/assurance for more details. (3) Restated due to availability of improved data. (4) Includes emissions associated with gas and power sold to customers, purchased goods and services alongside business travel and commuting which was expanded to include emissions from colleagues working from home during COVID-19. All emissions are calculated in line with the methodologies set out by the Greenhouse Gas Protocol’s technical guidance, apart from working from home emissions which are based on methodology set out in EcoAct’s homeworking emissions whitepaper. (5) Comprises UK 85tCO2e/£m and non-UK carbon intensity by revenue 99tCO2e/£m. Total is a weighted average of component parts. (6) Comprises UK 116tCO2e/£m and non-UK carbon intensity by revenue 107tCO2e/£m. (7) Comprises UK & Offshore 2,678,890,009kWh and non-UK energy use 5,652,531,252kWh. (8) Comprises UK & Offshore 3,130,631,079kWh and Non-UK energy use 6,964,542,291kWh. 30 Strategic Report | People and Planet continuedCentrica plc Annual Report and Accounts 2020 Task Force on Climate-related Financial Disclosures Climate change is one of the greatest challenges facing society. The energy sector has a key role to play in helping the world transition to net zero and we’re committed to playing our part. That’s why we became signatories of the Task Force on Climate- related Financial Disclosures (TCFD) in 2020, and why we’re working hard to improve our disclosure and more fully align with the framework when it becomes mandated in 2021. Governance The Board has direct oversight of climate-related issues. It agrees our position and commitments on climate change with the support of its Committees, and works alongside senior managers in Group Strategy & Environment who develop our climate strategy, as well as Group Risk who manage integration into the Enterprise Risk Management (ERM) process. In 2020, the Board’s Safety, Environment and Sustainability Committee (SESC), formerly the Safety, Health, Environment, Security and Ethics Committee, met to review performance against climate targets as well as the opportunity to strengthen our net zero commitments, which were later approved by the Board. To continuously improve governance in this area, Board members will receive climate change training during 2021. Strategy We’re focused on helping our customers live sustainably, simply and affordably. As part of our net zero goals (see previous page), we’ll drive emissions out of our business through a range of initiatives including completing our strategic transformation to focus on the customer by exiting interests in exploration and production, converting our fleet to electric, and expanding energy efficiency, onsite generation and green tariffs across our sites. For our customers, we’ll help cut carbon across power, heat and transport with the roll-out of energy efficiency and optimisation solutions like Hive, fuel switching with technologies including electric vehicle charging solutions, hybrid heat pumps and hydrogen, while providing cleaner energy through products such as green tariffs, demand side response and a cleaner fuel mix. During this period, we recognise that gas will be an important transition fuel. We’ve assessed the strategic risks and opportunities of decarbonisation and made good progress on scenario analysis using the National Grid Future Energy Scenarios in addition to our own in-house model. For example, we’ve assessed various scenarios including 1.5°C, that explore alternative technology pathways such as electrification and hydrogen, together with the financial risks and opportunities these pose to our main businesses. Based on modelling so far, we believe we’re well positioned to offset potential adverse impacts by adapting our technical capabilities and engaging our customers to harness opportunities as we transition to net zero. We’ll publish our net zero transition plan in 2021 and continue to assess our strategy in line with the needs of the energy transition, as well as the views of our stakeholders (see page 23). Risk management Climate change risks in 2020 were primarily managed through our ERM process. Risk profiles were produced at a business level with Board-level oversight of climate-related risks maintained by the SESC. The Group Strategy & Environment team additionally provided horizon scanning, testing and calibration. Meanwhile, we enhanced our understanding of longer-term risks relating to our scenario analysis and shared them at the annual Board Planning Conference, which considers how the market environment, technology and policy are influenced by climate change. Became signatories of the Task Force on Climate-related Financial Disclosures in 2020 Rated ‘A’ for leadership in action and disclosure on climate change by CDP DISCLOSURE INSIGHT ACTION Our near- and long-term climate-related risks include: • transitional risks which mainly relate to potential policy and regulatory changes that are considered ‘high’ in terms of significance and likelihood over the longer term. For example, policy development could trigger changes that affect our range of customer offerings and revenue. These include market and technology changes that shift demand such as customers moving to electric heating which would reduce the demand for gas and related products like gas boilers or, it could adversely affect the longer term viability of products like Combined Heat and Power units (CHPs) which are a viable transition technology but reliant on fossil fuels; and • physical risks are low in the near term and ‘low-to-medium’ in the longer term for significance and likelihood. Changes in temperature, for instance, could impact energy demand for heating and cooling, while less predictable weather might limit the accuracy of demand forecasting. Both risks could adversely affect revenue. Significant opportunities have also been identified. These include areas where we already have a leadership position or where we’re well-placed to ramp up our involvement when the time is right – from the installation and maintenance of EV charge points, heat pumps and hydrogen boilers, to hydrogen storage and trading. Metrics and targets We were early adopters of best practice reporting of greenhouse gas emissions and have a strong track record in setting and achieving climate-related targets. We monitor and report our global scope 1, 2 and 3 emissions and in 2020, strengthened existing targets to help our customers and business be net zero by 2045-50 (see previous page). These goals are aligned to the Paris Accord which is a global agreement to keep temperature rise well below 2°C above pre-industrial levels, and pursue efforts to limit the increase to 1.5°C. Delivering our targets is in part dependent on having a policy and regulatory environment that supports our net zero objectives, and so we have continued to advocate for positive policy development relating to issues like the decarbonisation of heat, transport and increased flexibility. 31 Centrica plc Annual Report and Accounts 2020Strategic Report Our Foundations Our People & Planet Plan is underpinned by strong foundations that ensure we act fairly and ethically Customers 2020 was a challenging year for many customers and we wanted to be there for them. We spent £216 million in mandatory and voluntary contributions to help those who struggled to pay for their energy. For example, over 570,000 customers were supported through the UK’s Warm Home Discount Scheme while additional assistance was prioritised for those impacted by the pandemic. This included over 80,000 of British Gas’ most vulnerable customers receiving extra help through advance credit (prepayment customers) or deferred payments (credit customers). And on top of providing energy advice and grants for customers and non-customers via the British Gas Energy Trust, the Trust also created an £800,000 COVID Response Fund to support frontline money and energy advice organisations. Good customer service levels were additionally maintained to help us solve customer issues (see pages 13 to 15). Colleagues We want our people to feel safe, engaged and rewarded. There were no process safety Tier 1 or 2 events in 2020 and our total recordable injury frequency rate (TRIFR) improved by 3% to 1.03 per 200,000 hours. During COVID-19, all field workers were also provided with personal protective equipment (PPE) and operated in line with government guidance to keep themselves and our customers safe. We strive to continuously improve our safety performance by working to ensure that safety is front-of-mind and reinforcing a strong safety culture, while improving controls and monitoring. Alongside physical health, we were mindful of the impact COVID-19, coupled with the reorganisation of our business, could have on mental health. We helped provide peace of mind by ensuring everyone had the flexibility to adjust working hours to accommodate caring responsibilities and temporarily amended policies to ensure COVID-related absence wouldn’t impact pay. We additionally ran campaigns that talked about the importance of being open about mental health, encouraged use of our mental health suite which includes the ‘Unmind’ Wellbeing app and support available via our Mental Health First Aiders. The reorganisation also regrettably contributed to our engagement score declining by 1% to 42% favourable. We have a big opportunity to improve engagement following our transformation by connecting colleagues with our purpose while creating a more inclusive and supportive place to work. We reward our people fairly. This includes paying at least the Living Wage in the UK and upholding equal pay. Our gender pay gap rose by 5% to 35% median and continues to be due to more men working in higher paid senior and technical roles like engineering. To improve transparency, we also voluntarily published our ethnicity pay gap which was 14% median and is driven by similar factors to our gender pay gap. Tackling the pay gap is not quick or easy, and we expect our performance to fluctuate in the short term as we transform our business and as our People & Planet Plan gets fully underway (see page 29). Communities Our Code and Our Values help us operate in a way that’s beneficial to society by setting out the high standards and behaviours we expect from those who work for us or with us. For example, Our Code includes our commitment to uphold and protect human rights. We take action to ensure our people and workers in our supply chain are safeguarded from abuses through activities like undertaking human rights training, due diligence and monitoring 32 Supporting mental health Our 130-strong network of Mental Health First Aiders provide vital support and encourages preventative action of supplier selection and renewal, as well as conducting site inspections across our supply chain and, to date, we’ve found no instances of modern slavery. Clear guidance is also provided on avoiding bribery and corruption. We prohibit any improper payments, including facilitation payments, regardless of value or the jurisdictions in which we operate, and exchange gifts and hospitality responsibly. To further reduce risk, anti-bribery training is provided to colleagues in higher risk roles and our Financial Crime team run third-party risk management screening to reduce threats. We also undertake due diligence and monitoring across supplier selection, contract renewals and our gifts and hospitality and conflicts of interest registers. During 2020, 96% of colleagues completed refresher training on Our Code and confirmed they would uphold its standards and principles. A confidential Speak Up helpline is available to anyone who suspects Our Code is being violated. In 2020, we had 1.43 reports per 100 employees which is largely in line with the external benchmark of 1.40 per 100 employees, and demonstrates that colleagues feel safe to speak up. All reports are investigated by the Ethics & Compliance team, with quarterly monitoring via the SESC and the Audit and Risk Committee, with matters being brought to the attention of the Board as appropriate. We want to be a force for good in our communities. Towards this in 2020, we donated over £3 million in charitable contributions which includes support for our flagship partners The Trussell Trust, Carers UK and Focus Ireland (see page 24). We also assessed a further 63 suppliers on their social and environmental standards which includes human rights. Overall, our sustainability score remains healthy at 54 (low risk) which is better than the multi-industry average of 45 (medium risk). If suppliers receive a high-risk rating, we consider appropriate action which may involve conducting a site visit to better understand the level of risk, or ending our relationship and reporting the abuse. By the end of 2020, five site visits/revisits had been completed in China, Bangladesh, Pakistan and Cambodia to review labour standards which included human rights and was down from nine site visits/revisits in 2019 due to the impact of COVID-19. Findings from the site visits were reassuring and resulted in five action plans to help our suppliers continuously raise standards. To maintain appropriate oversight during the pandemic, we’ve targeted questionnaires to our highest risk suppliers and will roll out remote worker surveys in 2021. Environment We closely monitor and manage our wider environmental impact. During 2020, our water consumption dropped by 41% to 306,361m3 while our waste declined 26% to 27,299 tonnes. The main factors behind this decline were reduced activity and occupancy levels during the pandemic alongside our exit from two power stations. Strategic Report | People and Planet continuedCentrica plc Annual Report and Accounts 2020 Non-Financial Information Statement In line with the Non-Financial Reporting Directive, we have set out where the relevant information we need to report against can be found. This includes an explanation of the relevant Group policies which relate to the below matters and an overall summary of their effectiveness, including specific examples of how these policies are implemented, any due diligence processes conducted and outcomes. Reporting requirement Section Business model Business Model – Pages 10 to 11 Reporting requirement and policy position Due diligence and outcome Impact of COVID-19 Our Code represents a high-level summary of our key policies and forms the foundation for how we do business. Read more at centrica.com/ourcode Colleagues Our policy states that we work collaboratively to create a workplace that has a respectful and inclusive culture while offering fair reward and recognition. We’re also committed to working safely and provide proactive support to ensure colleague’s health and wellbeing. • Stakeholder Engagement – Pages 22 and 26 • People and Planet – Pages 29 and 32 • Principal Risks and Uncertainties: Capability of People, Process & Systems and Health, Safety, Environment: Process Containment – Pages 38 and 39 • Key Performance Indicators (KPIs) – Pages 13, 29, 32, 222 and 223 • Chairman’s Statement – Pages 2 to 3 • Stakeholder Engagement – Pages 22, 26 and 27 • People and Planet – Page 32 • Principal Risks and Uncertainties: Health, Safety, Environment: Process Containment – Page 39 Environmental matters The policy sets out that we endeavour to understand, manage and reduce our environmental impact. Towards this, we will play our part in the transition to net zero. • Stakeholder Engagement – Page 23 • Principal Risks and Uncertainties: Weather Risk – Pages 36 and 38 • People and Planet – Pages 30 and 31 • KPIs – Pages 30, 222 and 224 • People and Planet – Pages 30 and 32 Social matters Our policy states that we will treat all of our customers fairly. As part of this, we strive to provide services and solutions that meet their needs as well as care for customers who need extra support. We also want to make a difference and help create more inclusive communities. We partner with community organisations on key issues and inspire colleagues to volunteer. • Stakeholder Engagement – Pages 22, 24 and 27 • People and Planet – Pages 29 and 32 • KPIs – Pages 13 to 15, 29, 32 and 223 to 224 • Chairman’s Statement – Pages 2 to 3 • Stakeholder Engagement – Pages 24 and 26 • People and Planet – Page 32 • Principal Risks and Uncertainties: COVID-19 and Legal, Regulatory & Ethical Compliance – Pages 35 and 39 Human rights The policy commits that wherever we work in the world, we respect and uphold the fundamental human rights and freedoms of everyone who works for us or with us. • Stakeholder Engagement – Page 24 • People and Planet – Page 32 • KPIs – Pages 32 and 223 • Stakeholder Engagement – Page 24 • People and Planet – Page 32 Anti-bribery and corruption Our policy commits us to working with integrity, within the laws and regulations of all the countries in which we operate and in accordance with recognised international standards. This includes not offering or accepting bribes or other corrupt practices. We will not tolerate any form of bribery or corruption from suppliers. • People and Planet – Page 32 • Principal Risks and Uncertainties: Legal, Regulatory and Ethical Compliance – Page 39 • Based on materiality, KPIs specific to anti-bribery and corruption are not reported externally • No material impact 33 Centrica plc Annual Report and Accounts 2020Strategic Report Our Principal Risks and Uncertainties We manage risks to support our Group strategy COVID-19 has posed significant challenges to the risk management and resilience of businesses across the globe. Centrica has a robust approach to risk management which enabled a rapid mobilisation of resources to react and mitigate the potential impacts of the pandemic. In the following pages, we set out an overview of Centrica’s risk management framework, highlighting changes adopted in 2020 and the Principal Risks at the year end. Our Principal Risks remain linked to our Group Priorities and the Group’s risk appetite is expressed in relation to our four categories of risk: Strategic, Operational, Financial and Compliance. Strengthening risk management and internal control Centrica’s Group Enterprise Risk and Internal Controls Framework remains a core element of our Governance Model which is set out below. During 2020, in light of changes to the organisational structure and operating model, the Risk Oversight process has been adjusted. The updated model is set out in the Risk Framework section below. The Group Core Principles and Framework and Governance structures remain unchanged. As part of this review, the Group Enterprise Risk team, working with the Centrica Leadership Team, conducted a full review of Group Principal Risks. An updated set of the most significant Principal Risks to the Group are set out on pages 36 to 39. Centrica Group’s Annual Risk Management Process Asse s s Business Unit risk assessment and mitigation update Functional advisory teams Business Unit risk owners I d e n tif y E v al u a t e Business Unit Risk and Controls Committee Quarterly Group Enterprise Risk and Controls review Bi-annual review of Principal Risks n tr ol & m onitor C o Group Enterprise Risk and Controls report Centrica Leadership Team RISK DEEP DIVES ARC* SESC* *Audit and Risk Committee (ARC) *Safety, Environment and Sustainability Committee (SESC, formerly SHESEC) 34 Strategic ReportCentrica plc Annual Report and Accounts 2020 Risk appetite The Board is ultimately responsible for aligning the risk appetite of the Group with our long-term strategic objectives, taking into account the emerging and Principal Risks. The Board has determined the risk appetites for all the key risks within Centrica’s Risk Universe, which are summarised into the categories of Strategic, Operational, Financial and Compliance. Due to the industry and the nature of some of the markets in which the Group operates, we have high to moderate risk appetites for our strategic and operational risks. However, we have a minimal risk appetite for safety risks and we continue to strive for an incident free workplace. We have a low risk appetite for failing to conduct business operations in compliance with the laws and regulations that Centrica manages as part of its various licences to operate. For Financial Risks we adopt a conservative approach to manage our liquidity position and balance sheet strength. However, due to the higher risks inherent in managing the commodity and weather variables within our energy supply businesses, we accept a higher appetite for certain elements of financial markets risk. Risks are assessed at a Business Unit level to determine impact and likelihood. During the Business Unit and Group level risk reviews the adequacy of mitigating actions are considered to determine the net residual risk scores and compare them to the Group risk appetite. Risk framework Day-to-day ownership of risk sits with business management under the regular scrutiny of the Centrica Leadership Team to whom the Board has delegated principal responsibility for risk oversight. The Group Principal Risks are those which potentially could impact delivery of our strategic objectives over the medium to long-term as determined through our strategic planning process. The annual risk management process is summarised in the diagram on the previous page. Quarterly Business Unit risk reviews – Each Business Unit (BU) is responsible for identifying and assessing its significant risks with support from functional subject matter experts. Current and emerging risks and issues are formally reviewed quarterly by the Business Unit Leadership teams. – The finalised risk reporting and assessment of each BU’s control environment is then formally discussed at a Group Risk and Controls Review for each BU chaired by the Group CFO. – At these quarterly reviews, recent assurance reports and findings from internal audits and other assurance reviews are discussed. Actions from previous audits and assurance reviews are tracked to ensure close out in line with agreed timescales. Executive and Committee reviews – Bi-annually the Group Principal Risks are presented to the Centrica Leadership Team for review and challenge. These include the aggregate risk assessments from the BU ‘bottom-up’ process and any Group level risk assessments. – The Group Principal Risk profile, as updated by the Centrica Leadership Team, is presented to the Audit and Risk Committee (ARC, formerly Audit Committee) for review. – Internal Audit presents quarterly to the ARC on any material findings as a result of independent assurance work. – Risk deep dives were undertaken by the ARC and SESC to review high priority risks, ad-hoc topics and emerging matters. In our assessment of viability, we consider the potential impact of ‘severe but plausible’ risks and note linkages to the Group Principal Risks as described on pages 41 to 42. The annual Viability Review has been presented to and approved by the Audit and Risk Committee. Board – The Board reviews risk as part of its strategy review process and, during the year, conducted a robust assessment of the Company’s principal and emerging risks. – At the year end the Board reviewed and approved the Principal Risk and Uncertainties disclosure. – On an annual basis we evaluate our System of Risk Management and Control, which is supported by an annual certification of controls and adherence to Group policies by senior management. Changes in risk climate and emerging risks Business Units and functions review their risks and report key changes as part of the Monthly Business Performance Reviews. Major emerging risks and issues are escalated immediately. During 2020 a number of Group level areas of risk were closely monitored and actions taken to mitigate their impact on the Group. COVID-19 At the beginning of the pandemic the Group mobilised a Global Crisis Management Team (GCMT) to co-ordinate our response and ensure the consistency of actions to protect the safety of our customers, colleagues and communities The Principal Risks outlined in pages 36 to 39 reflect the impacts of COVID-19 where applicable. Monthly Board-level reporting tracks the impact of the pandemic and provides information on the Group and Business Unit mitigations. Steps were taken to underpin the long-term financial strength of the Group as referenced in Section 172 pages 25 to 27. Centrica has maintained a strong direct link to both the UK Government and regulators. Changes in operational processes and working practices have been adopted and modified as the pandemic has progressed. The longer-term potential financial impacts on the Group have been considered in the Viability Statement as set out on pages 40 to 42. Brexit The Group continued to monitor the progress of the Brexit negotiations throughout 2020. In H2, the Brexit Readiness Working Group was re-established to ensure the Group was prepared and mitigations were in place to minimise business disruption post Brexit. This included proactive engagement with our critical suppliers and continuous monitoring of the implications for electricity trading and carbon markets. Business Unit teams will continue to monitor, assess and implement changes to processes as greater clarity emerges. Specifically, the Energy Marketing & Trading (EM&T) team will focus on understanding the implications for their business with the establishment of new efficient electricity arrangements for EU-UK interconnectors by April 2022. Industrial action Integrated contingency plans were developed in 2020 as a response to potential industrial action following terms and conditions negotiations with our employees and Trade Unions. The plans covered a range of scenarios to manage the impact of strike action on customers, colleagues and our business. We continue dialogue with our Trade Union representatives and focus our available resource on delivering for our vulnerable customers, and work with our regulators to keep them informed of our customer outcomes. 35 Centrica plc Annual Report and Accounts 2020Strategic Report Strategic Report | Our Principal Risks and Uncertainties continued Climate change We continuously consider the wider context in which we operate and, in particular, the impact of climate change. As an energy supplier, we recognise that risks associated with climate change are multi-faceted and interconnect with some of our Principal Risks. The direct risk of climate change on Centrica includes weather volatility impacting customer demand. The Weather Risk has been included in our Principal Risks detailed on page 38 due to the increased likelihood of severe weather events. Further medium- and long-term risks including transitional and physical risks are detailed in the People and Planet section on page 31. The risks posed by climate change and the opportunities to the Group to support our customers transitioning to a lower carbon future are monitored at a Committee and Board level. Oversight of climate-related risks is maintained by the SESC Committee. The Group Environmental team has presented to both the SESC Committee and Centrica Leadership Team on climate-related risks during 2020 and BU risk committees consider climate-related risks in their Quarterly Risk reviews. Technology Advances in technology bring both opportunities and threats in the medium term. Failure to adapt and exploit opportunities from advances in technology in the medium term will impact our ability to grow, compete and meet the changing needs of our customers. Digital connectivity, and intelligent systems supported by advanced analytics and artificial intelligence will drive unanticipated changes. We continue to automate and integrate our operations and monitor the changing technology landscape. Principal Risks Key changes in our presentation of the Principal Risks from the 2019 Annual Report reflect a review and rationalisation of the most significant risks to the Group, changes to the external environment, a dynamic risk landscape and articulation of risks to give clearer transparency on themes and specific issues. The following Principal Risks were adopted by the Board in 2020 and reflect the position of Group at the point of signing the accounts. The risks are presented in order of magnitude to the Group based on net residual risk, after mitigations. Overview Political and Regulatory Intervention Risk Category: Strategic FY 19: Political & Regulatory Intervention Group Priority Magnitude NO CHANGE Risk of political or regulatory intervention and changes, including those resulting from Brexit, or a failure to influence such changes. • Risk of further government intervention to support vulnerable customers or increased corporate taxation to fund costs of COVID-19 related measures • Increased focus on Environmental, Social and Governance interventions and impact on investor relations • The Group faces potential erosion of profit margins through potential further FCA interventions on pricing impacting our UK Services business Examples of mitigations We continue to be committed to an open, transparent and competitive UK energy market which provides choice for consumers. • Ongoing dialogue with policy makers to help form future regulatory requirements • Dedicated Corporate Affairs and Regulatory teams which examine upcoming political and regulatory changes and their impact • Brexit Planning Team re-convened as part of the Global Crisis Management Team to re-assess potential risks from Brexit. Management to continuously monitor the implications of the deal Developments • The risk globally that governments will determine vulnerable customers need more protection may be addressed via additional market intervention • Risk of increase to corporation tax rates to reduce public debt accumulated during the pandemic could impact future cash flows • Potential impact of planned regulatory changes in certain US states will no longer exist following the Direct Energy sale to NRG • In Q4 2020, publication of the 10-point plan for a Green Revolution and the Energy White Paper ‘Powering our Net Zero Future’ present significant medium-term opportunities and challenges for the Group. With the Government’s energy agenda covering Consultation in spring 2021 this will provide greater clarity and detail as we develop the Group’s response Our Group Priorities Customer Obsession Operational Excellence Most Competitive Provider Cash flow Growth Empowered Colleagues Safety, compliance and conduct foundation 36 Centrica plc Annual Report and Accounts 2020 Commodity Risk Asset Production Access to Sufficient Market Liquidity Risk Category: Financial Risk Category: Operational Risk Category: Financial FY 19: Financial Market FY 19: Asset Development, Availability & Performance FY 19: Balance Sheet Strength and Credit Position Group Priority Magnitude Group Priority Magnitude Group Priority Magnitude NO CHANGE INCREASE DECREASE Risk of financial loss due to our exposure to market, credit and operational risk. • Material downward movements in commodity prices can impact in year P&L through reduced revenue on sale of asset production and impact the long-term valuation of asset portfolio • Commodity exposure arises within the trading businesses, which provide a route to market for Centrica’s upstream and power generation operations, sourcing of electricity and gas for the Group’s energy supply businesses and proprietary trading activities. We also have commodity exposures driven by our LNG portfolio and, in particular, the Cheniere contract • Our ability to accurately forecast changes in our customer demand can result in a commodity exposure as we need to balance our established hedges and market prices Risk that failures in the development or integrity of our investments in operated and non-operated assets could compromise performance delivery. • Failure to invest in the maintenance and development of our assets could result in significant safety issues or asset underperformance through unplanned outages • Operational integrity is vital to our ability to deliver projects in line with our objectives • Failure to capture adequate return on our 20% nuclear investment due to operational issues suppressing earnings and cash flows or increased decommissioning costs Risk that our balance sheet may not be resilient, limiting our ability to access funding with implications for our ability to withstand difficult market or trading conditions or financial stresses to the business. • Failure to achieve our financial and strategic targets could adversely impact our investment grade credit rating, which would adversely impact access to cost-effective capital and trading arrangements • Long-term financial obligations, such as pension schemes, may increase in value due to factors both inside and outside of our control resulting in additional funding required to meet our obligations • External events could see a deterioration in asset values, resulting in a weaker balance sheet position • Financial risks reviewed regularly in • Group annual plan includes contingencies • Regular communication with key dedicated Risk Committee forums within trading entities to cover events such as unexpected outages from assets stakeholders (e.g. pension trustees, banks, credit rating agencies) • Downstream pricing, hedging and • Group-wide minimum standards are demand forecasting is actively managed by the monthly Downstream Energy Margin Meeting • Increased credit risk exposure review and mitigation actions taken, both within the individual Business Units and at Group level • Centrica Business Solutions increased their reviews of demand curves and made more regular adjustments of anticipated demand changes • Updated exploration & production (E&P) hedging policy to help mitigate risk of commodity fluctuations applied to all assets, whether operated or non-operated • Maintenance activity and improvement programmes are conducted across the asset base to optimise effectiveness and maximise production levels • We use our presence on the Board of EDF Energy Nuclear Generation Group Limited to monitor the performance of the Nuclear fleet • The exploration and production portfolio is not dependent on a single asset and the impact of an outage is diluted. The Spirit Energy joint venture structure also mitigates the impact of outages • Depressed commodity prices in 2020 have materially impacted the asset businesses through impairment, reduced in-year profits and delayed investment in further exploration • During 2020 we have experienced nuclear plant availability issues. We are waiting for the regulatory approval of safety cases for Hunterston and Hinkley nuclear stations to return to service • COVID-19 led to a substantive and • During 2020, despite the pandemic, Spirit Energy maintained all activity and programmes critical to the safe operation of assets. The 2020 production levels continue to be broadly in line with plan • In December 2020 an outage occurred at Whitegate power station in Ireland. Repairs are ongoing and the asset may not return to service until Q3 2021 immediate decrease in business volume consumption along with a fall in commodity prices, resulting in excess commodity being sold at a loss. Action was taken by management to review and adjust demand forecasts dynamically to mitigate further hedging losses in an uncertain COVID-19 environment • During 2020, in reaction to the fall in commodity prices and the impact of COVID-19, Spirit Energy took measures to maintain a free cash flow neutral position, such as actions to reduce operating costs, capital expenditure and decommissioning spend • Significant mitigating actions have been taken to strengthen the balance sheet in response to COVID-19, reducing 2020 cash expenditure and delaying capital projects • Active portfolio management to strengthen the balance sheet, for example the decision to sell the Direct Energy business to significantly reduce the level of net debt • Closely monitoring leading indicators of potential credit issues, segmenting debt to focus on high risk customers and actively working with customers to manage debt • Open dialogue with the UK Government and Ofgem about additional support should the COVID-19 crisis lead to material bad debt has led to agreement to factor bad debt into the calculation of the price cap • Proceeds from the sale of Direct Energy have significantly strengthened the balance sheet, reduced the Group net debt including the pension deficit and the potential cash and collateral calls needed following a credit downgrade • The Group has significant cash and credit facilities which it has yet to draw down • There is continued concern from the credit rating agencies as to the potential recovery of the UK energy market • The DE Sale has reduced the Group’s global diversification. Credit rating agencies will closely monitor Centrica’s business performance and UK market share in 2021 37 Centrica plc Annual Report and Accounts 2020Strategic Report Strategic Report | Our Principal Risks and Uncertainties continued Overview Cyber Risk Weather Risk Capability of People, Process & Systems Risk Category: Operational Risk Category: Financial Risk Category: Operational FY 19: Cyber Security and Resilience FY 19: Not Applicable – New risk FY 19: People, Change Management, Digital Technology and Information Systems Group Priority Magnitude Group Priority Magnitude Group Priority Magnitude NO CHANGE NO CHANGE INCREASE Risk of cyber-attack, security of IT systems and resilience to restore system availability. A cyber-attack presents a risk to Centrica operations in the following ways: • Destructive compromise of the Group-wide network resulting in a loss of all services • Confidentiality (leakage of customer data) • Integrity (accuracy of Centrica’s data) • Availability (loss and access to data) Due to the diversity of Centrica’s services, the Company could suffer all the above which could lead to regulatory compliance impact or fines, including but not limited to, General Data Protection Regulations (GDPR), Network and Information Security Regulation (NIS), Payment Card Industry-Data Security Standard (PCI), Smart Energy Code • Ongoing collaboration and information sharing with industry peers, Security Service and National Cyber Security Centre continues • Guidance on protecting our data while working from home and articles on how to recognise a COVID-19 scam have been published on the intranet • The Cyber Security Maturity Improvement Programme to focus on activities that make Centrica a much harder target to attack and exploit effectively • Information Security tooling, that identifies, mitigates and removes malicious domains and Internet Protocols The impact on present or future profitability resulting from deviations in normal weather. • Downstream businesses, as registered shippers, are exposed to financial risk due to uncertain future wholesale commodity prices, which are significantly impacted by weather • An unseasonably warm autumn/winter in the UK could reduce customer demand significantly • Downstream pricing, hedging and demand forecasting is actively managed by the monthly Downstream Energy Margin Meeting • Committee oversight of commodity and financial risks (including weather risks) by the Audit and Risk Committee • Options to mitigate weather risk in British Gas, to narrow the range of gross margin outcomes, are reviewed ahead of winter seasons Examples of mitigations Developments • Nation State and criminal actors are using COVID-19 as a lure to introduce malware or to harvest information such as log in details and passwords • Increase in attacks against newly (and often rapidly) deployed remote access or remote working infrastructure • Rise in social engineering techniques taking advantage of human traits such as curiosity and concern around the coronavirus pandemic • Implementation of revised demand curve to account for warming weather conditions • A hedge of the Q4-20 weather risk was executed to reduce earnings volatility over the first half of winter in British Gas Risk that we are unable to attract and retain employees, fail to deliver the planned benefits from technological change or poor process controls leading to the business failing to have the appropriate capabilities to meet our strategic objectives. • Failure to attract and retain key capabilities across the business could have a detrimental impact on our ability to meet our strategic objectives • Failure to deliver IT solutions in support of the prioritised objectives and change programmes in the business would have consequences both for our organisational transformation and, in some cases, our compliance obligations People capabilities: • A full skills and capability gap analysis delivered in Q4 2020 • Continuous focus on our values and culture aligned to our purpose • Greater focus on diversity and inclusion at all levels of the organisation Systems: • Regular evaluation of the adequacy of our infrastructure and IT security controls, testing of our contingency and recovery processes, and employee awareness training • Digital Technology Services (DTS) track progress of the strategic priorities for technology, data and digital activities • Introduction of a new operating model in our DTS function for the delivery of change • Business Units and functions have been closely monitoring the impact of the 2020 reorganisation and modernising of employee terms and conditions on knowledge and skills retention • Throughout the pandemic there has been increased direct employee communications from the Centrica Leadership Team, with continued emphasis on wellbeing, mental health and ways of working. Pulse surveys are regularly completed to gauge employee sentiment and address concerns • As a part of the organisational redesign, Project Delivery Teams in DTS have been rewired into the new Centrica Business Units to work closely with customer teams and drive value and business benefit • The development of the new platform for British Gas Evolve customers is managed through an agile delivery model. A governance model for the migration of customers has been implemented with oversight provided through monthly reviews with the Group CEO and CFO Our Group Priorities Customer Obsession Operational Excellence Most Competitive Provider Cash flow Growth Empowered Colleagues Safety, compliance and conduct foundation 38 Centrica plc Annual Report and Accounts 2020 Highly Competitive Markets Legal, Regulatory & Ethical Compliance Health, Safety, Environment: Process Containment Risk Category: Strategic Risk Category: Compliance Risk Category: Operational FY 19: External Market Environment FY 19: Legal, Regulatory, and Ethical Standards Compliance FY 19: Health, Safety and Environment Group Priority Magnitude Group Priority Magnitude Group Priority Magnitude NO CHANGE NO CHANGE NO CHANGE Risk that events in the external market or environment could hinder the delivery of our strategy. • Successful delivery of our strategy requires serving customers in a way that satisfies their changing needs in a competitive marketplace. Reflecting increased focus on climate change, renewables and a move to lower carbon products and propositions • Pace of change is critical given competitive pressures, ability to rightsize the cost base and take advantage of market opportunities • Driving transformation at pace creates additional risk Risk of failure to comply with laws and regulations, and to behave ethically in line with Our Code, resulting in adverse reputational and/or financial impact. • Any real or perceived failure to follow Our Code or comply with legal or regulatory obligations would undermine trust in our business • Non-compliance could lead to financial penalties, reputational damage, customer churn and/or legal and/or regulatory action Risk of failure to protect the health and safety of employees and third parties or to take appropriate measures to protect our environment and respond to climate change. • Our operations have the potential to result in personal or environmental harm • Significant HSE events could have regulatory, financial and reputational repercussions that would adversely affect some, or all, of our brands and businesses • Significant focus on profitable growth • Regulatory compliance monitoring and innovation across all Business Units including customer retention in the downstream businesses. Focus on developing our products to respond to changing customer needs and sentiment • Regular review of organisational model to support delivery of strategic objectives • Launch of British Gas Evolve is a significant step in addressing the challenge from new low-cost markets entrants • Regular review of skills and capability to sustain a strong ethically minded and performance-focused culture activities are performed by dedicated teams to drive Group-wide consistency and quality • Control frameworks are in place to deliver customer experience in line with requirements over sales compliance, billing, retentions, customer correspondence and complaints handling. These are regularly reviewed by relevant leadership teams through KPIs • The Financial Crime Team monitors threats throughout the business and adequacy of response to the threat of bribery and corruption • A global ‘Speak Up’ helpline exists to provide a consistent Group-wide approach to reporting unethical behaviour • Continuous dialogue with Ofgem and the FCA • Continued investment in training to ensure maintenance of safe operating practices • HSE Management Systems are established to include policies, standards and procedures to protect employees, third parties and our environment • Continuous engagement with regulatory agencies such as the Environment Agency, Oil and Gas Authority and UK Health and Safety Executive • Assurance over our HSE processes and controls provided by our in-house HSE teams supported by external subject matter experts, where needed • Core markets continue to be highly • During COVID-19 our approach to • As part of continuous improvement competitive • Competitive pressures may lessen if regulators and market participants determine that higher margins are needed to improve sustainability of the sector or competitors fail to maintain low prices during the pandemic • Our Group reorganisation announced in June 2020 is designed to place the focus on the customer and reduce the cost base of the Group customer visits is continually reviewed to ensure that employees are operating in line with government guidelines and that the health and safety of employees and customers is maintained • British Gas agreed with Ofgem to make payments totalling £1.73 million for handling of changes to prepayment meter top-up arrangements • The Our Code employee annual training for 2020 included expense fraud and information security dilemmas as part of a campaign to raise awareness of increased fraud risks activities, Spirit Energy has commissioned an independent review to assess its safety culture and identify any areas of improvement • Minimum manning levels have been assessed and contingency plans made for key assets (offshore and onshore) in light of COVID-19 • Mitigations have been implemented to address potential operational issues from higher staff absence rates or staff contracting COVID-19 • HSE Function has been working with the business to ensure effective HSE resources and competency in the new organisational structure 39 Centrica plc Annual Report and Accounts 2020Strategic Report Assessment of Viability Disclosure 2. Market trends affecting future prospects • Growing progress and government support for decarbonisation, corporates committing to clear decarbonisation targets • Increased regulator and consumer activism, high levels of competitive intensity, margins under pressure • Falling costs for battery, solar and wind, electric vehicles deployment accelerates, growing need for flexibility • Role of data analytics, artificial intelligence and automation increasingly important 3. Customer needs • Hassle-free, empathetic, personalised and safe service, offering solutions, not just products • Responsible options (including green tariffs) and expert guidance to help them achieve their decarbonisation goals • Trusted and credible counterparty • Lower costs and greater value 4. The Group’s strategic objectives The Group’s strategic purpose includes sustainability, simplicity and affordability, as set out on pages 8 to 9 of this Annual Report. These support the assessment of the Group’s prospects. 5. Principal risks facing the Group, as set out on pages 36 to 39. The risks we consider to be of greatest significance in assessing our prospects include: • Further political or regulatory intervention, including increased focus on Environmental, Social and Governance issues and the potential impact of the UK Government’s Energy White Paper, published in December 2020 • External risks associated with COVID-19, commodity price and other index movements, although it is noted that the commodity price risk will reduce if the Group successfully exits the E&P business as intended • Highly competitive markets • Access to sufficient market liquidity • The effectiveness of our internal control environment in relation to cyber risk, data protection and customer conduct A more detailed summary of the business strategy is provided in the strategic report on pages 8 to 9 and more detail on the Principal Risks facing the Group on pages 36 to 39. Requirement In accordance with provision 31 of the 2018 UK Corporate Governance Code the Directors have assessed the prospects and viability of the Group taking into account the business model (as set out in the strategic report on pages 10 and 11), current position in the context of liquidity and credit metrics of the Group, and Principal Risks. Assessment of prospects The assessment is based upon the current long-term top-down forecast which is reviewed annually by the Board and a longer- term assessment of the Group’s prospects beyond that period. The assessment considers the current position of the Group, the Group strategy, longer-term market trends and customer needs, and the Group’s Principal Risks as well as forecast cash generation against long-term obligations to repay debt and fund the defined benefit pension schemes. The longer-term prospects will be enabled by the Group successfully delivering on the near-term strategic objectives: • Focus on markets where we have scale and a leading position, specifically the UK and Ireland • Simplify the organisation to free up colleagues to focus on customers and to reduce costs • Modernise our working practices to increase flexibility both for colleagues and for customers • Build the capabilities and culture we need for the future • Maintain appropriate balance sheet strength Good progress has been made on these near-term objectives during 2020, including the sale of Direct Energy and the Group restructuring activity which has simplified management structures, reduced layers and increased the proportion of our colleagues who interact directly with customers, enabling us to put customers at the heart of everything we do. Key factors in assessing the long-term prospects of the Group: 1. The Group’s competitive position today Centrica has strong brands with large customer bases as the number one supplier in many of the markets in which it operates. In its core markets: British Gas is the largest residential energy supplier and home services provider in the UK; Bord Gáis is the second largest residential energy supplier in Ireland; and Centrica’s Energy Marketing & Trading business is a leading route to market services provider across Europe. We also have the largest heating engineer workforce in the country which is highly trusted by our customers, and well positioned to continue to support new fuels and technologies. With the disposal of Direct Energy, the Group has a strengthened balance sheet and lower net debt, and has been assigned an investment grade credit rating. In assessing our prospects beyond the strategic planning period, the Board considers how these strengths position the Group to grow long term shareholder value. 40 Strategic ReportCentrica plc Annual Report and Accounts 2020 Viability Sensitivity Tests Assessed Links to Principal Risks A. External risks associated with a 30% reduction in commodity price • Commodity Risk B. External risks associated with COVID-19 C. The risk of further regulatory interventions and/or risks in relation to data loss including sustained employee industrial action • Highly Competitive Markets • Access to Sufficient Market Liquidity • Political and Regulatory Intervention • Legal, Regulatory & Ethical Compliance • Cyber Risk • Capability of People, Process & Systems D. Significant disruption to the asset-based businesses leading to loss of production and/or earnings • Asset Production • Health, Safety, Environment: Process Containment Event E. The risk of significant adverse weather at year end • Weather Risk F. Increased margin cash and collateral requirements arising from • Access to Sufficient Market Liquidity adverse market conditions or a single-notch credit rating downgrade Assessment of viability The Board continues to believe that a three-year time horizon is the appropriate timeframe to assess viability, and is also consistent with the Group’s planning cycle. The Group’s focus on the energy supply and services businesses means the most significant risks continue to be shorter-term in nature including the potential for regulatory change, potential industrial action, asset performance, and competitive pressures creating disruption in our customer-facing markets. COVID-19 remains a risk in the viability timeframe, therefore a COVID-19 risk scenario has also been considered. Important context to the viability assessment is the management of the Group financing profile through accessing a diverse source of term funding and maintaining access to carefully assessed levels of standby liquidity which support the Group’s planned financial commitments. As at 31 December 2020, the Group had total committed credit facilities of £4.8 billion, of which £0.4 billion are short-term facilities associated with the sale of Direct Energy and £4.4 billion are not due to expire until 2024 at the earliest. The undrawn committed facilities as at 31 December 2020 were £3.6 billion. On 5 January 2021, the sale of the Group’s North American energy supply, services and trading business, Direct Energy, to NRG Energy Inc. was completed for a sales price of $3.6 billion in cash. This transaction significantly enhanced the Group viability assessment through the receipt of these proceeds and the removal of the risks associated with the Direct Energy business. The proceeds from the sale are in addition to the available facilities reported in the section above, and as such are a further source of immediate liquidity headroom to the Group which will enable the Group to make future contributions to the defined benefit pension schemes as well as other uses as appropriate. The viability assessment identifies six sensitivities (A to F) shown in the table above, which incorporate the impact of our Principal Risks as set out on pages 36 to 39. These risks were selected as they have the most material impact on cash flow and liquidity. These sensitivities were applied to the baseline financial forecast which uses the Group Annual Plan for 2021 and the top-down forecast for 2022 and 2023. The key assumptions made in the specific sensitivities include: • Historical evidence and the evaluation of similar events observed in the market to inform the potential impact of modelled scenarios • A 30% sustained reduction in the oil, gas and baseload power price curves assumed in the Group Annual Plan and top-down forecast applied to unhedged sales volumes (Sensitivity A) • A sustained loss of production from one of the highest producing oil and gas fields (Sensitivity D) • A repeat of historically seen adverse UK weather which primarily impacts short-term working capital (Sensitivity E) Further Group-wide assumptions include: • No material acquisitions or disposals of Group business areas, other than the disposal of Direct Energy which was completed on 5 January 2021 • No new debt funding within the three-year period of the assessment • The Group retains its existing credit ratings (BBB/Baa2) during the three-year period of the assessment A new sensitivity considered this year is COVID-19 which adversely impacted business performance during 2020, and is expected to do so to some extent during the viability period. The Group was particularly affected during the first wave of the pandemic in H1 2020, where lockdown restrictions impacted our services and solutions activity as only essential work was undertaken. In addition, business energy consumption fell and the Group recognised losses from the associated sell back to the market of unrequired commodity hedges at a loss due to falling market prices. The Group also experienced higher customer bad debt. Measures were taken to allow more services and solutions work to be performed in a safe and secure manner, where restrictions allowed, and some recovery was observed in business customer energy demand during Q3 2020, until restrictions increased again towards the end of 2020. The Group took swift management action to mitigate some of the financial impact of the pandemic, but the net impact was still adverse for the year. The Group Annual Plan for 2021 includes some of the forecast ongoing impacts from COVID-19, such as lower energy demand in Centrica Business Solutions and incremental bad debt as the economy recovers from the pandemic, but the outlook remains highly uncertain. In determining a suitable sensitivity for the viability analysis (sensitivity B), consideration has been given to a variety of factors that could affect the level of restrictions such as the success of the UK vaccination programme and the emergence of new variants of COVID-19. Due to this degree of uncertainty, the severe but plausible sensitivity being applied assumes that the Group continues to be impacted by further COVID-19 restrictions throughout the viability assessment period, but with the largest impact seen in 2021. Bad debt has been assumed to be the most material impact, although ongoing impacts on our services and solutions activity, higher electricity system balancing costs and changes to consumer and business energy demand have also been modelled. UK Government support measures for businesses and individuals is assumed to continue for as long as restrictions are in place, although we have not assumed any direct government support to the Group such as additional furlough payments. The six sensitivities have been grouped into three scenarios as set out in the table on page 42. It is not plausible that all six sensitivities would occur at the same time, and therefore each of the three scenarios is considered as a plausible combination of the above sensitivities. Within these scenarios, commodity 41 Centrica plc Annual Report and Accounts 2020Strategic Report Strategic Report | Assessment of Viability Disclosure continued (sensitivity A), COVID-19 (sensitivity B) and credit rating, collateral and liquidity risks (sensitivity F) were selected as constant events in all three scenarios. Sensitivities grouped into three scenarios Scenario 1: A significant external event outside the Group’s control such as a significant and sustained reduction in commodity price, continuation of COVID-19 restrictions throughout 2021, along with a regulatory/industrial event and additional debt and liquidity risks Scenario 2: A significant external event outside the Group’s control such as a significant and sustained reduction in commodity price, continuation of COVID-19 restrictions throughout 2021, along with a significant disruption to the asset-based businesses, and additional debt and liquidity risks Scenario 3: A significant external event outside the Group’s control such as a significant and sustained reduction in commodity price, continuation of COVID-19 restrictions throughout 2021, along with adverse weather impacts affecting the energy supply businesses, and additional debt and liquidity risks A + B + C + F A + B + D + F A + B + E + F The scenarios have been assessed to confirm whether the Group would have sufficient liquidity available to meet its future planned financial commitments against its existing undrawn committed credit facilities of £3.6 billion. In order to reach a conclusion as to the Group’s viability, the Directors have considered if any of the scenarios breach the available headroom in the three-year period and observed that sufficient headroom was available in all three scenarios. While mitigations were not required in any of the above scenarios to ensure the Group was viable, additional mitigations could be deployed to increase headroom and reduce the risk of a credit downgrade, including reductions in operational and capital expenditure. Reverse stress testing has also been performed which aims to identify and analyse the circumstances under which the Group’s business model would no longer be viable. Examples considered included further sustained low commodity prices significantly beyond the 30% fall assumed in the severe but plausible scenario, or specific idiosyncratic events, covering operational risk, business underperformance, regulatory changes, mandated faster settlement of defined benefit pension scheme technical provision deficit, and a below investment grade credit rating. The reverse stress test models all these scenarios occurring to an extreme extent and at the same time. The combined severity and extent of these modelled events far exceeds any impacts that have historically been experienced by the Group. As such, the likelihood of such a combination of events occurring concurrently, and at this severity, is judged to be very remote. Even after applying these additional stresses, there was still available headroom by the end of the three-year period. Conclusion The Directors have considered all the above factors in their assessment of viability and prospects, including the availability of mitigating actions within their control in the event that one of the scenarios above materialises. We have performed sensitivity analysis that enables the Directors to confirm that they have a reasonable expectation of the Group’s ability to continue to operate and meet its liabilities, as they fall due, over a period of at least three years. The Strategic Report, which has been prepared in accordance with the requirements of the Companies Act 2006, has been approved by the Board and signed on its behalf by: Raj Roy Group General Counsel & Company Secretary 24 February 2021 42 Centrica plc Annual Report and Accounts 2020 Governance 44 Directors’ and Corporate Governance Report 46 Board of Directors 49 Corporate Governance Statement 55 Committee Reports: – Audit and Risk Committee – Nominations Committee – Safety, Environment and Sustainability Committee – Remuneration Committee 84 Other Statutory Information Centrica plc Annual Report and Accounts 2020 43 Directors’ and Corporate Governance Report Dear Shareholder This is my first report since becoming Chairman of Centrica in April 2020. I am pleased to introduce the Directors’ and Corporate Governance Report for 2020. This has been a challenging year for Centrica. The Board’s priority during the COVID-19 pandemic has been to ensure the health and safety of our colleagues and customers. However, our commitment to robust corporate governance practices has enabled the Board to effectively adjust its focus and priorities throughout the pandemic. This Report describes our governance arrangements, the operation of the Board and its Committees, and how the Board discharged its responsibilities, including our compliance with all the relevant provisions of the UK Corporate Governance Code (details can be found on page 54). Changes to the Board Considerable work was carried out by the Board and Nominations Committee in reshaping and resizing the Board. During 2020, there were significant changes to Board membership, including the new appointments of Chairman, Group Chief Executive, Group Chief Financial Officer and two Non-Executive Directors. The Board believes that this refresh and resizing of the Board was important to ensure an appropriate combination of skills, knowledge and experience required to support Centrica in the delivery of its strategy. Chris O’Shea started the year as Group Chief Financial Officer, becoming Interim Group Chief Executive during the search for a permanent Group Chief Executive when Iain Conn stepped down in March 2020. On 14 April 2020, the Board appointed Chris as Group Chief Executive on a permanent basis having concluded that he was the right leader to navigate Centrica through and beyond the COVID-19 crisis. In April 2020, the Company appointed a third-party search and recruitment specialist to identify and assess candidates for the role of Group Chief Financial Officer. Following that process and rigorous assessments by the Nominations Committee and Board, Johnathan Ford joined Centrica on 11 June 2020. He was selected for his proven track record in driving growth and efficiency and deep experience in Centrica’s core in-home servicing business as well as experience of working in regulated industries. Unfortunately, for personal reasons, Johnathan stepped down from his role of Group Chief Financial Officer and from the Board on 18 January 2021 and resigned from the Company on 31 January 2021. Following recommendation by the Nominations Committee, the Board was pleased to approve the appointment of Kate Ringrose as Group Chief Financial Officer and Executive Director on 18 January 2021. Kate has been with Centrica since 2005, latterly in the position of Group Financial Controller, and brings a wealth of experience from a wide range of finance roles across Centrica. Heidi Mottram and Carol Arrowsmith were appointed to the Board as Non-Executive Directors during the year. Korn Ferry, a third- party search and recruitment specialist which, apart from providing regular senior management benchmarking, has no other relationship with Centrica or its individual directors, was appointed to carry out an external search towards the end of 2019. Heidi was appointed with effect from 1 January 2020 and has brought considerable relevant strategic, customer-facing and operational experience acquired in her current and previous roles. During the year, Russell Reynolds Associates, an external third-party search and recruitment specialist with no other relationship to Centrica or its individual directors, was engaged to identify Non-Executive Director candidates with remuneration experience. Carol was appointed on 11 June 2020 and brings extensive FTSE advisory experience to the Board, especially of advising boards on executive remuneration across a range of sectors and has a deep understanding of how the energy sector operates in a commercial setting. Carlos Pascual and Steve Pusey stepped down from the Board as Non-Executive Directors following the AGM held on 22 May 2020. Sarwjit Sambhi and Richard Hookway stepped down from the Board as Executive Directors in July 2020 and left the Company. In addition, Joan Gillman resigned from the Board as a Non-Executive Director on 8 February 2021. The Board now comprises the Chairman, two Executive Directors and five Independent Non-Executive Directors. This compares to a board of 13 Directors on 1 January 2020, which comprised the Chairman, four Executive Directors and eight Independent Non-Executive Directors. The Nominations Committee will continue to keep Board and Committee composition and succession planning under review, together with arrangements for effective workforce engagement which it will consider at its meeting in March 2021. Board effectiveness Due to the changes in the Board’s composition and the limited opportunities to meet in person during the year, the 2020 Board evaluation was undertaken as an internal evaluation. This was a detailed and thorough review covering a wide range of matters including strategy, succession planning and culture. Directors also considered the Board’s effectiveness during the COVID-19 pandemic. The outcome of this evaluation which was undertaken in the latter part of the year, was considered by the Board in December 2020. Whilst recognising current and future challenges for the Group and agreeing actions, the Board concluded that it has operated effectively during the year. Further information on the Board evaluation process and agreed actions is provided on page 51. Having given the refreshed Board some time to operate, an external evaluation will be undertaken during 2021. 44 GovernanceCentrica plc Annual Report and Accounts 2020 Diversity and inclusion The Group continues to be committed to putting diversity, inclusion, care and respect at the heart of what we do. That is why we are creating a workplace where everyone can be themselves and achieve their full potential, whatever their age, gender, culture, race, religion, sexual orientation, disability or background. Towards this, in 2020-21, we amplified our commitments in this area with our People & Planet Plan. We will strive to ensure that by 2030, all our Company and senior leaders reflect the full diversity of our communities, with greater representation across gender, ethnicity, disability, sexuality and more. See our People & Planet Plan on page 28 for further information on how we aim to achieve these goals. We have made positive changes to the way we recruit, to attract a more diverse workforce to our sector and Company. We will continue to report the diversity of all communities, alongside our existing focus on gender and ethnicity pay gaps. Conclusion The Directors’ and Corporate Governance Report which follows has been prepared to provide stakeholders with a comprehensive explanation of the Company’s governance framework under the UK Corporate Governance Code 2018, the Companies Act 2006, the UK Listing Rules and the Disclosure Guidance and Transparency Rules. Scott Wheway Chairman 24 February 2021 Further information on Workforce engagement can be found on Page 52 Responding to the COVID-19 pandemic The Board met more frequently than usual during 2020, focusing on Centrica’s response to safeguarding the health and wellbeing of our colleagues and customers and to ensure that we continued to serve our customers while protecting our business. The safety of our colleagues and customers remains a priority for the Board. As a result of lockdown, the majority of Board meetings held during 2020 were held virtually. The Board responded admirably to operating in this way. Our commitment to supporting high standards of corporate governance and our strong governance framework enabled the Board to adjust its focus and priorities and take some important decisions to strengthen our balance sheet and protect the Company from the difficult market environment arising from the COVID-19 pandemic. Details of the principal decisions taken by the Board can be found in the Section 172 statement on pages 25 to 27. Culture, Purpose and Values The Board plays a critical role in defining the right culture for the Group, by setting the tone from the top and monitoring how the Group’s culture and values are communicated, lived, and evolving. Our Code sets out our minimum expectations for all those we work with or alongside. It is a guide to making good choices and represents our commitment to doing the right thing and acting with integrity. As detailed in Stakeholder Engagement, on page 22, the Company consulted with colleagues to shape Centrica’s Purpose statement. Our new purpose of ‘Helping you live sustainably, simply, and affordably’ is part of our future business DNA, much like our Values have become. The SESC (formerly SHESEC) reviewed the process undertaken to develop the new Purpose statement and, as part of its remit, will monitor this on behalf of the Board to ensure that our Values are embedded within the business. Engagement with our stakeholders By listening to, and collaborating with, our stakeholders we believe we can grow the business and deliver improvements for our customers and society over the long term. During 2020, the Chairman, Group Chief Executive and Group Chief Financial Officer met regularly, and often remotely, with major shareholders, in order to update them and get their perspectives on performance, strategy and ESG matters. In addition, Joan Gillman, Employee Champion during the year, continued to engage with our colleagues to ensure that the voice of our workforce continued to be taken into consideration in the Boardroom. Further details of our engagement with our colleagues is provided on page 52. How the Board has sought to discharge its duties under Section 172 of the Companies Act 2006 during the year, including in relation to the COVID-19 pandemic, and its engagement with stakeholders, is covered in more detail in our Section 172 statement on page 25 and Stakeholder Engagement on pages 22 to 24. 45 Centrica plc Annual Report and Accounts 2020Governance Board of Directors Scott Wheway Chairman Chris O’Shea Group Chief Executive Kate Ringrose Group Chief Financial Officer Carol Arrowsmith Non-Executive Director C SC £ £ £ AC NC RC £ Carol joined the Board on 11 June 2020. Relevant skills and experience Carol brings extensive advisory experience, especially of advising boards on executive remuneration across a range of sectors, and is a Fellow of the Chartered Institute of Personnel and Development. Previous experience Carol is a former Deputy Chair and Senior Partner of Deloitte LLP. She was a Global Partner of Arthur Andersen and Managing Director of New Bridge Street Consultants. External appointments Non-executive director of Compass Group Plc and non-executive director of Vivo Energy Plc, member of the Advisory Group for Spencer Stuart, director and trustee of Northern Ballet Limited, and director of Arrowsmith Advisory Limited. Scott joined the Board on 1 May 2016 and became Chairman of the Board on 17 March 2020. Relevant skills and experience Scott has a wealth of experience as a senior customer-facing business leader with a mix of deep retail and consumer expertise. He has considerable knowledge gained in both the retail and insurance sectors, together with a strong understanding of operating within highly regulated businesses. Previous experience Scott worked in retail for 27 years both in the UK and internationally. He is the former chief executive officer of Best Buy Europe (retail services), director of The Boots Company plc, managing director and retail director of Boots the Chemist at Alliance Boots plc and a director of the British Retail Consortium. He formerly held a number of senior executive positions at Tesco plc (retail services), including chief executive of Tesco in Japan, served as non-executive director of Aviva plc until December 2016, and as the senior independent director of Santander UK plc until 30 September 2020. External appointments Chairman of AXA UK plc. Chris joined Centrica in 2018 as Group Chief Financial Officer and was appointed as Group Chief Executive on 14 April 2020. Kate joined Centrica in 2005 and was appointed as Group Chief Financial Officer on 18 January 2021. Relevant skills and experience Kate’s most recent role has been Group Financial Controller, and she has also held a wide variety of positions across the Group, including in Centrica’s energy supply, services, solutions and trading businesses, and in finance operations. Previous experience Prior to joining Centrica, Kate qualified as a chartered accountant with KPMG South Africa, before moving to the UK, and rejoining the KPMG London office. External appointments Non-Executive Director of EDF Energy Nuclear Generation Group Limited (representing Centrica). Relevant skills and experience Chris is an experienced listed company executive with considerable experience of complex, multi-national organisations, not only in the energy sector but also in technology-led engineering and services industries. Previous experience Chris was Group Chief Financial Officer of the Company from 1 November 2018 until 17 March 2020. He was Interim Group Chief Executive from 17 March 2020 until 14 April 2020. Prior to joining Centrica, Chris was group chief financial officer of both Smiths Group plc and Vesuvius plc, and a non-executive director of Foseco India Ltd, an Indian-listed supplier to the foundry industry. From 2006 to 2012 Chris held various senior finance roles with BG Group plc, including chief financial officer of Europe and Central Asia, prior to which he held a number of senior roles with Royal Dutch Shell plc in the UK, the US and Nigeria, and with Ernst & Young. Chris studied Accounting and Finance at the University of Glasgow, is a Chartered Accountant, and holds an MBA from the Fuqua School of Business at Duke University. External appointments None The Board considers that each of the Directors continues to contribute effectively to the work and deliberations of the Board. Reasons for the (re-)election of each of our Directors at the forthcoming AGM can be found on our website within the Centrica plc Notice of Annual General Meeting 2021. Full biographies can be found at centrica.com/board 46 Governance | Directors’ and Corporate Governance Report continuedCentrica plc Annual Report and Accounts 2020 Stephen Hester Senior Independent Director Pam Kaur Non-Executive Director Heidi Mottram Non-Executive Director Kevin O’Byrne Non-Executive Director AC NC RC £ AC NC SC £ NC RC SC NC £ Stephen joined the Board on 1 June 2016. Pam joined the Board on 1 February 2019. Heidi joined the Board on 1 January 2020. Kevin joined the Board on 13 May 2019. Relevant skills and experience Pam has extensive experience in audit, business, compliance, finance and risk management. Previous experience Pam has previously held various senior roles at global financial institutions including Citigroup, Lloyds TSB, the Royal Bank of Scotland and Deutsche Bank, and has worked with regulators and supervisory boards across the world. She has an MBA in finance and a BCom (Hons) from Panjab University in India and is a qualified chartered accountant. External appointments Group chief risk officer at HSBC Holdings plc. Relevant skills and experience Stephen has wide-ranging experience, particularly in customer-facing businesses, together with recognised expertise in transforming business performance. He has a deep knowledge of operating within highly regulated businesses with over 35 years’ experience in financial services and within FTSE 100 companies. Previous experience Stephen previously held positions as chief executive of Royal Bank of Scotland Group, chief executive of British Land plc and chief operating officer of Abbey National plc, as well as a number of senior executive roles at Credit Suisse First Boston in London and New York. External appointments Group chief executive of RSA Insurance Group plc. Relevant skills and experience Heidi brings considerable relevant strategic and operational experience acquired in her current and previous roles. Her deep understanding of the importance of customer service, delivered in complex, multi-stakeholder environments with a high public profile, is particularly pertinent to the Company at this time, as it focuses on the delivery of its customer-centric strategy. Previous experience Heidi began her career with British Rail in the mid-1980s. She held a number of roles in GNER, before joining Midland Mainline in 1999 as operations director. She was commercial director for Arriva Trains Northern from January 2004, becoming managing director of Northern Rail Limited, the UK’s largest rail franchise. External appointments CEO of Northumbrian Water Limited and Northumbrian Water Group Limited. Vice-Chair of the North East Local Enterprise Partnership, a member of the CBI Board and Vice-Chair of Newcastle University Council. Relevant skills and experience Kevin brings extensive retail and finance experience to the Board, having occupied senior roles in a number of leading UK and international retailers. The Board considers that Kevin has recent and relevant financial experience. Previous experience Kevin was previously chief executive officer of Poundland Group plc, and held executive roles at Kingfisher plc, including divisional director UK, China and Turkey, chief executive officer of B&Q UK & Ireland and group finance director. Prior to that he was finance director of Dixons Retail plc. From 2008 to 2017 he was a non-executive director and chairman of the audit committee of Land Securities Group PLC where he was also senior independent director from 2012 to 2016. External appointments Group chief financial officer of J Sainsbury plc. Committee membership key Skills and experience key C Chairman of the Board RC Remuneration Committee Energy Sector AC Audit and Risk Committee NC Nominations Committee SC Safety, Environment and Sustainability Committee Denotes Committee Chairman Financial Services Technology Engineering/Safety Consumer Services Government/Regulatory £ Finance/M&A 47 Centrica plc Annual Report and Accounts 2020Governance Board Diversity and Meeting Attendance Board and Committee meeting attendance during 2020(1): Scott Wheway Charles Berry(6) Chris O’Shea Iain Conn Johnathan Ford Carol Arrowsmith Joan Gillman Stephen Hester Richard Hookway Pam Kaur Heidi Mottram(7) Kevin O’Byrne Carlos Pascual(6) Steve Pusey(7) Sarwjit Sambhi Board 12/12 1/3 12/12 3/3 5/5 5/5 12/12 12/12 7/7 12/12 10/12 12/12 3/6 5/6 7/7 (2) AC N/A N/A N/A N/A N/A 2/2 N/A 4/4 N/A 4/4 N/A 4/4 N/A 1/2 N/A NC 2/2 0/1 N/A N/A N/A N/A 2/2 2/2 N/A 2/2 2/2 2/2 1/1 1/1 N/A RC 6/6 N/A N/A N/A N/A 2/2 8/8 8/8 N/A N/A N/A N/A 3/4 3/4 N/A (3) SC 3/3 N/A N/A N/A N/A N/A 3/3 N/A N/A 2/3 1/3 N/A 0/1 1/1 N/A 1. Attendance is expressed as the number of meetings attended out of the number eligible to be attended. Board changes during 2020 and the year to date are detailed in the table opposite. 2. Until 1 January 2021, the Audit and Risk Committee was formerly known as the Audit Committee. 3. Until 1 January 2021, the Safety, Environment and Sustainability Committee (SESC) was formerly known as the Safety, Health, Environment, Security and Ethics Committee (SHESEC). 4. This table does not include attendance by Audit and Risk Committee members at both of the joint SHESEC/Audit Committee meetings held during 2020. All members attended the joint SHESEC/Audit Committee meetings except for Carol Arrowsmith who attended one joint meeting in November 2020 following her appointment. 5. This table does not include attendance by SESC members at both joint SHESEC/ Audit Committee meetings held during 2020. All members attended these joint SHESEC/Audit Committee meetings except for Heidi Mottram who attended one joint meeting. 6. Charles Berry and Carlos Pascual were unable to attend Board meetings due to illness. 7. Heidi Mottram and Steve Pusey were unable to attend certain Board and Committee meetings due to unavoidable diary conflicts. Board diversity By gender By nationality By tenure Male Female 50% 50% 74% British Irish 13% South African 13% 0-3 years 3-6 years 75% 25% *Data as at 24 February 2021 Board changes during 2020 and the year to date: The names and biographies of the Directors who held office at the date of this Annual Report are provided on pages 46 and 47. Board changes during 2020 and up until the date of this Report are detailed in the table below: Name Position Date of Appointment Date of Resignation/ Retirement Heidi Mottram Independent Non-Executive Director 1 January 2020 Charles Berry Chairman Iain Conn Group Chief Executive Carlos Pascual Steve Pusey Sarwjit Sambhi Independent Non-Executive Director Independent Non-Executive Director Chief Executive, Centrica Consumer Richard Hookway Chief Executive, Centrica Business 17 March 2020 17 March 2020 22 May 2020 22 May 2020 11 June 2020 11 June 2020 Carol Arrowsmith Independent 11 June 2020 Non-Executive Director Johnathan Ford Group Chief 11 June 2020 18 January 2021 Financial Officer Group Chief Financial Officer Independent Non-Executive Director 18 January 2021 8 February 2021 Kate Ringrose Joan Gillman In addition: • Scott Wheway, Senior Independent Non-Executive Director was appointed as interim Chairman on 12 February 2020 and as Chairman on 17 March 2020; and • Chris O’Shea, Group Chief Financial Officer, was appointed as interim Chief Executive Officer on 17 March 2020 and as Group Chief Executive Officer on 14 April 2020. 4848 Governance | Directors’ and Corporate Governance Report continuedCentrica plc Annual Report and Accounts 2020 Corporate Governance Statement The Board is committed to high standards of corporate governance and is pleased to confirm that throughout the year ended 31 December 2020, the Company has complied with all the relevant provisions of the UK Corporate Governance Code 2018 (2018 Code). The 2018 Code and associated guidance are available on the Financial Reporting Council’s website at frc.org.uk. The index on page 85 sets out where to find each of the required disclosures in respect of Listing Rule 9.8.4 and Disclosure Guidance and Transparency Rules 4.1.5R and 7.2.1. Governance framework In order to facilitate its oversight role, and to ensure that it retains decision-making power over matters considered to be material to the current or future financial performance of the Group, the Board has put in place the governance framework to support the creation of long-term value for stakeholders and contributes to wider society. This is achieved through a schedule of matters reserved for the Board. In order to allow the Board to focus on its priorities, a number of its oversight responsibilities have been delegated to four principal committees. These responsibilities are set out in terms of reference for each committee. The Board regularly reviews the remit, authority, composition and terms of reference of each committee. The Board has also delegated authority to the Group Chief Executive for the execution of the strategy and day-to-day management of the Group. The Centrica Leadership Team supports the Group Chief Executive in the performance of his duties. The Board oversees, challenges and supports executive management in the execution of the strategy and management of the Group. Our Board The Role of the Board The Centrica Board is responsible for corporate governance, developing strategy and major policies, reviewing management performance, approving financials and for providing entrepreneurial leadership to the Company within a framework of prudent and effective controls which enable risk to be assessed and managed. It is also responsible for setting the Company’s culture, values, and the behaviours it wishes to promote in conducting its business. Matters reserved exclusively for the Board There are certain key responsibilities that the Board does not delegate, and which are reserved for its consideration. The full schedule of matters reserved is available on the governance page of our website, but key matters reserved include: • the development of strategy and major policies; • approving the annual operating plan, Financial Statements and major acquisitions and disposals; • approving interim dividend payments and recommending final dividend payments; and • the appointment and removal of Directors and the Company Secretary. Board composition and roles During 2020, the Board was resized and now comprises the Chairman, two Executive Directors (Group Chief Executive and Group Chief Financial Officer), and five Independent Non-Executive Directors. A list of our current Directors and their biographies can be found on pages 46 and 47. There is a clear division of responsibilities between the Chairman and Group Chief Executive, reflected in the schedule of matters reserved. The Chairman is responsible for the leadership and management of the Board. In doing so, he is responsible for promoting high ethical standards, ensuring the effective contribution of all Directors and, with support from the Group General Counsel & Company Secretary, best practice in corporate governance and ensuring that Directors receive accurate, timely and clear information. The Group Chief Executive is responsible for the executive leadership and day-to-day management of the Company, to ensure the delivery of the strategy agreed by the Board. The Group Chief Financial Officer is responsible for providing strategic financial leadership of the Company and day-to-day management of the finance function. Independent Non-Executive Directors are responsible for contributing sound judgement and objectivity to the Board’s deliberations and overall decision-making process, providing constructive challenge, and monitoring the Executive Directors’ delivery of the strategy within the Board’s risk and governance structure. The Senior Independent Director acts as a sounding board for the Chairman and serves as a trusted intermediary for the other Directors, as well as shareholders, as required. The Company Secretary advises the Chairman and the Board on matters of corporate governance, induction, training and the efficient management of Board and Committee meetings, with responsibility for ensuring the effectiveness of the Company’s governance framework. The Board relies on the Company Secretary for facilitating the policies, processes, information, time and resources it needs in order to function effectively and efficiently. Board Committees In keeping with best practice, our Board oversees the Group’s operations through a unitary Board and four separate principal Committees – Audit and Risk Committee, Nominations Committee, Remuneration Committee, and Safety, Environment and Sustainability Committee (SESC, formerly SHESEC). The terms of reference of these Committees can be found on our website. The reports of the Audit and Risk Committee, Nominations Committee, Remuneration Committee and SESC can be found on pages 55 to 83. Attendance at meetings in 2020 can be found on page 48. 49 Centrica plc Annual Report and Accounts 2020Governance Board meetings The Board held 12 meetings in 2020. The table showing the attendance of Directors at Board meetings in 2020 can be found on page 48. If Directors are unable to attend a meeting, they have the opportunity beforehand to discuss any agenda items with the Chairman. The agendas for Board meetings are agreed in advance by the Chairman, Group Chief Executive and Company Secretary and consist of regular standing items, such as reports on financial performance, and in-depth examination or analysis of a topic, facilitating exchanges of views and robust debate. During the year, the Non-Executive Directors, including the Chairman, met frequently without management present. The Non-Executive Directors met once during the year without the Chairman present. Board activity During the year, the Board considers a comprehensive programme of regular matters covering operational and financial performance reporting, strategic reviews and updates, and various governance reports and approvals. In addition, Board meetings regularly feature deep dives into specific topics. During 2020, the Board focused on ensuring the safety of its colleagues and customers, conserving cash and protecting the business in response to the COVID-19 pandemic. Additionally, the Board focused on the restructure of the Group, reviewing business unit strategies, updated business model and the changes to employee terms and conditions, and industrial relations. In 2020, the Board made several decisions based on short-term strategy resulting from the COVID-19 pandemic, to protect the Company in the long term. The Board approved the decision to cancel the dividend, along with reducing consultancy spend, stopping pay increases and limiting bonus payments, to maintain a strong cash flow. The Board reviewed the Group Chief Executive’s proposal to restructure the business to create a simpler and more customer- focused business model and to modernise how the Company works. The Board approved the changes, believing it would create a successful transformation bringing the Group closer to customers and providing a platform for future growth. As part of the restructure, the Board also approved the sale of the North America business, Direct Energy, to NRG Energy in line with Centrica’s focus to simplify the business and reduce complexity. During 2020, Board discussions included: Key areas of activity Matters considered Views of stakeholder groups considered Strategy and business plan Performance and risk Governance • Strategic reviews, updates, and stress testing • Approval of updated Business Model • Approval of restructure plans • Approval of sale of Direct Energy • Cancellation of 2019 final dividend • Group Annual Plan 2020 • Portfolio optimisation • Group Performance Reports • Business reviews • Periodic results • Going concern and viability statements • Crisis management plans and performance • Annual Report and Accounts • Annual General Meeting • Board evaluation • Succession planning for Board • Committee composition • Reports from Committee Chairs • Conflicts of interest reviews • Terms of reference reviews • Director independence Culture and stakeholders • Structure reorganisation: organisational design and organisational health • Regular updates on COVID-19, including work-from-home arrangements and furloughed employees • Employee pulse surveys, with resulting employee engagement and alignment report • Purpose and vision for new Centrica • Leadership development and CLT (Centrica Leadership Team) succession planning • Investor updates and feedback • COVID-19 crisis management and mitigation • Brexit preparations • Modern Slavery Act Statement • Annual tax update • Treasury risk management annual update • Insurance update Political and regulatory environment 50 • Customers • Investors and shareholders • Communities and NGOs • Government and regulators • Suppliers • Colleagues • Customers • Investors and shareholders • Suppliers • Government and regulators • Colleagues • Investors and shareholders • Government and regulators • Colleagues • Investors and shareholders • Communities and NGOs • Government and regulators • Colleagues • Customers • Suppliers • Investors and shareholders • Communities and NGOs • Government and regulators • Suppliers Governance | Directors’ and Corporate Governance Report continuedCentrica plc Annual Report and Accounts 2020 Section 172(1) considerations Under Section 172 of the UK Companies Act 2006 (Section 172) directors must act in the way that they consider, in good faith, would be most likely to promote the success of their company. In doing so, our Directors must have regard to stakeholders and the other matters set out in Section 172. management, and the results were discussed at a Board meeting. A similar internal evaluation was undertaken in 2020, and the results were discussed by the Board at its meeting in December. The Chairman will hold individual performance meetings with each Director in 2021 to discuss their individual contribution, performance and their training and development needs. Further information on these matters considered can be found in relation to: • Decisions for the long-term success of the Company (Our Strategy (pages 8 and 9), Stakeholder Engagement (pages 22 to 24), People & Planet Plan (page 28), Board activity (page 50)); • Stakeholder Engagement and business relationships (Stakeholder Engagement (pages 22 to 24), People & Planet Plan (page 28), Board activity (page 50)); • Risk (Principal risks and uncertainties (pages 34 to 39)); • Training and information (Training and development of directors (page 51)); • Policies and procedures (Non-Financial Information Statement (page 33), Governance framework (page 49)); • Capital allocation and dividend policy (Group Financial framework (page 10), Board activity (page 50), note 11 (page 129)); • Culture and workforce (Stakeholder Engagement (pages 22 to 24), People & Planet Plan (page 28), Directors’ and Corporate Governance Report (page 45), Workforce engagement (page 52)) Board strategic planning Although the annual Board Planning Conference, at which the Board focuses on strategy and business model, could not be held in the usual format during 2020 as a result of the COVID-19 pandemic, the Board carried out a review of the Group’s operating model and strategic plan under a number of different scenarios. A strategic update and changes to the operating model were announced with the Interim results in July 2020. The Board has continued to review various elements of strategy at every subsequent Board meeting. Site visits While the bulk of the Board’s work is conducted via Board meetings, Directors recognise the importance and benefits gained by visiting the Group’s operations. However, due to COVID-19 restrictions, and ensuring the safety of Centrica’s Board members and colleagues, there were no site visits in 2020. Evaluation of the Board, Committees and the Directors The Board recognises that it continually needs to monitor and improve its performance, including through an annual evaluation. The Board also considers its composition, diversity and how effectively members work together to achieve objectives. Individual evaluations of the Board members are also carried out to ensure each Director continues to contribute effectively. In accordance with the 2018 Code, Centrica’s annual evaluation of Board effectiveness is facilitated by an independent third party at least once every three years. Internal self-assessments are normally conducted in the first two years. Questionnaires are completed by the Board and Committee members. Outcomes are discussed by the Board and recommendations are made for actions to be taken during the year. In the third year, an external evaluation is normally carried out. This is facilitated by an independent party, bringing expertise, objectivity and fresh perspective to the process, whilst serving as a catalyst to facilitate dialogue and adding value to conclusions of the evaluation process. The 2018 evaluation was conducted through externally facilitated interviews and a questionnaire by a third-party facilitator, Independent Audit Limited, which has no other relationship with the Company. The 2019 internal evaluation was supported again by Independent Audit Limited. It consisted of a questionnaire, completed by the Directors and members of the senior The Senior Independent Director, Stephen Hester, conducted the evaluation of the Chairman’s performance through discussions with Directors and senior executives and then discussed the feedback with the Chairman. The 2020 review concluded that the Board and its Committees continued to operate effectively and each director continued to contribute effectively. The Board also identified a number of areas of focus for the year ahead including: the enhancement of data and customer insights going to the Board; further focus on strategic decisions for the restructured Group; focus on Board dynamics, relationships and interactions with management in light of the refreshed Board composition and limited opportunities to meet in person during 2020; and training and briefings for Directors. Board appointments The report of the Nominations Committee on pages 62 and 63 describes the work of the Committee in relation to Board appointments and recommendations for (re-)election. Appointments to the Board are subject to a formal, rigorous and transparent procedure, and an effective succession plan is maintained for Board and senior management. Board appointments and succession plans are based on merit and objective criteria designed to promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths. Further information can be found in the Nominations Committee Report on pages 62 and 63. All Directors are subject to annual re-election. The Board sets out in the Notice of Annual General Meeting the specific reasons why each Director’s contribution is, and continues to be, valuable to the Company’s long-term sustainable success. Directors’ induction We understand that our new Board members will want to contribute to the organisation as quickly as possible. We have therefore created an induction programme which is led by the Chairman and supported by the Company Secretary and is tailored to meet the individual’s needs, providing all the information and support needed in a structured way to allow them to be effective in their role. The aim is to help new members to understand the organisation and its challenges, the external environment in which it operates, and their role in making the organisation a success. On completion of the induction programme, Directors will have sufficient knowledge and understanding of the business to effectively contribute to strategic discussions and the oversight of the Group. Directors are asked to provide input on how their induction should be tailored, in relation to both content and delivery, and will be provided with the whole programme plan at the start. The Chairman reviews the induction with the Director mid-way through the process, and again after 12 to 18 months, and seeks their input on any further induction requirements they may have. Training and development for Directors It is important to ensure that Directors’ skills and knowledge are refreshed and updated regularly, given the dynamic business and regulatory environment in which the Company operates. The Chairman, supported by the Company Secretary, is responsible for the ongoing development of all Directors and discusses with each Director any individual training and development needs, such as formal and informal briefings, meetings with management and visits to the Group’s operations. During 2020, the Directors received training on managing commodity price risk. 51 Centrica plc Annual Report and Accounts 2020Governance In addition, the Directors have full access to the advice and services of the Group General Counsel & Company Secretary, who is responsible for advising the Board, through the Chairman, on corporate governance matters. Directors are also able to seek independent professional advice at the Company’s expense in respect of their duties. Board diversity We recognise the value that individuals from diverse backgrounds and of different abilities can bring to our business, and in an increasingly competitive environment this is a key factor in the Company’s strategy. Our Nominations Committee is committed to ensuring and promoting a diverse blend of skills, backgrounds, genders and nationalities on the Board and further details on the Committee’s activities in this regard are set out in the Nominations Committee report on pages 62 and 63. The Board Diversity Policy sets out the approach of the Group to diversity and inclusion and is designed to help ensure that Board composition better reflects the communities in which we operate. Throughout the process of appointment of Board members, due regard is given to ensuring fairness and diversity through consideration of skills, experiences, competencies, and individual characteristics. The recruitment process follows Group HR recruitment processes around diversity, respect, and inclusion. The Chairman of the Board is accountable for the implementation of the Board Diversity Policy and considering and adopting a range of approaches to promote diversity within the Board. Senior managers are also required to support this policy in developing diversity in the broader business and must also comply with Group HR recruitment processes and the Centrica UK Diversity, Respect and Inclusion Policy. The Company supports the recommendations of the Hampton- Alexander and Parker Reviews in relation to gender and ethnic diversity respectively and is continuing to develop a diverse talent pipeline with the necessary skills, experience and knowledge. The Board currently meets the Parker Review target for FTSE 250 companies, of at least one director from an ethnic minority background. The Board also exceeds the recommendations of the Hampton-Alexander Review with currently 50% women on our Board and we will strive to achieve gender parity in our senior leadership and wider roles. The Nominations Committee and the Board monitor and measure Board diversity on an ongoing basis. We recognise that there is always more we can do and will continue to work to build an inclusive workplace at all levels of the Company. Directors’ independence and conflicts All our Non-Executive Directors are considered to be independent against the criteria in the 2018 Code, and free from any business interest which could materially interfere with the exercise of their independent judgement. In addition, the Board is satisfied that each Non-Executive Director is able to dedicate the necessary amount of time to the Company’s affairs. The Non-Executive Directors’ Letters of Appointment state that they must inform the Company Secretary of any other businesses, directorships, appointments, advisory roles, or other relevant connections (including any relevant changes, and a broad indication of the time involved). Directors also confirm that they will inform the Board of any subsequent changes to their circumstances which may affect the time they can commit to their duties. The agreement of the Chairman must be obtained before accepting additional commitments that might affect the time Non-Executive Directors are able to devote to their appointment. In accordance with the Companies Act 2006 and the Company’s Articles of Association, Directors are required to report actual or potential conflicts of interest to the Board for consideration and, if required, authorisation. If such conflicts exist, Directors recuse themselves from consideration of the relevant subject matter. The Company maintains a schedule of authorised conflicts of interest which is regularly reviewed by the Board. The Company’s Articles of Association provide how Directors are appointed, retired and replaced. These can be found on our website. Engaging with our stakeholders Workforce engagement During the year Centrica’s workforce engagement role was carried out by an independent Non-Executive Director. Joan Gillman was appointed Employee Champion in 2018 due to her wide-ranging experience in leadership and operations in the media and communications, and her support and understanding of the importance of employee engagement, teamwork and diversity. In this role, Joan spent time listening to colleagues and ensuring their voices were heard in the Boardroom. In 2020, the role continued to evolve, and as a result, the Board introduced a number of metrics to measure organisational health and carried out a deep dive on colleague wellbeing. The work on organisational health also informed the business transformation that commenced during 2020 aimed at empowering our employees. Furthermore, our Group Chief Executive and HR Director sought to change the leadership tone from the top, resulting in fortnightly global townhalls allowing all colleagues an opportunity to engage with the Group Chief Executive, and the introduction of a weekly blog from the Group Chief Executive to all colleagues. More recently, Joan worked with our Group Chief Executive and HR Director to outline the cultural shifts the organisation needs to take. Following Joan’s resignation as a Director in early February 2021, the Nominations Committee has agreed to review the arrangements for effective workforce engagement at its meeting in March 2021. Details of these arrangements will be included in the 2021 Annual Report. In 2020, we conducted over 100 engagement surveys to understand and respond to colleague ‘pain points’. Through focus groups, we worked with colleagues to shape Centrica’s Purpose statement and gain insight on our approach to flexible working. At the end of 2020, a small cross-functional working group was set up by the Centrica Leadership Team to create Centrica’s new Purpose statement. The Colleague Experience Team reached out to our colleagues and customers to get their input, views and ideas. Our Purpose statement is part of our future business DNA, much like our Values have become. 52 Governance | Directors’ and Corporate Governance Report continuedCentrica plc Annual Report and Accounts 2020 Although shareholders were not able to attend in person, their views remained important to us. All shareholders were encouraged to exercise their votes by submitting their proxy forms either electronically or by post. We also invited shareholders to submit their questions via a dedicated question facility on our website and the answers were published on our website. Our 2020 AGM was well supported with voting in favour of the resolutions ranging from 93% to 99% and with 68% of issued share capital voted. On 24 July 2020, we announced the proposed sale of our North American energy supply, services and trading business, Direct Energy, to NRG Energy. The transaction constituted a Class 1 transaction for Centrica under the Listing Rules and completion of the transaction required shareholder approval. In line with UK legislation in relation to holding company meetings during the COVID-19 pandemic, a General Meeting was convened on 20 August 2020 with the minimum quorum of Centrica’s shareholders in order to conduct the business of the meeting. Again, shareholders were not able to attend in person, however, they were encouraged to exercise their votes electronically or by post and to ask questions in advance of the meeting via a dedicated question facility on our website. The answers can be found on our website along with the general meeting voting results (centrica.com/GM820). The resolution proposed at the General Meeting was passed with 99.96% of the votes in favour. More than 64% of the issued share capital was voted. The Notice of 2021 AGM and further information regarding the meeting can be found at centrica.com/agm21 Centrica.com Our website, centrica.com, contains up-to-date information for shareholders and other interested parties including annual reports, shareholder circulars, share price information, news releases, presentations to the investment community and information on shareholder services. Shareholder engagement The Board is committed to maintaining open channels of communication with all of the Company’s stakeholders. An important part of this is providing a clear explanation of the Company’s strategy and objectives, and ensuring feedback is acknowledged, considered and, where appropriate, acted upon. During 2020, the Chairman held 5 one-to-one meetings with investors. Meetings, roadshows, and conferences The Group Chief Executive and Group Chief Financial Officer typically meet with our major institutional shareholders twice a year, following the Company’s Preliminary and Interim results, which provides an opportunity for a review of the Company’s strategy and performance. In addition, management and/or Investor Relations attend a number of investor conferences throughout the year, giving shareholders further opportunity to meet and receive updates directly from Company representatives, while senior management are also available to meet on an ad hoc basis with major shareholders if requested. Engagement themes with our institutional shareholders During the year, engagement themes included: • Centrica’s strategic refresh and organisational restructure; • Interim results; • Sale of Direct Energy in North America; • Progress on the planned divestments of Nuclear and Spirit Energy; • The regulatory and political environment for UK energy; • Board succession; and • ESG matters. General Meetings The Company holds an Annual General Meeting (AGM) each year. At the AGM, the Chairman gives his thoughts on governance aspects of the preceding year and the Group Chief Executive reviews the performance of the Group over the last year. Shareholders are encouraged to attend the meeting and to ask questions at or in advance of the meeting. Due to health and safety considerations, the 2020 AGM was held as a closed meeting and shareholders were not able to attend in person. The format of the 2020 AGM was purely functional to comply with the relevant legal requirements for the conduct of the meeting. 53 Centrica plc Annual Report and Accounts 2020Governance Our compliance with the UK Corporate Governance Code It is the view of the Board that Centrica has applied the principles of the UK Corporate Governance Code throughout the year. As set out below, there are examples throughout this report of the way in which we do this. Section 1: Board Leadership and Company Purpose Principle A: A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society. Principle B: The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture. Principle C: The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls Pages 46 to 49 Pages 6 to 9 and 45 Pages 10 to 13 34 to 39 Principle D: In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties. Principle E: The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern. Pages 22 to 24 25 to 27 Pages 22, 32 and 38 Section 2: Division of Responsibilities Principle F: The chair leads the board and is responsible for its overall effectiveness in directing the company. The chair should demonstrate objective judgement throughout their tenure and promote a culture of openness and debate. In addition, the chair facilitates constructive board relations and the effective contribution of all non-executive directors, and ensures that directors receive accurate, timely and clear information. Principle G: The board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision-making. There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business. Section 3: Composition, Succession and Evaluation Principle J: Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be maintained for board and senior management. Both appointments and succession plans should be based on merit and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths. Pages 44 and 45 49 Principle H: Non-executive directors should have sufficient time to meet their board responsibilities. They should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account. Pages 52 and 63 Pages 46 to 47 49 and 52 Principle I: The board, supported by the company secretary, should ensure that it has the policies, processes, information, time and resources it needs in order to function effectively and efficiently. Page 49 Pages 62 to 63 Principle K: The board and its committees should have a combination of skills, experience and knowledge. Consideration should be given to the length of service of the board as a whole and membership regularly refreshed Principle L: Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively. Section 4: Audit, Risk and Internal Control Principle M: The board should establish formal and transparent policies and procedures to ensure the independence and effectiveness of internal and external audit functions and satisfy itself on the integrity of financial and narrative statements. Pages 56 and 57 Principle N: The board should present a fair, balanced and understandable assessment of the company’s position and prospects. Principle O: The board should establish procedures to manage risk, oversee the internal control framework, and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives. Section 5: Remuneration Principle P: Remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the company’s long-term strategy. Pages 66 to 83 Principle Q: A formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established. No director should be involved in deciding their own remuneration outcome. Principle R: Directors should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances. 54 Pages 46 to 48 62 to 63 Pages 44, 51 Page 57 Pages 34 to 39 Pages 66 to 75 Pages 66 to 75 Governance | Directors’ and Corporate Governance Report continuedCentrica plc Annual Report and Accounts 2020 Audit and Risk Committee Dear Shareholder On behalf of the Board, I present the Audit and Risk Committee’s report for the year ended 31 December 2020 which explains the Committee’s focus and activities during the year. As for many other companies, 2020 has been an extremely challenging year for Centrica as we have navigated the unprecedented impacts of the COVID-19 pandemic. Since lockdown in March 2020, the Committee has focused closely on the impacts of, and responses to, the pandemic and has reviewed heightened risk areas including financial reporting risk, accounting judgements and the finance function’s ability to operate effectively in lockdown to ensure the control environment remains effective. Additionally, the Committee reviewed the approach taken to assess credit risk exposure to wholesale and large industrial and commercial customers affected by the pandemic. The impacts of, and responses to, the pandemic, remain a focus on the Committee’s agenda and we will continue to review these in addition to our regular programme. I hope you find this report a helpful explanation of our work during the year. It should be read in conjunction with our UK Corporate Governance Code compliance section on page 54, Our Principal Risks and Uncertainties on pages 34 to 39 and our Viability Statement on pages 40 to 42. The Audit Committee assists the Board in fulfilling its oversight responsibilities by reviewing and monitoring the integrity of the financial information provided to shareholders and other stakeholders. The Committee oversees financial reporting and related risks and internal controls, and also has a role in overseeing the internal and external auditors, as well as interacting with other members of management and external stakeholders as required. I believe that the Committee has performed effectively in the most difficult of circumstances in 2020 and I would like to thank members of the Committee and all the colleagues who have contributed to our work, for their time and commitment during what was an unprecedented year. Role of the Committee The Committee’s terms of reference are available on our website. The core responsibilities of the Committee are to: • support the Board in fulfilling its responsibilities to maintain effective governance and oversight of the Company’s financial processing and reporting, internal controls and risk management; • provide advice to the Board on whether the Annual Report and Accounts, when taken as a whole, is fair, balanced and understandable and provides all the necessary information for shareholders to assess the Company’s position, performance, business model and strategy; • monitor and review the operation and effectiveness of the Group’s Internal Audit function, including its independence, strategic focus, activities, plans and resources; • facilitate the appointment and, if required, the removal of the Group Head of Internal Audit; • manage the relationship with the Group’s external auditors on behalf of the Board including the policy on the award of non-audit services; • conduct a tender for the external audit contract at least every 10 years and make appointment recommendations to the Board; and • consider and review legal and regulatory compliance issues, specifically in relation to financial reporting and controls, and, together with SESC (formerly SHESEC), maintain oversight of the arrangements in place for the management of statutory and regulatory compliance in areas such as financial crime. The Committee regularly undertakes reviews of its terms of reference to ensure it reflects the actual role carried out by the Committee and how it is operating. During the year, the Committee and the SESC (formerly SHESEC) reviewed their respective roles and terms of reference to identify areas of duplication and possible opportunities to simplify their operation. As a result of that review and with effect from 1 January 2021, the Audit Committee was renamed the Audit and Risk Committee and assumed sole responsibility for the oversight of the overall enterprise risk framework together with the oversight of the risk management of cyber risks and legal, regulatory and ethical compliance. As a consequence of these changes, the committees dispensed with their joint meetings held twice each year. Membership of the Committee and attendance at meetings The Committee is comprised solely of independent Non-Executive Directors. Kevin O’Byrne, as group chief financial officer of J Sainsbury plc, is considered by the Board to have recent and relevant financial experience as required by the 2018 Code. The members of the Committee are Carol Arrowsmith, Stephen Hester and Pam Kaur. Biographical details of the Committee Chairman and members can be found on pages 46 and 47. The Board is satisfied that the Committee has the resources and expertise to fulfil its responsibilities. Meetings of the Committee are attended by the Chairman of the Board, the Group Chief Executive, the Group Chief Financial Officer, the Group General Counsel & Company Secretary, the Group Financial Controller and the Group Head of Internal Audit, none of whom do so as a right. Other Senior Executives will attend as required to provide information on matters being discussed which fall within their area of responsibility. The external auditors, Deloitte LLP (Deloitte), also attended each meeting. The Committee meets individually with the external auditors, the Group Chief Financial Officer and the Group Head of Internal Audit without other Executive Directors present. The Committee met four times in 2020, and twice jointly with the SESC (formerly SHESEC). 55 Centrica plc Annual Report and Accounts 2020Governance The Committee has developed its agenda to enable, over the course of a year, active oversight of all key areas of responsibility and to facilitate deeper dives into topics of particular importance or pertinence. At the joint meetings between the Committee and SESC (formerly SHESEC), the Committees considered the Group’s System of Risk Management and Internal Control: in the first quarter to assess the system’s effectiveness; and in the fourth quarter to look prospectively at plans for the year ahead. From 2021, the Audit and Risk Committee will consider the Group’s System of Risk Management and Internal Control. More detail on the key issues considered by the Committee in 2020 are given below. Main activities of the Committee during 2020 • Reviewed the impact of and response to COVID-19 on heightened risk areas including increased financial reporting risk and accounting judgements and the finance function’s ability to operate effectively in lockdown to ensure the control environment remains effective. Details of key judgements and financial reporting matters in 2020 are set out on pages 58 to 61. • Reviewed the approach taken to assess credit risk exposure to wholesale and large industrial and commercial customers affected by COVID-19; • Reviewed accounting judgements in particular relating to exceptional or one-off items excluded from underlying results and the impact of COVID-19; • Kept under review Going Concern and viability approaches and associated disclosures; • Reviewed the future working capital requirements of the Group following the disposal of Direct Energy; • Reviewed the 2019 financial results, 2019 Annual Report and Accounts and 2020 Interim results; • Reviewed the structure of the 2020 Annual Report and Accounts to best reflect the Group’s operations in line with the strategic update in 2020; • Effectiveness review of the external audit process; • Continued oversight of the maintenance and development of the control environment particularly in light of organisation design changes and their impact on the oversight of the control environment; • Reviewed regular reports on Risk, Assurance and Controls, Internal and External Audit; • Carried out deep dives of Group-wide financial risk and Group definitions of capital employed; and • Reviewed controls in Direct Energy Business and EM&T. Effectiveness of the Committee Read more about the Board and Committee effectiveness on page 51. Risk management and internal controls Internal Audit The Committee is responsible for monitoring and reviewing the operation and effectiveness of the Group’s Internal Audit function, including its independence, strategic focus, activities, plans and resources. The Group Head of Internal Audit has direct access to the Chairman of the Board and to the Committee Chairman, and is accountable to the Committee. The appointment and removal of the Group Head of Internal Audit is also a matter for the Committee. The Committee approved the Group’s annual Internal Audit plan. The plan is developed in response to those risks identified through the Enterprise Risk Management processes, using the independent insight and experience of the Internal Audit team and their advisers. It incorporates assurance over all aspects of our Group Risk Universe, including the Principal Risks in the categories of Strategic, Financial, Operational and Legal & Regulatory risk. Further information on the Principal Risks is available on pages 34 to 39. As part of its consideration of the plan, the Committee reviewed staffing levels and qualifications to ensure these were appropriate and adequate for the delivery of the plan. The Committee reviewed, midway through the year, the 2020 Internal Audit plan which was revised in response to the changing risk landscape as a result of COVID-19 and organisational changes. During the year, the Committee received regular reports summarising the findings from the Group Internal Audit team’s work and action plans to resolve any highlighted areas. The Committee monitored the progress of the most significant action plans to ensure these were completed satisfactorily. During the year, the Internal Audit function was benchmarked against the Internal Audit Code of Practice 2020. No material gaps were noted and some opportunities to strengthen existing operating practices were identified. The Committee has satisfied itself that the Internal Audit function has an appropriate remit with adequate resources and appropriate access to information to enable it to fulfil its mandate, and to ensure it is equipped to perform in accordance with appropriate professional standards for internal auditors. It has also satisfied itself that the Internal Audit function has adequate standing and is free from management or other restrictions. Review of the System of Risk Management and Internal Controls Each year, a process of self-certification operates throughout the Group whereby the effectiveness of the System of Risk Management and Internal Controls, including compliance with Our Code, and policies are assessed. In addition, there is a programme to assess the Group’s Entity Level Controls. The results of the annual process, together with the conclusions of the internal reviews by Internal Audit, enable the Audit Committee and the SESC (formerly SHESEC), on behalf of the Board, to form and report their view on effectiveness. From 2021, the Audit and Risk Committee, in accordance with its revised terms of reference, will assess the effectiveness of the System of Risk Management and Internal Controls. During 2020, there was further activity to improve the financial and commercial controls across the Group. These improvements were discussed within the Committee and the SESC (formerly SHESEC) throughout the year to provide support and guidance to our management teams. The risk management process and internal controls have been in place for the whole year, though we recognise the need for ongoing and continuous improvement. We have confidence in the work of Internal Audit and the functional support teams, alongside our management teams, to identify issues that arise and remediate where necessary control gaps in line with our risk appetite. 56 Governance | Committee Reports continuedCentrica plc Annual Report and Accounts 2020 Fair, balanced and understandable As part of the Committee’s determination, on behalf of the Board, of whether the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy, the Committee considers the processes and controls involved in its production and the financial reporting responsibilities of the Directors. There is a robust governance framework around the production of the Annual Report to ensure it is critically reviewed and signed off by the key teams in the relevant businesses and functions and the Committee was satisfied that the process was effective and confirmed to the Board that the Annual Report, when taken as a whole, was fair, balanced and understandable. External auditors The Committee manages the relationship with the Group’s external auditors on behalf of the Board. The Committee considers annually the scope, fee, audit plan, performance and independence of the external auditors as well as whether a formal tender process is required. The Committee last led a formal audit tender process in 2016, the details of which can be found in the 2016 Annual Report and Accounts. The Board considers it of prime importance that the external auditors remain independent and objective and, as a safeguard against this being compromised, the Committee implemented and monitors a policy on the independence of external auditors. This policy details the process for the appointment of the external auditors, the tendering policy, the provision of non-audit services, the setting of audit fees and the rotation of audit partner and staff. There are no contractual or similar obligations restricting the Group’s choice of external auditors. Deloitte was appointed as the Company’s auditor at the beginning of 2017 and will this year perform its fourth full audit. The re- appointment of Deloitte as auditors was approved by shareholders at the AGM in May 2020 and Deloitte has been recommended for re-appointment again in 2021. The Company has complied with the Statutory Audit Services Order 2014 for the financial year under review. Effectiveness of the external audit process and the independence and objectivity of the external auditors To assess the effectiveness of the external audit process and independence and objectivity of the external auditors, the Committee carried out an assessment, primarily looking at the key areas of: • Robustness of the audit process • Quality of people and service • Quality of delivery • Independence and objectivity • Value added advice This assessment included an internal questionnaire, which was completed by the Chairman of the Board, Committee members and senior members of management on their views of Deloitte’s performance. The questionnaire covered a review of the audit partner and team, the audit scope and approach, audit plan execution, auditor independence and objectivity and robustness of challenge of management. Separately, Deloitte also provided an assessment, via an internal management questionnaire, of management’s controls, judgements and engagement throughout the audit process. The feedback received was reviewed by management and reported to the Committee. The Committee was satisfied with the external auditor’s commitment to audit quality, the robust and professional working relationship with management and demonstration of strong technical knowledge and professional scepticism. In addition, to ensure the independence of the external auditors, and in accordance with International Standards on Auditing (UK & Ireland) 260 and Ethical Standard 2019 issued by the Accounting Practices Board and as a matter of best practice, Deloitte has confirmed its independence as auditors of the Company. Together with Deloitte’s confirmation and report on their approach to audit quality and transparency, the Committee concluded that Deloitte demonstrated appropriate qualifications and expertise and remained independent of the Group and coupled with effective management engagement, that the audit process was effective. Corporate Reporting Review During the year, the Group’s 2019 Annual Report and Accounts were reviewed by the Corporate Reporting Review (‘CRR’) team of the Financial Reporting Council (‘FRC’) and the Group received a number of queries. The Audit Committee considered these queries and the comments of our auditors, Deloitte, and approved the responses prepared by management. The Committee was pleased that the responses provided to the CRR dealt with the matters raised, and that only minor amendments to our disclosures have been made in our 2020 Annual Report and Accounts to clarify certain matters raised by the CRR. The Committee does note however that the review conducted by the FRC was based solely on the Group’s published Annual Report and Accounts and does not provide assurance that the Annual Report and Accounts are correct in all material respects. Non-audit fees To safeguard the objectivity and independence of the external auditor, the Committee is responsible for the policy on the award of non-audit services to the external auditors. A copy of this policy is available on our website. All requests to utilise Deloitte for non-audit services must be approved by the Chairman of the Audit Committee and there is an annual cap on non-audit work during the normal course of business of £1 million, which is assessed each year for appropriateness in the context of external guidance and regulation. During 2020, work on the divestment of Direct Energy required significant additional services from Deloitte to facilitate the sale, above the cap of £1 million. Approval for this expenditure was sought and received from the Committee in advance of the work commencing. The work related to both the Reporting Accountant services in respect of the disposal Class 1 Circular and the audit of US GAAP carve-out accounts for Direct Energy, undertaken for NRG’s purposes, but under the direction of the Group. Deloitte were clearly best placed to undertake these engagements given their knowledge of the business and also the required time frame. Fees for these services amounted to £3.3 million. Overall, total non-audit fees incurred in the year were £4.3 million, including £0.6 million for the review of interim results and £0.3 million for the audit of Ofgem consolidated segmental statements. The amount incurred in year is below the legal cap of 70% non-audit fees (for services not required by regulation) compared to the three-year average of statutory audit fees, amounting to approximately 55%. Given the one-off nature of the engagements related to the Direct Energy disposal, the Committee expects this percentage to fall dramatically in 2021. In normal circumstances, all significant non-audit work is put out to tender, and where Deloitte is appointed, this is only because their skills and experience not only make them the most appropriate supplier of the work but also there is clear evidence that another firm could not be used without adversely affecting the business. Kevin O’Byrne on behalf of the Audit and Risk Committee 24 February 2021 57 Centrica plc Annual Report and Accounts 2020Governance Key judgements and financial reporting matters in 2020 Audit and Risk Committee reviews and conclusions Credit Provisions for Trade and Other Receivables The IFRS 9 impairment model requires credit provisions (‘bad debt’) for trade and other receivables to be based on an expected credit loss model, as opposed to an incurred loss basis. The economic effects of the COVID-19 pandemic will likely impact the ability of the Group’s customers to pay amounts due and accordingly, there is significant judgement around the levels of forecast bad debt and the provisioning required at the year-end. The Group’s residential and business energy supply customers account for the majority of the Group’s credit exposure. Expected default rates in these areas are calculated initially on a matrix basis by considering recent historical loss experience, the nature of the customer, payment method selected and, where relevant, the sector in which they operate. Management have then also factored in forward looking economic assumptions, taking into account unemployment forecasts (e.g. from the office of budget responsibility), as well as the mitigating effect of government support and stimulus schemes. As a result, the bad debt charge from continuing activities for the year increased to £195 million (2019: £112 million). For UK Downstream energy supply, the bad debt charge amounted to 2.2% (2019: 1.2%) of UK energy supply revenue and the closing bad debt provision moved to 34% (2019: 28%) of UK energy supply gross receivables. Due to the significant estimation uncertainty in this area, management have provided detailed analysis and sensitivities in note 17 of this Annual Report and Accounts. Assets held for sale and discontinued operations The Group announced that it had agreed to dispose of Direct Energy to NRG Energy, Inc. on 24 July 2020. At the time of the announcement, the disposal was subject to shareholder and regulatory approvals, all of which were subsequently obtained by 31 December 2020. The Group judged that the assets and liabilities of the Direct Energy disposal group should be classified as held for sale as at 24 July 2020 because disposal was highly probable at that point. Furthermore, because the disposal group represented a separate major line of business and geographical operation, its results have been presented as discontinued operations for 2019 and 2020. The Group’s investments in Spirit Energy and Nuclear were not judged to be assets held for sale at 31 December 2020 because, at that date, their disposal was not considered highly probable within the next year. Determination of long-term commodity prices and their use valuing long-lived assets and derivative contracts Long-term commodity price forecasts are a key assumption in the valuation of the Group’s long-lived assets. In 2019, following debate with the Committee, the Group moved to using a “P50” median price curve, derived from a collection of third-party forecasts. The advantage of this approach is to more clearly align to pricing that a reasonable market participant would use and so that other external data points (e.g. consensus view of the impact of climate change and COVID-19) are factored into these prices. In 2020, the Group has continued to use the “P50” methodology for deriving long-term price forecasts and have used these forecasts in asset impairment testing and contract valuations. The Group has also obtained commodity price forecasts which are intended to be consistent with the Paris Accord. These are typically lower than the “P50” curves the Group has adopted, but the Group has shown the impact of such price forecasts on the gas and oil assets in note 7 of the financial statements. The Committee initially reviewed management’s approach to credit provisioning at the half-year and provided feedback. It reviewed management’s groupings of receivables by the key factors affecting recoverability (e.g. payment method, nature of customers). and considered the levels of provisions booked against each grouping, at the year-end. The Committee discussed the approach with the external auditors and debated the range of potential outcomes. The Committee was comfortable with the provisions booked whilst noting the significant estimation uncertainty in this area. The Committee welcomed the enhanced disclosure in note 17, setting out the judgemental nature of the provisioning and the sensitivity analysis to allow users of the accounts to model different outcome scenarios. The Committee considered this judgement and concurred that the disposal of Direct Energy was highly probable on 24 July 2020. It also agreed that classification as a discontinued operation was appropriate given the separate line of business and the materiality of Direct Energy’s trading. The Committee noted that the transaction completed on 5 January 2021. The Committee considered the status of the Spirit Energy and Nuclear disposal processes and concurred with management’s assessment that they should not be classified as assets held for sale at 31 December 2020. The Committee reconfirmed that they continued to support the “P50” median curve (derived from third parties) as an appropriate approach. The Committee also noted that the “P50” long-term commodity price forecasts had reduced substantially year-on-year, in line with most external third-party forecasts. The external auditors provided detailed reporting and held discussions with the Committee on the impact of the commodity curves. As a result of the above, the Committee were comfortable the curves were reasonable. Sensitivities of the asset impairment tests to changes in price forecasts are provided in note 7 on pages 122 to 124. The Committee noted the use of a price curve intended to be consistent with the Paris Accord in the impairment sensitivities and believed the output provided useful information to readers of the accounts. 58 Governance | Committee Reports continuedCentrica plc Annual Report and Accounts 2020 Key judgements and financial reporting matters in 2020 Audit and Risk Committee reviews and conclusions The Committee reviewed management reports detailing the assets at risk of impairment and the key judgements and estimates used. The Committee observed the general year-on-year fall in both liquid and “P50” commodity prices. It noted that £509 million of the Upstream E&P field and Goodwill write-offs (including decommissioning and Danish asset disposal) were primarily due to these price reductions. £135 million related to fields where development was now deemed unlikely under the Group’s ownership. The Committee noted the Nuclear investment recoverable amount continues to be based on a value-in-use (‘VIU’) calculation rather than on a sales basis. It observed that the impairment booked was primarily driven by the price reductions noted above, as well as a fall in production volume assumptions, following the earlier than expected closure announcements for Hunterston and Hinkley and other availability issues. The Audit and Risk Committee challenged management and the external auditors on the key inputs to the impairment models including price, outage rates, assumed lives and discount rates, and was comfortable with the conclusions reached. The Committee also noted the methodology used in valuing the Centrica Business Solutions – energy solutions and Centrica Home Solutions businesses. It had provided initial feedback around its view of the growth prospects of these businesses in the November meeting. The Committee concurred with management’s ultimate assessment of the level of impairment required for the Centrica Home Solutions assets and Centrica Business Solutions goodwill. Further detail on impairment arising and the assumptions used in determining the recoverable amounts is provided in notes 7 and S2 on pages 122 to 124 and 163 to 164. Impairment of long-lived assets The Group makes judgements and estimates in considering whether the carrying amounts of its assets are recoverable: Upstream (Exploration and Production (‘E&P’) and Power assets) For Upstream assets, discounted cashflows are prepared from projected production profiles of each field or power asset, taking into account forecast future commodity prices, to assess their recoverable amount. When deriving forecast cashflows, market prices are used for the period when a commodity is liquid. For the longer-term illiquid period, the “P50” median price curve is used (see “Determination of long-term commodity prices and their use valuing long-lived assets and derivative contracts”, on the previous page). Judgement is also required around production volumes. For E&P, each field has specific reservoir and field characteristics and is modelled independently. For exploration and evaluation prospects, likelihood of development is also a key factor. For Nuclear, recent availability issues at Hunterston, Hinkley and Dungeness have been factored in and implications considered for the wider fleet. The expected operating life of Sizewell has continued to be reflected to 2055 in the modelling, beyond the original design life. In E&P, the recoverable amount of goodwill is assessed by taking the remaining headroom on individual field assessments and deducting the forecast general administration and running costs of the business over the life of the fields. At the year-end, pre-tax net exceptional impairment write-offs of E&P gas and oil fields of £582 million were booked, relating to UK, Danish and Norwegian assets (including decommissioning and the Danish asset disposal). This included £135 million related to the Greater Warwick Area exploration and evaluation asset. Goodwill of £62 million has also been written-off. Pre-tax exceptional impairments and asset derecognition of £525 million in relation to power assets (of which £481 million is against the Nuclear investment) were also booked. This included £21 million associated with the Whitegate power station for components which were damaged, following an incident in December 2020. Centrica Business Solutions – energy solutions and Centrica Home Solutions businesses For Centrica Home Solutions (reported within British Gas) and the Centrica Business Solutions – energy solutions customer cash generating unit (‘CGU’), the recoverable amount of each business is calculated using a discounted cashflow. Cashflows are projected over a 5-year period, based on Board-approved business plans, and a terminal value calculated based on year 5 and an appropriate growth rate. Judgement is required in assessing the achievement of Board-approved business plans, the long-term projected cash flows, and macroeconomic assumptions such as the growth and discount rates. During 2020, the COVID-19 enforced lockdowns restricted the ability of these businesses to grow in the manner previously forecast. For Centrica Business Solutions, the disposal of Direct Energy significantly reduced the expected future prospects in the North American market. At year end, £78 million of Goodwill impairment has been booked in relation to Centrica Business Solutions – energy solutions customer CGU and £72 million of impairment of IT intangible assets booked in relation to Centrica Home Solutions. Other impairments have been reflected in exceptional items as part of the Group’s property rationalisation programme. Other impairments, such as dry hole write-offs, have been reflected within business performance. These items are not subject to the same level of judgement and estimation uncertainty as the impairments of E&P, Centrica Business Solutions – energy solutions and Centrica Home Solutions assets detailed above. 59 Centrica plc Annual Report and Accounts 2020Governance Key judgements and financial reporting matters in 2020 Audit and Risk Committee reviews and conclusions The Committee had formally reviewed and approved the Group’s policy on exceptional items in previous years and, in the current year, it used this policy to help inform the appropriateness of the proposed classifications. The Committee challenged the items classified as exceptional items, considering their size, nature and incidence and in the context of the Group policy. The Committee concluded that separate disclosure of these items as exceptional was appropriate in the Financial Statements. The Committee also noted that the Group policy on certain re-measurements classification remained unchanged from previous periods and that this presentation allowed underlying performance to be reflected on a consistent and comparable basis. Further detail is provided in notes 2 and 7 on pages 107 and 120 to 124. The Committee noted that the Group’s policy and methodologies in classifying and valuing energy derivatives were unchanged from previous periods. The Committee also reviewed and understood the breakdown by business, of the movement in IFRS 9 energy derivative valuations in the Group Income Statement. They reflected on the fact the Group is generally a net buyer of commodity and that the certain re-measurement gain was as a result of both the unwind of prior year out-of-the-money positions and the way liquid commodity prices fell to a mid-year low before rising higher by year-end (although still generally lower than prior year for the outer liquid years). Further detail is provided in notes 2 and 7 on pages 107 and 120. The Committee noted and concurred with the specific judgement around LNG contract own use classifications. The Committee also discussed the valuation of the Cheniere contract with management and the external auditors and noted the valuation uncertainty particularly in relation to the extrinsic element of the contract. The Committee welcomed the detailed disclosure in note 3 to the accounts, describing this significant uncertainty and providing sensitivity analysis. Classification and presentation of exceptional items and certain re-measurements The Group reflects its underlying financial results in the business performance column of the Group Income Statement. To be able to provide this in a clear and consistent presentation, the effects of certain re-measurements of financial instruments and exceptional items are reported separately in a different column in the Group Income Statement. The classification of items as exceptional and specific trades as certain re-measurements (see “Energy Derivatives – classification and valuation” below) are subject to defined Group policies. These policies are reviewed annually by management. At the year-end, exceptional items included the impairments noted above, as well as restructuring costs related to the Group’s final phase of the cost efficiency programme of £154 million and net pension charge of £120 million related to redundancy strains (see “Pensions” on the following page). Certain re-measurements totalled a £784 million gain. Energy derivatives – classification and valuation The Group enters into numerous commodity contracts in its ordinary course of business. This can be to procure load for its downstream business, sell output from its upstream assets, to trade around its other commodity exposures or to make money from proprietary activities. On entering into these contracts, the business assesses each of the individual trades and classifies them as either: (i) Out of scope of IFRS 9: For “own use” contracts (i.e. customer contracts, contracts to take delivery and meet customer demand or sell upstream output) and contracts that cannot be net settled. (ii) In scope of IFRS 9: Contracts for commodities which have the ability to be and practice of being net settled. Energy contracts outside the scope of IFRS 9 are accruals accounted. Those contracts considered to be within the scope of IFRS 9 are treated as derivatives and are marked-to-market (fair valued). If the derivatives are for proprietary energy trading, they are recorded in the business performance column of the Group Income Statement. If they are entered into to protect and optimise the value of underlying assets/contracts or to meet the future downstream demand needs, they are recorded as certain re-measurements. The fair-value of derivatives are estimated by reference to published liquid price quotations for the relevant commodity. Where the derivative extends into illiquid periods, the valuation typically uses the “P50” median price curves (see Determination of long-term commodity prices and their use valuing long-lived assets and derivative contracts). Judgement is required in all aspects of both the classifications and valuations. One of the Group’s critical accounting judgements is that its LNG contracts are outside the scope of IFRS 9 because they are entered into for its own purchase and sale requirements (“own use”). The 20-year Cheniere LNG purchase contract from Sabine Pass in the USA is also assessed annually to check whether it is onerous. The contract value depends heavily on the gas price spread between Henry Hub and NBP and between Henry Hub and Asian LNG. During the year, the forecast spreads have narrowed making the intrinsic value of the contract negative. However, the forecast extrinsic value capture more than offsets this negative amount. As a result, the contract is not considered onerous but there is a degree of estimation uncertainty around this valuation. 60 Governance | Committee Reports continuedCentrica plc Annual Report and Accounts 2020 Key judgements and financial reporting matters in 2020 Audit and Risk Committee reviews and conclusions Energy supply revenue recognition The Group’s revenue for energy supply activities includes an estimate of energy supplied to customers between the date of the last meter reading and an estimated year-end position. This is estimated through the billing systems, using historical consumption patterns, on a customer-by- customer basis, taking into account weather patterns, load forecasts (including the impact of COVID-19) and the differences between actual meter readings being returned and system estimates. An assessment is also made of any factors that are likely to materially affect the ultimate economic benefits which will flow to the Group, including bill cancellation and re-bill rates. To the extent that the economic benefits are not expected to flow to the Group, revenue is not recognised. At the year-end, unread energy income for the continuing supply businesses was £1.5 billion (2019: £1.3 billion). The Committee has reviewed the level of unread revenue and unbilled accrual made during the year and discussed with management and the external auditors. The Committee noted that the unread revenue and unbilled accrual had followed the same estimation process as in previous years and that the external auditors had independently reperformed this calculation to within an immaterial difference. More details of unread energy income are provided in note 3 on page 110 and on unbilled energy income in note 17 on pages 138 to 143. Pensions The assets and liabilities, and the cost associated with providing benefits under defined benefit schemes is determined separately for each of the Group’s schemes. Judgement is required in setting the key assumptions used for the actuarial valuation which determines the ultimate cost of providing post-employment benefits, especially given the length of the Group’s expected liabilities. The net Group pension deficit was £601 million (2019: £163 million). The UK defined benefit schemes used a nominal discount rate of 1.5% (2019: 2.2%) and inflation of 2.8% (2019: 2.9%). During the year, the Group provided for pension strains as a result of redundancies. The impact of these changes has been reflected in the above deficit (and are part of the pension exceptional item). The Committee noted the key pension assumptions and disclosures in the Financial Statements. The Committee also noted the pension strains from redundancies and the link to exceptional items. The Committee noted the consistent year-on-year methodology used to derive the key defined benefit assumptions and that the rates were within comparator range. The Committee understood that management had assessed it to be too early to make an adjustment to the mortality assumptions or experience as a result of the COVID-19 pandemic. The Committee recognised the role of the independent actuary, who are consulted on the appropriateness of the assumptions, and discussions were also held with the external auditors. Further details on pensions are set out in note 22 on pages 147 to 151. Going concern, viability statement and liquidity risk The Group experiences significant movements in its liquidity position due primarily to the seasonal nature of its business and margin cash. To mitigate this risk the Group holds cash on deposit and maintains significant committed facilities. The Group regularly prepares an assessment detailing these available resources to support the going concern assumption in preparing the Financial Statements. The Group also models various possible downside scenarios to show the longer-term viability of the business and to support the viability statement. This included scenarios around the continued impact of COVID-19 and its longevity, as well as reflecting the £2.7 billion of cash proceeds received for the Direct Energy disposal in early January 2021. The Committee reviewed and challenged management’s funding forecasts and sensitivity analysis and the impact of various possible adverse events including significant commodity price movements, credit rating downgrades and prolonged COVID-19 impacts. The Committee also reviewed the Group’s long-term viability statement, and challenged the assumptions made and the clarity of the statement in the context of the uncertainties facing the Group. The external auditors also provided detailed reporting and held discussions with the Committee. Following the review, the Committee recommended to the Board the adoption of the going concern statement in the Annual Report and Accounts 2020 and concurred with the Viability conclusion. Further details on sources of finance are set out in note 24 on pages 154 to 156. The Going Concern section is in Other Statutory Information on page 87 and the Viability statement in Our Principal Risks and Uncertainties on pages 40 to 42. Fair, Balanced and Understandable The Board is required to confirm that the Annual Report and Financial Statements are fair, balanced and understandable. To enable the Board to make this declaration, there is a year-end review process to ensure that the Committee and the Board have access to all relevant information, including management’s papers on significant issues. The Committee reviewed the key factors considered in determining whether the Annual Report is fair, balanced and understandable. The Committee and all Board members received a draft of the Annual Report and Financial Statements in sufficient time to review and challenge the disclosures therein. In addition, the Committee took into consideration the external auditor’s reviews of the consistency between the reporting narrative of the Annual Report and the Financial Statements. Ofgem Consolidated Segmental Statement The Group is required to prepare an annual regulatory statement (Consolidated Segmental Statement (CSS)) for Ofgem which breaks down our licensed activities for the financial year into a generation, domestic and non-domestic and electricity and gas result. The CSS is reconciled to our externally reported International Financial Reporting Standards Annual Report and Accounts. The Group publishes the CSS at the same time as the full year Annual Report and Accounts and the CSS is independently audited. In preparing the CSS, judgement is required in the allocation of non- specific costs between domestic and non-domestic and electricity and gas and the distinction between licensed and non-licensed activities. The Committee reviewed the Ofgem Consolidated Segmental Statement and the key judgements and disclosures made in its preparation. The external auditor also provided a report and held discussions with the Committee. The full CSS and the independent audit opinion approved by the Committee for publication are set out on pages 207 to 218. 61 Centrica plc Annual Report and Accounts 2020Governance Nominations Committee Dear Shareholder On behalf of the Board, I am pleased to present the Nominations Committee report for 2020 which explains the Committee’s focus and activities during the year. This year the Committee has focused on succession planning and, specifically, refreshing the membership of the Board and ensuring the Board is of the appropriate size and has the right composition as the Company reviews its strategy for the future. Role of the Committee The Nominations Committee is responsible for ensuring that the Board and its Committees have the appropriate balance of skills, knowledge, and experience to effectively lead the Company both now and in the future. This is achieved through effective succession planning, and the identification and development of internal talent to support the delivery of Centrica’s strategy. In identifying and nominating candidates to fill Board vacancies, the Committee considers candidates from a wide range of backgrounds, assessing them on merit against objective criteria and with due regard for the benefits of diversity on the Board. The Committee embraces the importance of diversity and inclusion and supports the recommendations of the Hampton-Alexander and Parker Reviews in relation to gender and ethnic diversity. In line with the Board’s Diversity Policy, adopted by the Board in July 2019, the Committee remains committed to enhancing the diversity of the Board, with broad search criteria used to encourage a diverse range of candidates. As at 31 December 2020, following the refreshing of Board membership undertaken by the Committee, the Board comprised 44% women compared with 17% as at 31 December 2020. Female Board representation increased further to 50% following the appointment of Kate Ringrose as Group Chief Financial Officer on 18 January 2021 and the resignation of Joan Gillman as a Non-Executive Director on 8 February 2021, compared to the 33% target set by Hampton-Alexander. As at 24 February 2021, our eight-member Board comprises nationals of three different countries (the UK, Ireland and South Africa), with a wide range of backgrounds and experience. Three out of five independent Non-Executive Directors (60%) are women. We are pleased with the progress that we have made during 2020. However, as a Committee we recognise that this is only one aspect in our strategy of achieving a diverse and inclusive business. In this respect, our Senior Managers are also required to support our Board Diversity Policy in developing diversity in the business. Further information on the steps that the Company is taking to create a diverse workplace and the appropriate culture to enable all of our colleagues to achieve their full potential together, with information on the diversity and ethnicity of our management and employees provided on page 29. The Committee regularly undertakes reviews of its Terms of Reference to ensure that they remain appropriate and the Committee continues to operate effectively. Main activities for the Committee during 2020 During the year, the Committee met on two occasions and its main areas of focus were: • The process for the selection and appointment of Scott Wheway as Chairman, led by the Senior Independent Director; • The process for the selection and appointments of Chris O’Shea as Group Chief Executive and Johnathan Ford as Group Chief Financial Officer; • The process for the selection and appointment of Carol Arrowsmith as a Non-Executive Director; and • Recommended changes to the membership of the Audit and Risk, Nominations and Remuneration Committees and of SESC (formerly SHESEC). Board succession It is the role of the Committee to ensure there is a formal procedure for the appointment of new directors to the Board. The Committee is responsible for leading this process and making recommendations to the Board. Chairman Stephen Hester, Senior Independent Director, led the process for the Chairman succession. The Committee recommended to the Board the appointment of Scott Wheway as Chairman because of his deep knowledge of the Company, previous plc board experience and in-depth customer-facing pedigree. He has been an Independent Non-Executive Director of Centrica since 2016, acting as Chairman since 12 February 2020. The Board accepted the Committee’s recommendation and Scott Wheway was appointed Chairman of the Board on 17 March 2020, succeeding Charles Berry, who resigned after being on medical leave. Executive Directors In July 2019, the Company announced that Iain Conn had agreed with the Board to step down as Group Chief Executive and to retire from the Board in 2020. The Nominations Committee considered both internal and external candidates for the role. Chris O’Shea, Group Chief Financial Officer since 1 November 2018, was, on the recommendation of the Committee, appointed Interim Group Chief Executive on 17 March 2020. The Chairman completed a further review of both the internal and external candidates for this role and concluded that Chris was comprehensively the best candidate to navigate Centrica through and beyond the COVID-19 crisis focusing on the welfare of our colleagues and customers, the financial resilience of the Company and the agility to move quickly when we emerge from these unprecedented circumstances. He was subsequently appointed as the permanent Group Chief Executive on 14 April 2020. Following the decision to appoint Chris O’Shea as Group Chief Executive, the Committee undertook a search for a new Group Chief Financial Officer. The Committee again considered both internal and external candidates and following a robust search process, Johnathan Ford was appointed on the recommendation of the Committee given his extensive relevant sectoral experience. 62 Governance | Committee Reports continuedCentrica plc Annual Report and Accounts 2020 Scott Wheway chaired the Remuneration Committee until his appointment as Chairman of the Board on 17 March 2020, and Stephen Hester took over on an interim basis until 11 June 2020. Carol Arrowsmith became Chairman of the Remuneration Committee on 11 June 2020, replacing Stephen who continues to be a member. In addition, following the retirement from the Board of Carlos Pascual, Non-Executive Director, on 22 May 2020, Heidi Mottram was appointed as a member of the Remuneration Committee. Following the retirement from the Board of Steve Pusey, Non- Executive Director, Scott Wheway was appointed as Chairman of the Safety, Health, Environment, Security and Ethics Committee (SHESEC), effective until 31 December 2020. Heidi Mottram succeeded Scott as Chairman of the SHESEC (renamed Safety, Environment and Sustainability Committee) with effect from 1 January 2021. Carol Arrowsmith also joined the Audit and Risk Committee on 11 June 2020. Board and Committee evaluation Following a formal and rigorous process for evaluating the performance of the individual Board members, which gives due regard to their time commitment, performance and ability to continue to contribute to the Board taking account of the knowledge, skills and experience required, eight Directors were proposed for re-election by shareholders at the 2020 AGM. For the 2020 Board evaluation, an internal review was conducted, led by the Chairman and supported by the Company Secretary. Directors and certain senior executives were invited to complete questionnaires. The results of the evaluation process were discussed by the Board. Read more about the Board and Committee evaluation process on page 51. Scott Wheway on behalf of the Nominations Committee 24 February 2021 In June 2020, further changes to the Board were announced as part of the significant refresh and resizing. As part of the wider Group organisational restructuring, Sarwjit Sambhi, Chief Executive, Centrica Consumer and Richard Hookway, Chief Executive, Centrica Business stepped down from the Board as Executive Directors in July 2020 and left the Company. In January 2021, Johnathan Ford stepped down as Group Chief Financial Officer and Executive Director, leaving on 31 January 2021. In line with succession plans in place, Kate Ringrose was appointed Chief Financial Officer with effect from 18 January 2021. Non-Executive Directors Centrica has a thorough and robust search process for the selection of new Non-Executive Directors. Search firms are appointed to secure a strong and diverse list of candidates. A shortlist of candidates is shared with the Committee, meetings scheduled with Directors and members of management, and then once the candidates have been identified, and their ability to meet the necessary time commitment is confirmed, a recommendation is made to the Board. Prior to the approval of Scott Wheway, Independent Non-Executive Director, as Centrica Chairman on 17 March 2020, the Board was informed by Scott that he would be stepping down from the Board of Santander UK by the end of the summer. Scott left the Board of Santander UK on 30 September 2020. The Board was satisfied that Scott would be able to devote sufficient time to perform his role as Chairman. In addition, following appointment as a Director, any additional external appointments taken up by Directors require advance approval by the Board, to ensure that the Director will continue to have sufficient time to commit to their Centrica responsibilities. During 2020, a search process was carried out to identify a new Non-Executive Director. Following the process, the Committee recommended to the Board the appointment of Carol Arrowsmith who joined the Board on 11 June 2020. Carol was selected for her extensive FTSE experience, especially of advising boards on executive remuneration across a range of sectors and a deep understanding of how the energy sector operates in a commercial setting. Carlos Pascual and Steve Pusey stood down as Non-Executive Directors following the conclusion of the 2020 AGM. Committee memberships During the year, the Nominations Committee carried out a review of the composition of the Committees to take account of the skills and experience new Directors brought to the Board and made recommendations for changes to the membership of four of the Committees. Scott Wheway became Chairman of the Nominations Committee upon appointment as Chairman of the Board on 17 March 2020. Heidi Mottram joined the Committee on 1 January 2020 and Carol Arrowsmith joined on 11 June 2020. 63 Centrica plc Annual Report and Accounts 2020Governance Safety, Environment and Sustainability Committee Dear Shareholder On behalf of the Board, I present the Safety, Environment and Sustainability Committee (SESC) report for the year ended 31 December 2020 which explains the Committee’s focus and activities during the year. This is my first report as the Chair of the Committee, having joined as a member in January 2020 and then succeeded Scott Wheway as Chair in January 2021. Since lockdown in March 2020, the Committee focused closely on the impact of the COVID-19 pandemic on Centrica’s employees and their ability to continue to perform their roles safely together with the possible effects on the mental health of colleagues. Additionally, the Committee reviewed the effectiveness of information security controls in light of the heightened risk of cyber-attacks during the pandemic. The impacts of, and responses to, the health and safety issues arising from the pandemic remain a focus for the Committee which we will continue to review. With the easing of restrictions on movement, the Committee was able to devote time to reviewing environmental and climate change issues, together, our People & Planet Plan. The Committee and the Audit and Risk Committee reviewed their roles and responsibilities and amended their terms of reference to clarify and simplify their operation. The Committee was renamed the Safety, Environment and Sustainability Committee with effect from 1 January 2021 reflecting the need to have greater focus on wider ESG matters, as well as health and safety risks. More information is set out below. I believe that the Committee has continued to perform effectively in the most difficult of circumstances caused by the COVID-19 pandemic and I look forward to chairing the Committee in 2021 with its renewed focus and responsibilities. Role of the Committee in 2020 During the year, the Committee was responsible for keeping under review the adequacy and effectiveness of the Company’s internal controls and risk management systems related to safety, health, environment, security and ethics in respect of: • People: Engagement, Culture and Behaviours; • Sourcing and Supplier Management; • Infrastructure, Equipment and Practices affecting Health, Safety, Environment and Security (HSES); • Information Systems and Security; and • Legal, Regulatory and Ethical Standards Compliance. The Committee regularly undertakes reviews of its terms of reference to ensure that it reflects the actual role carried out by the Committee and is operating effectively. Following Steve Pusey’s retirement from the Board and because Heidi Mottram could not immediately take on the SESC Chair in 2020 due to her other commitments arising from the COVID-19 pandemic, the Board amended the Committee’s terms of reference in May 2020 to allow the Chairman of the Board to also act as Committee Chairman. 64 As noted above, following a review and with effect from 1 January 2021, the Committee was renamed the Safety, Environment and Sustainability Committee (SESC) and oversight of the enterprise risk framework, legal and regulatory compliance risks and data and cyber security risks was reassigned to the renamed Audit and Risk Committee (formerly the Audit Committee), with supplier management matters being overseen by the executive. The Committee will focus on ESG issues relevant to Centrica, including corporate reputation, and will continue to review health and safety risks. As a result of the revised role and responsibilities of the Committee, in early 2021, SESC undertook an in-depth review of customer and colleague insights and the rationale for refreshing our purpose following discussions between the Board and management in 2020 prior to its adoption. Further details of the process and our engagement with stakeholders is provided on page 22. Membership of the Committee and attendance at meetings The Committee is comprised solely of Non-Executive Directors with Heidi Mottram as Chairman, and members Pam Kaur and Scott Wheway. Joan Gillman stepped down from the Board and Committee on 8 February 2021. SESC members bring a wide range of sector experience, insight and stakeholder perspectives which are used to challenge, shape and provide oversight of the SESC’s agenda. Details of the matters discussed at Committee meetings are set out later in this report. During the year, the Group Chief Executive, the Group General Counsel & Company Secretary, the Group HR Director, the Group HSES Director and the Group Head of Internal Audit, Risk and Control attended all Committee meetings, as did other key executives on relevant issues. The Committee met three times in 2020, and twice jointly with the Audit Committee. Joint meetings of the Audit and Risk Committee and SESC The SESC and Audit and Risk Committee held two joint meetings in 2020 to consider the Group’s systems of risk management and internal control: in the first quarter to assess the system’s effectiveness; and in the fourth quarter to look prospectively at plans for 2021. Following the re-allocation of the Committees’ responsibilities reported above, these joint meetings have been dispensed with. Main activities of the Committee during 2020 The review of operational risk and performance, with a particular focus on the challenges posed by COVID-19, formed a large part of the Committee’s agenda in 2020. Group HSES, Group Internal Audit, Risk & Control and Ethics & Compliance provided quarterly reports on their assurance work, on operational risk, including on the Group’s health, safety and environmental performance and operational integrity. Group HSES responded to the COVID-19 crisis focusing on risks for service engineers in the field, home-working and risk assessment for returning to the office. The Committee agreed that, in light of the pandemic, the People agenda would move to the Board agenda for the remainder of 2020 and into 2021. Information Systems and Cyber Security assessed the risks from the COVID-19 pandemic which mainly presented through increased risk of attack through phishing and additional fraud from call centres. However, controls remained effective and remote working had not seen the controls being compromised. Governance | Committee Reports continuedCentrica plc Annual Report and Accounts 2020 The Committee reviewed and discussed performance in 2020 against climate targets including: • performance to date against our climate change ambitions across Centrica emissions, Customer emissions and Flexible, Distributed & Low Carbon energy technologies concluding all were either on track or ahead of plan; • how expectations on businesses regarding climate change were rising across our key stakeholder groups; • discussed best practice in managing the risks and opportunities of climate change; and • our performance and ranking in trusted benchmarks where we maintained or improved our upper quartile position. The Committee recognised the opportunity to strengthen our net zero commitments and the proposed enhancements to our climate ambition targets for both Centrica emissions and Customer emissions which, following discussing the implications on our strategic planning, were approved by the Committee. Further deep dives provided measures of personal and process safety, environmental considerations and regulatory engagement and compliance, data protection, data security and cyber risk analysis. The Committee reviewed these risks, their management and their mitigation in depth with relevant executive management. As a result of these reviews: • a dashboard with measures of organisational health would give focus to specific areas, such as wellbeing and mental health; • direct access to the Centrica corenetwork were to be tested; • approved recommendations for the future organisation, reporting and assurance of process safety activity, controls and performance; and • management were challenged by the Committee on overdue occupational safety audit actions. Finally, the Committee reviewed the Company’s approach to the Modern Slavery Act (MSA) and recommended the adoption of the Company’s MSA statement to the Board. Committee effectiveness Read more about our Board and Committee effectiveness on page 51. Heidi Mottram on behalf of the Safety, Environment and Sustainability Committee 24 February 2021 Read more about our process safety performance in our Key Performance Indicator on Page 13 Read more about Our Code and the Speak Up helpline centrica.com/ourcode See page 32 or centrica.com/ assurance for more details Read more about our People & Planet Plan’s net zero goals on Pages 30 and 31 65 Centrica plc Annual Report and Accounts 2020Governance Remuneration Report Dear Shareholder On behalf of the Board, I present the Remuneration Committee’s report for 2020. This is my first remuneration report since joining the Centrica Board in June 2020 and assuming the role of Remuneration Committee Chair. I have been impressed at the careful and conscientious way our Executives have approached the extraordinary challenge of transforming Centrica into a competitive provider of energy services, restoring financial stability and dealing with the very real impact that COVID-19 has had on our business. 2020 has been a difficult year for our colleagues, our customers and our shareholders. To set our remuneration decisions in context I thought I would share with you some of the key aspects of change and how we have responded to them in our approach to remuneration. Board changes during the course of 2020 In March, we appointed Scott Wheway as our Chairman, and agreed an annual fee which was £35,000 per annum less than the previous Chairman. In April, the Board appointed Chris O’Shea, our then Group Chief Financial Officer, as Group Chief Executive with a reduction of £250,000 in fixed remuneration compared to the previous incumbent, Iain Conn, who left on strictly contractual terms. Chris elected to waive £100,000 of his new annual salary for 2020 in the context of the difficult choices he made to safeguard the business and colleagues and the impact of this on colleagues and shareholders. In June, the Board appointed a new Group Chief Financial Officer, Johnathan Ford, with fixed remuneration set at a level consistent with the size and complexity of the business at that time, thus saving over £100,000 in fixed costs. We also halved the number of Executive Directors, reducing fixed costs by £1.47 million. Sarwjit Sambhi, Chief Executive, Centrica Consumer and Richard Hookway, Chief Executive, Centrica Business, left the business on strictly contractual terms, however Sarwjit also waived his right to an enhanced redundancy pension as afforded by the legacy pension scheme rules. Taking into account short and long-term incentives calculated at the maximum opportunity level, the total annual saving in potential Executive Director remuneration achieved through the elimination of these two roles was over £7 million. Company developments in 2020 In June, we announced plans for a significant restructure designed to create a simpler, leaner Group focused on delivering for our customers. In simplifying the organisational structure, it has been possible to reduce layers and duplications in the management of the business as well as rebalance the number of colleagues in management and group support to business and customer facing roles. The number of roles at the three most senior levels of the organisation has been reduced by around 45% including two Executive Directors. The cost of our senior leadership team was dramatically reduced delivering an almost 50% saving, with the remaining UK executive team members accepting terms harmonised with the rest of the workforce. This includes a reduction in pension contributions for the Executives and senior leadership team to 10% by April 2021, which compares with an average across the UK workforce of 13%. We have negotiated over 7,000 different contract variations into a more coherent structure of terms with our workforce and have reduced our UK headcount by approximately 1,100, using our discretionary redundancy terms which are far more generous than the statutory minimum. We believe that the process and outcome is necessary and the way that it has been achieved is respectful and fair. In the early part of the year, in the light of the uncertain impact of COVID-19 on the business, the decision to pay the annual bonus earned in 2019 for 7,000 eligible colleagues in largely non-customer-facing roles was deferred. In July, this decision was re-assessed and management proposed that our more junior colleagues, approximately 62% of the 7,000 colleagues, would receive their cash bonus in full, to align them with the customer- facing colleagues that had already received a bonus relating to 2019. Executive Director bonuses had already been reduced to zero by the Committee, as set out in last year’s report, and cash bonuses for our management, senior management and senior leadership team relating to 2019 were all cancelled. This demonstrates leadership’s approach to handling all matters on remuneration this year. The Committee is conscious of the need to balance underlying performance and absolute delivery against motivation and retention of a much-reduced senior team. At the beginning of lockdown last year we took the decision to furlough colleagues as a result of not being able to continue non-essential activities and this also had a knock-on effect on supporting roles. Despite not knowing how long the situation would last we committed at the outset to paying furloughed colleagues in full. Whilst the number of colleagues furloughed fluctuated month to month, overall, we furloughed around 6,000 employees during the period from March to October. In total, we claimed £27 million of support via the Coronavirus Job Retention Scheme, being the equivalent of 2.25% of our total UK wage bill (which is approximately £1.2 billion per annum). The additional support provided by Centrica to maintain full pay and benefits amounted to £7 million. Performance outcomes for the year Historically profit and cash flow for bonus purposes has been adjusted for a number of factors including commodity prices, foreign exchange movements and weather. For this year and going forward we believe that the two goals of transparency and shareholder alignment will be better served by not making multiple complex adjustments. Accordingly, even though the impact in 2020 of decreases in commodity prices and warm weather was significant, for this year and going forward we will not make these adjustments. The decision not to make adjustments has a net effect of reducing the financial performance element of the bonus by 21% for 2020. Despite the impact of COVID-19 on the business, we delivered a resilient performance in 2020 that (after excluding £27 million of support received through the Coronavirus Job Retention Scheme) led to bonus outcomes between threshold and target level. Under the free cash flow measure, following actions such as reductions in discretionary spend, efficient execution of cost reduction programs, focus on cash collection and reductions and deferral of some capex, the stretch target was exceeded (note: the non- payment of the dividend does not affect this outturn). Under the operating profit and cost efficiency measures, just over threshold performance was achieved. Overall, this resulted in a formulaic outcome at the Executive Director level of 72% of the financial 66 GovernanceCentrica plc Annual Report and Accounts 2020 The Committee also exercised its discretion to reduce to zero the overall vesting of the 2018-20 LTIP award as only a proportion of the non-financial performance targets had been achieved. As set out in last year’s report, the Committee made a similar decision to exercise its discretion at the end of the performance period for the 2017-19 LTIP award, resulting in zero vesting for this award. Remuneration Policy review Turning to the future, under the regulatory requirements, we are scheduled to submit a new three-year policy to shareholders at the 2021 AGM. Ahead of this, we sought views from our major shareholders. They were very supportive of our proposal to submit a policy which is largely unchanged. Our intention is to conduct a thorough review of remuneration for the Directors and the senior leadership team during 2021 and to seek your approval for the new policy at the 2022 AGM. We have taken the opportunity to make small changes to reflect the 2018 Code requirements and to better align our policy with best practice. Conclusion Overall, 2020, has been a challenging year for Centrica as a business and for our shareholders. The Committee continues to take a disciplined approach to executive remuneration that seeks to ensure Executives are fairly and appropriately rewarded whilst ensuring alignment with the expectations of all our stakeholders. We believe that the actions taken in respect of 2020 achieve this aim and our new simpler senior leadership structure, together with a set of UK employment terms that are more modern and consistent, will allow us to grow and improve our performance. The Committee is dedicated to an open and transparent dialogue with our investors and therefore I welcome views on any part of our remuneration arrangements. Carol Arrowsmith on behalf of the Remuneration Committee 24 February 2021 element (75% of the bonus is assessed on financial measures and the remainder is determined by strategic and individual achievement). Five Executive Directors were eligible to be considered for a bonus payment in respect of 2020. For the three former Executives, Iain Conn, Sarwjit Sambhi and Richard Hookway, the Committee has determined that no 2020 bonus will be received. In addition, Johnathan Ford left the Board in January 2021 and accordingly he will not be eligible to receive a bonus for 2020. Our Group Chief Executive, Chris O’Shea, has been central to the delivery of our performance over the year and the Board considered that he has performed exceptionally well since he took over in March 2020. In addition to the achievements set out above, Chris has energised the significantly reduced leadership team towards swift decisive action, simplified the priorities of the business and embraced the drive towards rightsizing the Group. Based on an assessment of the personal objectives that applied to Chris over the year covering leadership, balance sheet actions, portfolio simplification, organisational change and emphasis on a performance culture, the Committee determined an outcome of above target, at 60%, under the personal objectives element of the annual bonus was appropriate. In this context the Committee felt that it was important to recognise the success of Chris’s first year in the role whilst considering the wider stakeholder experience. We noted Chris’s recent appointment to the role of Group Chief Executive and his strong leadership on the path to transformation throughout a very challenging year. The Committee also noted the wider impact of a significant discretionary reduction in the annual bonus, for the second consecutive year, and the third year out of four, on the Company’s reputation in the context of being able to attract talented executives in the future. However, the Committee recognises the expectation set out by the proxy agencies and a number of shareholders that payment of bonuses to executive directors is not considered appropriate in the event that expected dividends have been withdrawn and where our employees have received the benefit of furlough scheme support. However, we believe with no bonus in 2019 and a new Group Chief Executive in role, Centrica faces some unique circumstances. Upon careful consideration and review of the overall context and external environment, the Committee determined that whilst resilient performance was achieved under both the financial and personal elements of the bonus, the payment of a bonus relating to 2020 was not appropriate. Accordingly, the Committee exercised its discretion to reduce the annual bonus payment for the Group Chief Executive to zero. Role of the Remuneration Committee The role of the Committee continues to be ensuring that the Directors, the Senior Executive Group and the Chairman of the Board are appropriately rewarded, through making recommendations regarding remuneration policy and framework. The Terms of Reference further extend the Committee’s remit to include greater responsibility for understanding how pay and conditions align across the Group. The Committee monitors and reviews the effectiveness of the Remuneration Policy and considers its impact and compatibility with remuneration policies across the wider workforce. To facilitate this remit, the Committee is provided with information and context on pay, benefits and incentive structures in place across the Group to support its decision-making. Membership and attendance The Committee is chaired by Carol Arrowsmith, an Independent Non-Executive Director. Each member of the Committee is independent. No Director is involved in the determination of, or votes on, any matters relating to his or her own remuneration. The Chairman of the Board, the Group Chief Executive, the Group HR Director and the COO, HR, Procurement & Property are normally invited to attend each Committee meeting to provide advice and guidance, other than in respect of their own remuneration. 67 Centrica plc Annual Report and Accounts 2020Governance Directors’ Annual Remuneration Report Directors’ remuneration in 2020 This report sets out information on the remuneration of the Directors for the financial year ended 31 December 2020. Summary of total remuneration received in 2019 and 2020 (£000) 800 600 400 200 0 800 600 400 200 0 2019 2020 Chris O’Shea CEO Long-term incentive Short-term incentive Fixed Remuneration 2019 2020 Johnathan Ford CFO (appointed in 2020) Long-term incentive Short-term incentive Fixed Remuneration Single figure for total remuneration (audited) Executives £000 2020 Chris O’Shea(6) Iain Conn(7) Johnathan Ford(8) Richard Hookway(9) Sarwjit Sambhi(9) Total 2019 Chris O’Shea Iain Conn Johnathan Ford(8) Richard Hookway Sarwjit Sambhi Total Salary/ fees Bonus (cash) Bonus (deferred) Benefits(1) LTIPs(2) Pension(3)(4)(5) Total remuneration Total fixed Total variable remuneration 659 203 275 268 277 1,682 620 953 – 600 517 2,690 – – – – – – – – – – – – – – – – – – – – – – – 25 5 10 21 11 72 25 31 – 34 21 111 – – – – – – – – – – – – 81 31 28 16 21 177 107 202 – 110 69 488 765 239 313 305 309 1,931 752 1,186 – 744 607 3,289 765 239 313 305 309 1,931 752 1,186 – 744 607 3,289 – – – – – – – – – – – (1) Taxable benefits include car allowance, health and medical benefits and financial planning advice. Non-taxable benefits include matching shares received under the Share Incentive Plan (SIP). Both taxable and non-taxable benefits are included in the table. (2) The LTIP award for the 2018-20 performance period will lapse. Further details are set out on page 70-71. (3) Notional contributions to the Centrica Unapproved Pension Scheme defined contribution section (CUPS DC) for Chris O’Shea and Richard Hookway have been included in this table as if CUPS DC was a cash balance scheme. This includes a deduction in respect of an allowance for CPI inflation on the opening balances of 1.5% in 2020 (2.4% in 2019). (4) Iain Conn and Johnathan Ford received a salary supplement in lieu of a pension contribution, of 15% and 10% of base salary respectively. (5) The value of the increase in defined benefit (DB) pension accrual for Sarwjit Sambhi has been calculated using 20 times the increase in accrued pension over the period, less the contributions paid by him over the year. He received a salary supplement of 10% of the difference between the earnings cap and base pay between 1 January and 11 June 2020. (6) Chris O’Shea was appointed Group Chief Executive on 14 April 2020, on a salary of £775,000. He elected to waive £100,000 of his salary between March and 31 December 2020. (7) Iain Conn stepped down from the Board on 17 March 2020. The remuneration in this table includes his pro-rated salary, benefits and pension contributions earned up to the date he stepped down. The remuneration for the period from 18 March to 29 July 2020 is disclosed in payments for loss of office on page 69. (8) Johnathan Ford was appointed to the Board on 11 June 2020. (9) Richard Hookway and Sarwjit Sambhi stepped down from the Board on 11 June 2020. The remuneration in this table includes their pro-rated salary, benefits and pension benefits earned up to the date they stepped down. The remuneration for the remainder of 2020 is disclosed in payments for loss of office on page 69. 68 Governance | Remuneration Report continuedCentrica plc Annual Report and Accounts 2020 Payments for loss of office (audited) Iain Conn stepped down from the Board on 17 March and left Centrica on 29 July 2020. He received his contractual salary and benefits, including pension supplement, until his leave date. For the period 18 March to 29 July 2020 Iain was paid £350,054 in base salary, £8,315 in benefits and £52,508 in pension benefits. Richard Hookway stepped down from the Board on 11 June and left Centrica on 31 July 2020. He received pay in lieu of notice in accordance with his service contract. During the period 12 June to 31 July Richard was paid £93,174 in base salary, £3,432 in benefits and £12,250 in pension benefits. From 1 August to 31 December 2020, Richard was paid £250,000 in lieu of notice, representing base pay only. The pay in lieu of notice will continue until the end of the contractual notice period. Sarwjit Sambhi stepped down from the Board on 11 June and left Centrica on 31 July 2020. He received pay in lieu of notice in accordance with his service contract. During the period 12 June to 31 July Sarwjit was paid £84,389 in base salary, £3,368 in benefits and £6,512 in pension benefits. From 1 August to 1 November 2020 Sarwjit was paid £154,998 in lieu of notice, representing base pay only. No further loss of office payments were made. As set out on page 67, the Committee determined that the three Executives that stepped down from the Board during 2020 would not receive an annual bonus payment relating to 2020. Single figure for total remuneration (audited) £000 Non-Executives Scott Wheway(1) Carol Arrowsmith(2) Charles Berry(3) Joan Gillman Stephen Hester Pam Kaur Heidi Mottram(4) Kevin O’Byrne Carlos Pascual(5) Steve Pusey(6) Total Salary/fees Total 2020 2019 2020 2019 343 51 93 93 93 73 73 98 28 36 981 93 – 392 93 93 67 – 62 73 93 966 343 51 93 93 93 73 73 98 28 36 981 93 – 392 93 93 67 – 62 73 93 966 (1) Scott Wheway was appointed Chairman on 17 March 2020. (2) Carol Arrowsmith joined the Board on 11 June 2020. (3) Charles Berry stepped down from the Board on 17 March 2020. (4) Heidi Mottram joined the Board on 1 January 2020. (5) Carlos Pascual stepped down from the Board on 22 May 2020. (6) Steve Pusey stepped down from the Board on 22 May 2020. Base salary/fees Chris O’Shea was appointed as Interim Group Chief Executive on 17 March and was awarded a salary supplement of £100,000 per annum, pro-rated for the period that he was in the interim role. He elected to waive the salary supplement. On 14 April, Chris O’Shea was appointed as Group Chief Executive with a base salary of £775,000 per annum, which was 19% lower than Iain Conn, the previous Group Chief Executive Officer. On appointment, Chris O’Shea elected to continue with the voluntary salary reduction of £100,000. His Group Chief Executive earnings were therefore based on £675,000 per annum during 2020. The Committee reviewed the base salary for the Group Chief Executive in January 2020 and determined that no change was required. As the existing Group Chief Financial Officer had announced his intention to leave the Company, and the new Group Chief Financial Officer terms had been recently agreed, no further Executive Director salary changes were proposed. Scott Wheway was appointed Chairman on 17 March 2020 with an annual fee of £410,000, which was £35,000 less than the previous incumbent. Base fees for Non-Executives, as well as the additional fee for the Chairman of the Risk and Audit Committee, were last increased on 1 January 2016. Non-Executive Director fee levels were reviewed in December 2020 and it was agreed that no changes would be made to the base fees or the Committee Chairman fees. Bonus – Annual Incentive Plan (AIP) In line with the Remuneration Policy, 75% of the award was based on a mix of financial measures based on the Company’s priorities for 2020 and 25% was based on personal objectives. Half of any AIP award is deferred into shares which are held for three years. For the operation of the AIP in 2020, 50% of the financial measures was based on adjusted operating profit (AOP), 30% was based on free cash flow (FCF) and 20% was based on cost efficiency, with targets aligning to the Group Annual Plan. AOP of £732 million was required for target achievement and £805 million was required for maximum. The threshold level was £659 million. The AOP result for 2020 was £672 million, excluding £27 million of government furlough support, resulting in an outcome of between threshold and target for this element of the AIP. FCF of £607 million was required for target achievement and £668 million was required for maximum. The threshold level was £546 million. FCF of £1,034 million, excluding £27 million of government furlough support, was generated in 2020 resulting in an outcome of maximum for this element of the AIP. Cost efficiency of £475 million was required for target achievement and £523 million was required for maximum. The threshold level was £428 million. Cost efficiency of £435 million was generated in 2020 resulting in an outcome of slightly above threshold for this element of the AIP. The chart below summarises the formulaic outcome across the three agreed measures that were set for the operation of the AIP in 2020. Financial performance 50% 30% 20% AOP 00% FCF Cost efficiency 19% 7% Maximum Achieved Not achieved Historically, AOP and FCF for bonus purposes have been adjusted for a number of factors including commodity prices, foreign exchange movements and weather. For 2020 and going forward, the Committee believes the two goals of transparency and shareholder alignment will be better served by not making multiple complex adjustments. Accordingly, even though the impact in 2020 of decreases in commodity prices and warm weather were significant, no adjustments will be made for 2020 or in future years. The decision not to make adjustments for 2020 has a net effect of reducing the financial performance element by 21%. As set out above and on page 66, Centrica delivered a resilient performance in 2020 that, after excluding £27 million of support received through the Coronavirus Job Retention Scheme, which exceeded expectations set at the start of the year, and which generated a bonus outcome of between threshold and target level. Chris O’Shea has been central to the delivery of this performance over the year and the Committee considered that he has performed exceptionally well since he took over in March 2020. In addition to the achievements set out above, Chris has energized the significantly reduced leadership team towards swift decisive action, simplified the priorities of the business and embraced 69 Centrica plc Annual Report and Accounts 2020Governance the drive towards rightsizing the Group. Based on an assessment of the personal objectives that applied to Chris over the year covering leadership, balance sheet actions, portfolio simplification, organisational change and emphasis on a performance culture, the Committee determined an outcome under this element of above target at 60% was appropriate. Notwithstanding the fact that resilient performance was achieved under both the financial and personal elements of the bonus, the Committee concluded that it was not appropriate to pay a bonus relating to 2020, due to the poor experience of our shareholders during the year. Long-term incentive awards due to vest in 2021 Performance conditions The performance conditions relating to the three-year period ending in 2020 are set out below, together with an explanation of the achievement against these performance conditions. Vesting between stated points is on a straight-line basis. Financial targets and outcomes Measures Relative TSR Underlying adjusted operated cash flow (UAOCF) growth Absolute aggregate Economic Profit (EP) Non-financial KPI improvement (1) Compound annual growth rate. Weightings 33.3% 22.2% 22.2% 22.2% Threshold (25%) FTSE 100 median CAGR 2%(1) £1,625m See below Targets Maximum (100%) FTSE 100 upper quartile CAGR 5%(1) £2,125m See below Outcomes Below median -6.9% £974m See below Centrica’s relative TSR during the three-year performance period was -67.6%, compared with the required threshold level of -1.9%, therefore the TSR portion of the LTIP award granted in 2018 will not vest. Both the UAOCF growth and the absolute aggregate EP threshold targets were not met and therefore these two portions of the LTIP award granted in 2018 will not vest. Non-financial KPI targets and outcomes KPI improvement relates to closure of the gap between performance at the start of the period (baseline performance) and our long-term aspirational goals which are generally aligned with upper quartile market performance: Baseline performance Long-term goal KPI Threshold vesting Maximum vesting For each LTIP cycle we expect the KPI performance gap to close by 25% for threshold vesting and 50% for maximum vesting. The KPI measures, targets and outcomes for the 2018-20 cycle were: Safety Total recordable injury frequency rate (TRIFR)(1) Tier 1 and Tier 2 process safety event frequency rate(1) Customer satisfaction Aggregate brand NPS across our customer businesses weighted by customer numbers Complaints per 100,000 customers across our customer businesses weighted by customer accounts Employee engagement (percentage favourable) (1) Per 200,000 hours worked. Baseline performance 2020 Threshold Maximum Long-term goal Outcomes Targets 1.06 0.08 +15.1 0.86 0.073 +16.33 0.45 0.065 +17.55 0.25 0.05 +20 1.03 0.00 +13.8 3,429 3,041 2,653 1,877 2,569 43 51.5 60.0 77 42 Performance against the non-financial KPI dashboard during the three-year performance period resulted in 40% of the KPI portion of the 2018-20 LTIP award vesting. Overall performance outcome The chart below indicates the extent of achievement against each measure. 33% 22% 22% 22% TSR 00% UAOCF growth EP Maximum Achieved Not achieved Non-financial KPIs 40% 60% Based on achievement against the LTIP performance conditions over the three-year performance period, as set out above, an overall weighted average vesting level of 8% of the original award was reached. 70 Governance | Remuneration Report continuedCentrica plc Annual Report and Accounts 2020 However, as the financial performance targets were not met, the Committee decided to exercise its discretion and reduce the overall vesting level of the 2018 LTIP to zero. Pension In 2020, it was agreed that the pension contributions for the newly appointed Group Chief Executive and Group Chief Financial Officer would be 10% of base salary to align them with the wider UK workforce where the current average pension contribution rate was 13% of base salary. Prior to 2020, pension contributions for existing Executive Directors were 15%. Iain Conn and Johnathan Ford elected to receive a salary supplement in lieu of participating in a Centrica pension plan. Richard Hookway and Chris O’Shea participated in the Centrica Unapproved Pension Scheme defined contribution section (CUPS DC). Notional contributions to the CUPS DC scheme have been included in the single figure for total remuneration table as if it was a cash balance scheme and therefore notional investment returns for the year have also been included. The notional pension fund balances for each Executive are disclosed below. Sarwjit Sambhi participated in the Centrica Pension Plan (CPP), in line with his existing contractual arrangement when he was appointed to the Board. The CPP is a registered defined benefit plan which is closed to new members. Sarwjit participated on the same basis as other plan members, subject to the CPP’s earnings cap of £141,600. He received a salary supplement of 10% of the difference between the CPP’s earnings cap and his full base salary (10% is aligned to the employer contribution rate available for the majority of the wider workforce who participate in Centrica’s defined contribution scheme). The accrued pension disclosed below for Sarwjit Sambhi is that which would be paid annually on retirement at age 62, based on eligible service and pensionable earnings as at 31 July 2020, the date he left Centrica. He accrued benefits within the Company’s defined benefit pension arrangements prior to being appointed to the Board in March 2019, however, the figures shown below relate only to benefits accrued after this date. CUPS DC Scheme(1) Richard Hookway(2) Chris O’Shea(2) Total notional pension fund as at 31 December 2020 £ 148,373 229,466 Total notional pension fund as at 31 December 2019 £ 130,028 146,170 (1) The retirement age for the CUPS DC scheme is 62. (2) Richard Hookway joined Centrica on 1 November 2018 and left Centrica on 31 July 2020. Chris O’Shea joined on 10 September 2018. Centrica Pension Plan Sarwjit Sambhi(1)(2) Accrued pension as at 31 December 2020 £ Accrued pension as at 31 December 2019 £ 2,768 1,982 (1) Sarwjit Sambhi was appointed to the Board on 1 March 2019 and left Centrica on 31 July 2020. (2) The pension accrual rate for 2019 was 1.67% of final pensionable earnings and for 2020 was 1.25% of final pensionable earnings. Executive Director recruitment and terminations Chris O’Shea Chris O’Shea was appointed Interim Group Chief Executive on 17 March 2020. He was offered a salary supplement of £100,000, pro-rated, whilst he was in this role. However, he elected to waive the salary supplement and to remain on his existing Group Chief Financial Officer salary of £620,000 per annum. On 14 April 2020, Chris O’Shea was appointed Group Chief Executive on a permanent basis. His remuneration package consisted of a base salary and variable incentive arrangements which were in line with Centrica’s remuneration policy and practice. The base salary was set at £775,000 per annum and the pension contribution was reduced from 15% to 10% of base salary to bring it closer to the average pension contribution across the UK workforce, which as at the end of 2020 was 13%. Chris elected to continue to waive £100,000 of his salary, pro-rated, until 31 December 2020. Johnathan Ford On 11 June 2020, Johnathan Ford was appointed Group Chief Financial Officer. His remuneration package consisted of a base salary and variable incentive arrangements which were in line with Centrica’s remuneration policy and practice. The base salary was set at £495,000 per annum and the pension contribution was set at 10% of base salary. It was confirmed that the annual bonus maximum award would be 150% of salary and the usual annual LTIP grant would be 175% of salary. Johnathan Ford resigned from his role on 18 January 2021 and Centrica waived its right to contractual notice. Therefore, all remuneration entitlement ceased from his leave date of 31 January 2021, with no further payments due to be made after this date. He will not be entitled to receive a bonus payment for 2020. Iain Conn It was announced in July 2019 that Iain Conn would step down from the Board and leave Centrica in 2020. On 17 March 2020, Iain stepped down from his role of Group Chief Executive and from the Board. He was treated in accordance with Centrica’s remuneration policy and his service contract for the remaining term of his employment. He received salary and contractual benefits, including pension supplement, until 29 July 2020, details of which are disclosed on page 69. All unvested LTIP awards lapsed on leaving and the Committee determined that no bonus payment for 2020 would be received. All deferred AIP shares from previous years will be released on their usual vesting dates. 71 Centrica plc Annual Report and Accounts 2020Governance Sarwjit Sambhi On 11 June 2020, Sarwjit Sambhi stepped down from the Board and from his role of Chief Executive, Centrica Consumer. He left Centrica on 31 July 2020 and was treated in accordance with Centrica’s remuneration policy and his service contract for the remaining term of his employment. Between 11 June and 31 July 2020, Sarwjit received salary and contractual benefits, including pension benefits, and for the remaining period of his notice he was entitled to a payment in lieu of base salary only. Details of these payments are disclosed on page 69. The Committee determined that no bonus payment for 2020 would be received. Sarwjit was granted an LTIP award in 2019 which will be time apportioned to 31 July 2020 and will vest on the normal vesting date subject to the satisfaction of the performance conditions. All deferred AIP shares from previous years will be released on their usual vesting dates. Richard Hookway On 11 June 2020, Richard Hookway stepped down from the Board and from his role of Chief Executive, Centrica Business. He left Centrica on 31 July 2020 and was treated in accordance with Centrica’s remuneration policy and his service contract for the remaining term of his employment. Between 11 June and 31 July 2020, Richard received salary and contractual benefits, including pension benefits, and for the remaining period of his notice he was entitled to a payment in lieu of base salary only. Details of these payments are disclosed on page 69. The Committee determined that no bonus payment for 2020 would be received. Richard was granted an LTIP award in 2019 which will be time apportioned to 31 July 2020 and will vest on the normal vesting date subject to the satisfaction of the performance conditions. All deferred AIP shares from previous years will be released on their usual vesting dates. Kate Ringrose On 18 January 2021, Kate Ringrose was appointed Group Chief Financial Officer. Her remuneration package consisted of a base salary and variable incentive arrangements which were in line with Centrica’s remuneration policy and practice. The base salary was set at £450,000 per annum and the pension contribution was set at 10% of base salary. It was confirmed that the annual bonus maximum award would be 150% of salary and the usual annual LTIP grant would be 175% of salary. Minimum shareholding requirement for new and departing Executives Executive Directors are expected to build up and maintain a minimum shareholding in the Company equivalent in value to 300% of base salary, over a period of five years. Departing Executive Directors are subject to a post-cessation shareholding requirement of 150% of base salary (or their actual holding if lower) for two years and this applies to Iain Conn, Sarwjit Sambhi and Richard Hookway. Directors’ interests in shares (number of shares) (audited) The table below shows the interests in the ordinary shares of the Company for all Directors on the Board at 31 December 2020. For Executive Directors only, the minimum shareholding requirement is 300% of base salary. The achievement against the requirement is shown below. Executive Directors have a period of five years from appointment to the Board, or from any material change in the minimum shareholding requirement, to build up the required shareholding. A post-cessation shareholding requirement of 50% of the full shareholding requirement (or full actual holding if lower) is applicable for two years post-cessation. Executives Chris O’Shea(4) Johnathan Ford Non–Executives Scott Wheway Carol Arrowsmith Joan Gillman Stephen Hester Pam Kaur Heidi Mottram Kevin O’Byrne Shares owned as at 31 December 2019(1) Shares owned as at 31 December 2020(1) Minimum shareholding guideline (% of salary) Achievement as at 31 December 2020 (% of salary)(2) Shares owned (subject to continued service) as at 31 December 2020(3) 385,399 – 489,251 0 300 300 34 0 528 0 Shares owned as at 31 December 2019(1) Shares owned as at 31 December 2020(1) 10,187 – – 20,700 – – 40,000 110,187 – – 20,700 – – 40,000 (1) These shares are owned by the Director or a connected person and they are not, save for exceptional circumstances, subject to continued service or the achievement of performance conditions. They include for Executives shares purchased in April 2019 with deferred AIP funds which have mandatory holding periods of three years and which will be subject to tax at the end of the holding periods. (2) The share price used to calculate the achievement against the guideline was 46.6 pence, the price on 31 December 2020. (3) Shares owned subject to continued service include SIP matching shares that have not yet been held for the three-year holding period. (4) During the period from 1 January 2020 to 12 February 2021 Chris O’Shea acquired 642 shares through the SIP. 72 Governance | Remuneration Report continuedCentrica plc Annual Report and Accounts 2020 Executive Directors interests in shares (number of shares) subject to Company performance conditions The table below shows the performance share awards that were granted in 2018 and 2019 to Executive Directors under the LTIP. These awards are subject to the achievement of Company performance conditions before vesting and there is a mandatory two-year holding period following the vesting date before the shares can be released. Chris O’Shea Plan LTIP LTIP Number of shares 979,818 1,332,530 Vesting date Sept 2021 April 2022 Release date Sept 2023 April 2024 Share awards granted in respect of 2020 (audited) In the 2019 remuneration report, it was reported that the 2020 LTIP award would be granted to Executive Directors based on 250% of salary. The performance targets for the three-year performance period 2020-22 were set out. The awards were not granted during the usual period following the Preliminary announcement due to ongoing discussions on the disposal of the Direct Energy (DE) business, which at the time amounted to price-sensitive information. Accordingly, the Committee has determined that the 2020 LTIP award will be granted in the period following the Preliminary announcement in 2021, with performance conditions relating to the three-year period 2020-22. The Economic profit element has been adjusted to reflect the DE disposal after the first year of the performance period and the non-financial KPIs that are customer-related have been revised based on the original 2019 baseline performance and long-term goal, with the impact of the DE business removed. It is proposed that the following financial targets will apply to the LTIP. Measures Relative TSR UAOCF growth Absolute aggregate EP Non-financial KPI improvement (1) Compound annual growth rate. Targets Weightings Threshold (25%) Maximum (100%) 33.3% 22.2% 22.2% 22.2% FTSE 100 median CAGR 2%(1) £1,357m See below FTSE 100 upper quartile CAGR 5%(1) £1,797m See below Vesting between stated points will be on a straight-line basis. KPI improvement relates to closure of the gap between performance at the start of the period (current performance) and our long-term aspirational goals which are generally aligned with upper quartile market performance: Baseline performance Long-term goal KPI Threshold vesting Maximum vesting For each LTIP cycle we expect the KPI performance gap to close by 25% for threshold vesting and 50% for maximum vesting. The KPI measures and targets are: Safety Total recordable injury frequency rate (TRIFR)(1) Tier 1 and Tier 2 process safety event frequency rate(1) Customer satisfaction Aggregate brand NPS across our customer businesses weighted by customer numbers Complaints per 100,000 customers across our customer businesses weighted by customer accounts Employee engagement (1) Per 200,000 hours worked. Current performance Threshold Maximum Long-term goal Targets 1.06 0.08 +12.95 3,879 43% 0.86 0.073 +13.61 0.45 0.065 +14.26 3,449 3,019 51.5% 60.0% 0.25 0.05 +16 2,159 77% 73 Centrica plc Annual Report and Accounts 2020Governance The annual remuneration relating to 2018, 2019 and 2020 for the three identified employees has been calculated on the same basis as the CEO’s total remuneration for the same period in the single figure table on page 68 to produce the ratios. The ratios in 2020 have reduced due to the fact that Chris O’Shea’s base salary and pension contributions are less than the previous CEO, Iain Conn, and total remuneration for the identified employees at each percentile level has increased. Pay for performance The table below shows the CEO’s total remuneration over the last ten years and the achieved annual short-term and long-term incentive pay awards as a percentage of the plan maximum. Chief Executive single figure for total remuneration £000 Annual short-term incentive payout against max opportunity % Long-term incentive vesting against max opportunity % Chris O’Shea 2020 Iain Conn 2020 2019 2018 2017 2016 2015 Sam Laidlaw 2014 2013 2012 2011 765 239 1,186 2,335 1,678 4,040 3,025 3,272 2,235 5,709 5,047 0 0 0 41 0 82 63 34 50 61 50 0 0 0 18 26 0 0 35 0 67 59 For 2020 the single figure for total remuneration for both Iain Conn and Chris O’Shea are shown. The total remuneration figure for Chris O’Shea includes his earnings during 2020 as CFO and CEO. The performance graph below shows Centrica’s TSR performance against the performance of the FTSE 100 Index over the 10-year period to 31 December 2020. The FTSE 100 Index has been chosen as it is an index of similar-sized companies and Centrica has been a constituent member throughout the majority of the period. Total return indices – Centrica and FTSE 100 200 150 100 50 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Centrica Total return index Source: Datastream from Refinitiv FTSE 100 Total return index Annual percentage change in remuneration of directors and employees The table below shows the percentage changes (on a full-time equivalent basis) in the Executive and Non-Executive Directors’ remuneration between the financial year ended 31 December 2019 and the year ended 31 December 2020 compared to the amounts for full-time employees of the Group for each of the following elements of pay: Executive Directors Chris O’Shea(1) Johnathan Ford(2) Non-Executive Directors Scott Wheway(3) Carol Arrowsmith(4) Joan Gillman Stephen Hester Pam Kaur Heidi Mottram(5) Kevin O’Byrne Average per employee (excluding Directors)(6) Percentage change from 2019 to 2020 Salary/fees Benefits Bonus 6.3 – 268.8 – 0 0 0 – 0 0 0 – – – – – – – – 1.1 0 – – – – – – – – 236.4 (1) Chris O’Shea was appointed to the Centrica Board as Group Chief Financial Officer on 1 November 2018 and became interim Group Chief Executive with effect from 17 March 2020. He was appointed as Group Chief Executive on 14 April 2020. From 17 March until 31 December 2020, he elected to waive £100,000 of his salary. (2) Johnathan Ford was appointed as Group Chief Financial Officer on 11 June 2020. (3) Scott Wheway was appointed as Non-Executive Chairman on 17 March 2020 and the increase in his fees is due to this change. (4) Carol Arrowsmith was appointed to the Board on 11 June 2020. (5) Heidi Mottram was appointed to the Board on 1 January 2020. (6) The comparator group includes all management and technical or specialist employees based in the UK in Level 2 to Level 6 (where Level 1 is the Executive and Non-Executive Directors). There are insufficient employees in the Centrica plc employing entity to provide a meaningful comparison. The employees selected have been employed in their role throughout 2019 and 2020 to give meaningful comparison. The group has been chosen because the employees have a remuneration package with a similar structure to the Executive Directors, including base salary, benefits and annual bonus. The increase in the benefits between 2019 and 2020 represents the increase in the healthcare plan costs. The increase in the bonus between 2019 and 2020 is due to the fact that cash bonuses relating to 2019 for non-customer facing employees were cancelled. The bonus number relating to 2020 is an estimate of the payments due to be made in March/ April 2021. The chart below shows the ratio of remuneration of the CEO to the average UK employee of the Group for 2018, 2019 and 2020. CEO pay ratio 2020 2019 2018 25th percentile 50th percentile 75th percentile 32:1 34:1 72:1 15:1 29:1 59:1 14:1 22:1 44:1 For 2020 the CEO total remuneration figure includes the single figure chart combined earnings of both Iain Conn and Chris O’Shea for the period that they were in the CEO role during 2020. The Company has used its gender pay gap data (Option B in the Directors’ Reporting Regulations) to determine the employees whose remuneration packages sit at the lower, median and upper quartile positions across the UK workforce. This is deemed the most appropriate methodology for Centrica given the different pension and benefit arrangements across the diverse UK workforce. To ensure this data accurately reflects individuals at each quartile position, a sensitivity analysis has been performed. The approach has been to review the total pay and benefits for a number of employees immediately above and below the identified employee at each quartile within the gender pay gap analysis. 74 Governance | Remuneration Report continuedCentrica plc Annual Report and Accounts 2020 Fees received for external appointments of Executive Directors In 2020, until 17 March, Iain Conn received £24,151 (£114,744 in 2019) as a non-executive director of BT Group plc. Richard Hookway represented Centrica as a non-executive director of EDF Energy Nuclear Generation Group Limited and Sarwjit Sambhi represented Centrica as a director of Energy UK. Neither Executive Director’s received any fees or remuneration relating to these external appointments during 2020. Relative importance of spend on pay The following table sets out the amounts paid in dividends and staff and employee costs for the years ended 31 December 2019 and 2020. Dividends Staff and employee costs(1) 2020 £m 0 1,577 2019 £m 471 2,027 % Change -100 -22 (1) Staff and employee costs are as per note 5 in the notes to the Financial Statements. Payments to past Directors (audited) During 2020, no payments were made to past Directors with the exception of the payments disclosed in the single figure for total remuneration table on page 68 and the payments for loss of office disclosure on page 69. Advice to the Remuneration Committee Following a competitive tender process, PwC was appointed as independent external adviser to the Committee in May 2017. PwC also provided advice to Centrica globally during 2020 in the areas of employment taxes, regulatory risk and compliance issues and additional consultancy services. PwC’s fees for advice to the Committee during 2020 amounted to £88,350 which included the preparation for and attendance at Committee meetings. The fees were charged on a time spent basis in delivering advice that materially assisted the Committee in its consideration of matters relating to executive remuneration. The Committee takes into account the Remuneration Consultants Group’s (RCG) Code of Conduct when dealing with its advisers. PwC is a member of the RCG and the Committee is satisfied that the advice it received during the year was objective and independent and that the provision of any other services by PwC in no way compromises their independence. Statement of voting Shareholder voting on the resolutions to approve the Directors’ Remuneration Policy, put to the 2018 AGM, and the Directors’ Remuneration Report, put to the 2020 AGM, was as follows: Directors’ Remuneration Policy Votes for 3,378,407,618 % Votes against 95.43 161,656,874 1,705,945 votes were withheld. Directors’ Remuneration Report Votes for 3,802,215,278 % 98.66 Votes against 51,694,947 137,428,211 votes were withheld. % 4.57 % 1.34 Implementation in the next financial year Base salaries for Executive Directors were reviewed in January 2020 and the Committee determined that current salaries were competitive when compared against the market data. The Committee therefore agreed that there would be no salary increases for Executive Directors in 2020. AIP awards will be in line with the limits set out in the Remuneration Policy table, not exceeding 200% of base salary. 75% of the award will be based on a mix of financial measures based on Centrica’s priorities for the forthcoming year and 25% will be based on personal objectives. The financial targets will align with the Group Annual Plan. The targets are considered commercially sensitive until the year end and will therefore be disclosed retrospectively in the Remuneration Report for 2021. LTIP awards will be granted to the Chief Executive and Chief Financial Officer within the limits set out in the Remuneration Policy. As a result of the uncertainty relating to long-term incentive targets, broader Company performance, and the impact of COVID-19, the Committee has decided to delay the grant of the 2021-23 LTIP award until later in the year when the Committee has clearer sight of the appropriate measures and targets that should apply to this award. The measures and approach to targets will not represent a significant deviation from our recent approach and will be fully disclosed in the Remuneration Report for 2021. The Remuneration Report has been approved by the Board of Directors and signed on its behalf by: Raj Roy Group General Counsel & Company Secretary 24 February 2021 2020 cash flow distribution to stakeholders The Committee monitors the relationship between the Directors’ total remuneration and cash outflows to other stakeholders. As demonstrated by the chart, the Directors’ aggregate total remuneration for the year equates to 0.06% (2019: 0.10%) of the Group’s operating cash flow. To staff To Directors To government To shareholders Investing activities 37% 0.06% 15% 0% 48.7% To staff To Directors To government To shareholders Investing activities 45% 0.10% 20% 14% 20% 2020 2019 75 Centrica plc Annual Report and Accounts 2020Governance Governance | Remuneration Policy Remuneration Policy As Centrica’s Directors’ Remuneration Policy (Policy) was last approved by shareholders at the AGM in 2018, the Policy set out below will be the subject of a shareholder vote at the AGM in May 2021 and will be effective from that date. Remuneration framework The design of the remuneration framework for Executives ensures that a substantial portion of the maximum opportunity is dependent upon performance and delivered in shares over a three to five-year period. Total remuneration comprises fixed pay and variable performance- related pay, which is further divided into short-term incentive (with a one-year performance period) and long-term incentive (with a three-year performance period). Fixed remuneration includes base salary, benefits and pension. Short-term incentive is delivered through the Annual Incentive Plan (AIP) which is described on page 77. Long-term incentive is delivered through the Long Term Incentive Plan (LTIP) which is described on page 78. Both plans are underpinned by stretching performance measures and targets that closely link to our strategy. Performance measures The Committee believes that the performance measures selected will help drive our customer-focused strategy, allowing us to deliver for our customers, our employees and our shareholders. We have taken the opportunity to make small changes to reflect 2018 Code requirements and to better align our Policy with best practice. Our intention is to conduct a thorough review of remuneration for the Directors and the senior leadership team during 2021 and to seek shareholders’ approval for a new Policy at the AGM in 2022. Executive Directors’ remuneration The Committee believes that the remuneration arrangements are aligned with the organisation’s strategic goals as well as the experience and expectation of shareholders. The Policy closely aligns the interests of the Executive Directors (Executives) with the delivery of long-term shareholder value through returns and growth whilst ensuring behaviours remain consistent with the governance and values of the business. Objectives The Policy aims to deliver remuneration arrangements that: • attract and retain high calibre Executives in a challenging and competitive global business environment; • place strong emphasis on both short-term and long-term performance; • are strongly aligned to the achievement of strategic objectives and the delivery of sustainable long-term shareholder value through returns and growth; and • seek to avoid creating excessive risks in the achievement of performance targets. How the LTIP measures link to our strategy The chart below shows our Group Priorities linked to the 2020 LTIP measures. Our strategy, business model and Group Priorities are set out in more detail on pages 8, 9 and 10. Centrica’s strategy/Group priorities Customer obsession Empowered colleagues Operational excellence Most competitive provider Cash flow growth 76 LTIP measures Non-financial KPIs Relative total shareholder return (TSR) Underlying adjusted operating cash flow (UAOCF) growth Economic profit (EP) Centrica plc Annual Report and Accounts 2020 Summary of Policy design Fixed remuneration Short-term incentive Long-term incentive Pension Base pay/salary Benefits 25% Individual performance Other financial measure Non-financial KPIs 75% Financial performance (mix of measures based on priorities for year) At least 33.3% Relative TSR Other financial measure 50% of award deferred into shares for three years Three-year performance period followed by two-year holding period Malus and clawback Remuneration Policy table The table below sets out the separate components of the Policy that applies to Executives. Purpose and link to strategy Operation and clawback Maximum opportunity Ordinarily, base salary increases in percentage terms will be in line with increases awarded to other employees of the Group. Increases may be made above this level to take account of individual circumstances such as a change in responsibility, progression/development in the role or a significant increase in the scale or size of the role. The base salary for an Executive will not exceed £1 million per annum. This is consistent with the previously approved policy. Maximum of 200% of base salary. Half the maximum is payable for on-target performance. This is consistent with the previously approved policy. Base pay/salary Reflects the scope and responsibility of the role and the skills and experience of the individual. Salaries are set at a level sufficient for the Group to compete for international talent and to attract and retain Executives of the calibre required to develop and deliver our strategy. Short-term incentive Designed to incentivise and reward the annual performance of individuals and teams in the delivery of short-term financial and non-financial metrics. Performance measures are linked to the delivery of the Group’s long-term financial goals and key Group priorities. Base salaries are reviewed annually, taking into account individual and business performance, market conditions and pay in the Group as a whole. Changes are usually effective from 1 April each year. In line with the Group’s annual performance management process, each Executive has an agreed set of stretching individual objectives each year. Following measurement of the individual and Company financial performance outcome AIP awards are made. Half of the AIP award is paid in cash. The other half is paid in deferred shares which are held for three years, to further align the interests of Executives with the long-term interests of shareholders. Dividends are paid on the shares during the holding period. If overall business performance is not deemed satisfactory, an individual’s AIP payment for the year may be reduced or forfeited, at the discretion of the Committee. Malus and clawback apply to the cash and share awards (see policy table notes). Performance measures Not applicable. 75% based on a mix of financial performance measures aligned to Centrica’s priorities for the forthcoming year and 25% based on individual objectives aligned to the Group’s priorities and strategy. Performance is assessed over one financial year. This is consistent with the previously approved policy. 77 Centrica plc Annual Report and Accounts 2020Governance Purpose and link to strategy Operation and clawback Maximum opportunity Performance measures Maximum of 300% of base salary in respect of each financial year plus dividend equivalents. The amount payable for achieving the minimum level of performance is 5.55% of award. This is consistent with the previously approved policy. Performance is assessed over a three-year period against measures determined by the Committee each year based on the key strategic and financial objectives of the business over the performance period. Typically, at least 33% of the award will be based on TSR, operated alongside other financial and non-financial metrics. This is consistent with the previously approved policy, but wording is amended for clarity. Not applicable. The maximum benefit for Executives is 10% of base salary. This compares with the average pension benefit across the wider UK workforce of 10-13%. Under the previously approved Policy, the maximum benefit for Executives was 25% of base salary. Long Term Incentive Plan (LTIP) awards are granted to Executives each year based on a percentage of base salary at the point of award. Shares vest at the end of a three-year performance period, depending on the achievement against the performance targets, but are not released until the fifth anniversary of the award date. LTIP awards are usually delivered as conditional shares. Awards may also be granted as nil-cost options with a seven- year exercise period. It is a requirement of the LTIP that the net shares are restricted for a further two years following the vesting date. Malus applies to the shares during the three-year performance period and clawback applies to the shares during the two-year holding period (see policy table notes). Dividend equivalents are accrued during the performance period and calculated on vesting on any conditional LTIP share awards or nil-cost options. Dividend equivalents are paid as additional shares or as cash. If overall performance is not deemed satisfactory, the award for any year may be reduced or forfeited, at the discretion of the Committee. Executives are entitled to participate in a Company money purchase pension arrangement or to take a fixed salary supplement (calculated as a percentage of base salary, which is excluded from any bonus calculation) in lieu of pension entitlement. The Group’s policy is not to offer defined benefit arrangements to new employees at any level, unless this is specifically required by applicable legislation or an existing contractual agreement. Long-term incentive Designed to retain Executives and to encourage sustainable high performance. Provides an incentive that aligns with the Group’s strategy to deliver long-term shareholder value through returns and growth. Provides a direct link between executive remuneration and the Group’s long-term financial goals and priorities. Pension Positioned to provide a market- competitive post-retirement benefit, in a way that manages the overall cost to the Company. 78 Governance | Remuneration Policy continuedCentrica plc Annual Report and Accounts 2020 Purpose and link to strategy Operation and clawback Maximum opportunity Benefits Positioned to support health and wellbeing and to provide a competitive package of benefits that is aligned with market practice. Relocation and expatriate assistance Enables the Group to recruit or promote the appropriate individual into a role, to retain key skills and to provide career opportunities. All-employee share plans Provides an opportunity for employees to voluntarily invest in the Company. Performance measures Not applicable. The Group offers Executives a range of benefits including but not limited to: Cash allowance in lieu of company car – £15,120 per annum. • a company-provided car and fuel, or a cash allowance in lieu; • life assurance and personal accident insurance; • health and medical insurance for the Executive and their dependants; and • health screening and wellbeing services. Assistance may include (but is not limited to) removal and other relocation costs, housing or temporary accommodation, education, home leave, repatriation and tax equalisation. Executives are entitled to participate in all-employee share plans on the same terms as all other eligible employees. The benefit in kind value of other benefits will not exceed 5% of base salary. The value of the car allowance has been reduced since the previously approved policy. Maximum of 100% of base salary. This is consistent with the previously approved policy. Not applicable. Not applicable. Maximum contribution limits are set by legislation or by the rules of each plan. Levels of participation apply equally to all participants. This is consistent with the previously approved policy. 79 Centrica plc Annual Report and Accounts 2020Governance Policy table notes The Committee reserves the right to make any remuneration payments and payments for loss of office, notwithstanding that they are not in line with the Policy set out above, where the terms of the payment were agreed before the Policy came into effect, at a time when the relevant individual was not an Executive of the Company or, in the opinion of the Committee, the payment was not in consideration for the individual becoming an Executive of the Company. For these purposes payments include the amounts paid in order to satisfy awards of variable remuneration and, in relation to an award over shares, the terms of the payment are agreed at the time the award is granted. The Committee may make minor amendments to the Policy (for regulatory, exchange control, tax or administrative purposes or to take account of a change in legislation) without obtaining shareholder approval for that amendment. Performance measures We continue to be committed to full transparency and disclosure. We will disclose all targets as soon as any commercial sensitivity falls away. At the latest, full disclosure will be at the end of the performance period. Relative total shareholder return (TSR) Compares Centrica’s TSR (share price growth plus dividends) for the performance period with the TSR ranking of the companies in the FTSE 100 Index. The FTSE 100 Index has been chosen as it is a broad equity index of which Centrica has historically been a constituent and it reflects the investment interests of our UK shareholder base. UAOCF growth Growth in net cash flow from operating activities (which includes taxes paid) adjusted to include dividends received from joint ventures and associates and to exclude payments relating to exceptional items, UK defined benefit pension deficit contributions and movements in variation margin and cash collateral that are included in net debt. Historically this has been adjusted for the impact of commodity price movements in Exploration & Production/Nuclear, foreign exchange movements and any material one-off working capital items to give a measure of underlying growth. Non-financial KPIs Based on the Group’s non-financial KPIs, using three-year targets for improvement. Malus and clawback The Committee can apply malus (that is reduce the number of shares in respect of which an award vests) or delay the vesting of awards if it considers it appropriate where a participant has engaged in gross misconduct or displayed inappropriate management behaviour which fails to reflect the governance and values of the business or where the results for any period have been restated or appear inaccurate or misleading. Where an award has vested, the resulting shares will generally be held for a period during which they may be subject to clawback in the event that the Committee determines that one or more of the circumstances above has occurred. Pension arrangements applying to Executives All registered scheme benefits are subject to HMRC guidelines and the Lifetime Allowance. The Centrica Unapproved Pension Scheme (CUPS) defined contribution (DC) section provides benefits for individuals not eligible to join the CUPS defined benefit (DB) section and for whom registered scheme benefits are expected to exceed the Lifetime Allowance. The CUPS DC section is offered as a direct alternative to a cash salary supplement. CUPS is unfunded but the benefits are secured by a charge over certain Centrica assets. An appropriate provision in respect of the accrued value of these benefits has been made in the Company’s balance sheet. The Centrica Pension Plan (CPP) is a registered defined benefit plan which is closed to new members. Discretion and judgement It is important that the Committee maintains the flexibility to apply discretion and judgement to achieve fair outcomes as no remuneration policy and framework, however carefully designed and implemented, can pre-empt every possible scenario. The Committee needs to be able to exercise appropriate discretion to determine whether mechanistic or formulaic outcomes are fair, in context and can be applied in an upward or downward manner when required. Judgement is applied appropriately by the Committee, for example when considering the political and social pressures on the business, the impact of significant movements in external factors such as commodity prices, in setting and evaluating delivery against individual and non-financial performance targets to ensure they are considered sufficiently stretching and that the maximum and minimum levels are appropriate and fair. The Committee has absolute discretion to decide who receives awards, the level of the awards under the incentive plans and the timing, within the parameters set in the rules. In the case of a corporate action, the Committee can agree when a corporate action applies to a share award, whether awards pay out or are rolled over in this situation and how any special dividend might apply. The Committee also maintains the discretion to adjust any awards in the event of a variation of capital, for example to maintain the incentive value at the level originally intended. The Committee retains discretion, consistent with market practice, regarding the operation and administration of the incentive plans including, but not limited to, the following: • agreeing appropriate measures and setting targets aligned to the Group’s priorities or KPIs; • determination of the result of any disputes relating to the interpretation of the rules; • alteration of the terms of the performance targets if it feels that they are no longer a fair measure of the Company’s performance, as long as the new targets are not materially less challenging than the original ones; and • determination that any award is forfeit in whole or in part. The Committee also retains the discretion to forfeit or clawback deferred awards if it determines that prior performance which resulted in the annual bonus being awarded was discovered to be a misrepresentation of results or inappropriate management behaviour which fails to reflect the governance or values of the business. 80 Governance | Remuneration Policy continuedCentrica plc Annual Report and Accounts 2020 Total remuneration by performance scenario The charts below indicate the minimum, on-target and maximum remuneration that could be received by each Executive, under the Policy. Assumptions made for each scenario are: • minimum – fixed remuneration only (base salary at current level, together with pension and benefits as set out in the Remuneration Policy table); • on-target – fixed remuneration plus target AIP (as set out in the Remuneration Policy table) and expected value under the LTIP on vesting of 50%; • maximum – fixed remuneration plus maximum AIP opportunity and maximum levels of vesting under the LTIP (as set out in the Remuneration Policy table); and • Maximum +50% share price growth – fixed remuneration plus maximum AIP opportunity and maximum levels of vesting under the LTIP (as set out in the Remuneration Policy table) with 50% share price growth. Recruitment policy The Committee will apply the same remuneration policy during the policy period as that which applies to existing Executives when considering the recruitment of a new Executive in respect of all elements of remuneration as set out in the Remuneration Policy table. Whilst the maximum level of remuneration which may be granted would be within plan rules and ordinarily subject to the maximum opportunity set out in the Remuneration Policy table, in certain circumstances, an arrangement may be established specifically to facilitate recruitment of a particular individual up to 25% above the maximum opportunity, albeit that any such arrangement would be made within the context of minimising the cost to the Company. The policy for the recruitment of Executives during the policy period includes the opportunity to provide a level of compensation for forfeiture of bonus entitlements and/or unvested long-term incentive awards from an existing employer, if any, and the additional provision of benefits in kind, pensions and other allowances, as may be required in order to achieve a successful recruitment. Service contracts Service contracts provide that either the Executive or the Company may terminate the employment by giving one year’s written notice. The Committee retains a level of flexibility, as permitted by the Code, in order to attract and retain suitable candidates. It reserves the right to offer contracts which contain an initial notice period in excess of one year, provided that at the end of the first such period the notice period reduces to one year. All Executive and Non-Executive Directors are required to be re-elected at each AGM. Total remuneration by performance scenario (£000) 6000 5000 4000 3000 2000 1000 0 59% 49% 41% 27% 32% 32% 26% 19% 15% 100% 31% 27% 42% 100% 39% 34% 27% 50% 28% 22% Minimum On-Target Maximum Maximum +50% Minimum On-Target Maximum Maximum +50% CEO CFO Fixed Remuneration Short-term incentive Long-term incentive 81 Centrica plc Annual Report and Accounts 2020Governance Termination policy The Committee carefully considers compensation commitments in the event of an Executive’s termination. The aim is to avoid rewarding poor performance and to reduce compensation to reflect the departing Executive’s obligations and to mitigate losses. Save for summary dismissal, the policy is to either continue to provide base salary, pension and other benefits for any unworked period of notice or, at the option of the Company, to make a payment in lieu of notice comprising base salary only. Typically any payment in lieu of notice will be made in monthly instalments and reduce, or cease completely, in the event that remuneration from new employment is received. An AIP award for the year in which the termination occurs may be made following the normal year end assessment process, subject to achievement of the agreed performance measures and time-apportioned for the period worked. Any award would be payable at the normal time with a 50% deferral and no new long-term incentive plan awards would be made. Except in cases of death in service, the policy is not to vest any existing long-term incentive plan awards earlier than their normal vesting date. In all cases any vesting remains subject to satisfaction of the associated performance conditions and will be time-apportioned for the period worked. Executives leaving following resignation will forfeit any potential AIP award for the performance year in which the resignation occurs and all unvested LTIP awards. In addition, Executives summarily dismissed will also forfeit any deferred shares. Deferred awards can also be clawed back if it is subsequently discovered that the results have been achieved by behaviour which fails to reflect the governance and values of the business or where the results for any period appear inaccurate or misleading. On a change of control, existing LTIP awards will be exchanged on similar terms or vest to the extent that the performance conditions have been met at the date of the event and be time-apportioned to the date of the event or the vesting date, subject to the overriding discretion of the Committee. Pay fairness across the Group The Group operates in a number of different environments and has many employees who carry out a range of diverse roles across a number of countries. In consideration of pay fairness across the Group, the Committee believes that ratios related to market competitive pay for each role profile in each distinct geography are the most helpful. The ratios of salary to the relevant market median are compared for all permanent employees across the Group and are updated using salary survey benchmarking data on an annual basis. Unlike the significant majority of the workforce who receive largely fixed remuneration, mainly in the form of salary, the most significant component of Executive compensation is variable and dependent on performance. As such, the Committee reviews total compensation for Executives against benchmarks rather than salary alone. A number of performance-related incentive schemes are operated across the Group which differ in terms of structure and metrics from those applying to Executives. The Group also offers a number of all-employee share schemes in the UK, Ireland and North America and Executives participate on the same basis as other eligible employees. Performance measures applying to Executives are cascaded down through the organisation and Group employment conditions include high standards of health and safety and employee wellbeing initiatives. No consultation in respect of Executive remuneration takes place with employees during the year. Shareholding requirement A minimum shareholding requirement is in place for Executive Directors to build and maintain a value of shares over a five-year period equal to 300% of base salary, with a condition that 75% of vested incentive shares (post-tax) will be retained until the requirement has been met. A post-cessation shareholding requirement of 50% of the shareholding requirement (or full actual holding if lower) is applicable for 24 months post-cessation. External appointments of Executives It is the Company’s policy to allow each Executive to accept one non-executive directorship of another company, although the Board retains the discretion to vary this policy. Fees received in respect of external appointments are retained by the individual Executive and are set out in the Directors’ Annual Remuneration Report each year. 82 Governance | Remuneration Policy continuedCentrica plc Annual Report and Accounts 2020 Non-Executive Directors’ remuneration Remuneration Policy Centrica’s policy on Non-Executive Directors’ (Non-Executives) fees takes into account the need to attract the high calibre individuals required to support the delivery of our strategy. Terms of appointment Non-Executives, including the Chairman, do not have service contracts. Their appointments are subject to Letters of Appointment and the Articles of Association. All Non-Executives are required to be re-elected at each AGM. Remuneration Policy table (consistent with the previously approved policy) Purpose and link to strategy Operation and clawback Maximum opportunity Performance measures The maximum level of fees payable to Non-Executives, in aggregate, is set out in the Articles of Association. Not applicable. Chairman and Non- Executive Director fees Sufficient level to secure the services of individuals possessing the skills, knowledge and experience to support and oversee the Executive Directors in their execution of the Board’s approved strategies and operational plans. Fees reflect market practice as well as the responsibilities and time commitment required by our Non-Executives. The fee levels for the Chairman are reviewed every two years by the Remuneration Committee. The fee levels of the Non-Executives are reviewed every two years. Non-Executives are paid a base fee for their services. Where individuals serve as Chairman of a Committee of the Board, additional fees are payable. The Senior Independent Director also receives an additional fee. Current fee levels (applying from 1 January 2016): Chairman of the Board – up to £495,000 per annum. Base fee for Non-Executives – £72,500 per annum. The following additional fees apply: • Chairman of Audit and Risk Committee – £25,000 per annum; • Chairman of Remuneration Committee – £20,000 per annum; • Chairman of Safety, Environment and Sustainability Committee – £20,000 per annum; • Senior Independent Director – £20,000 per annum; and • Employee Champion – £20,000 per annum. The Company reserves the right to pay a Committee membership fee in addition to the base fees. Non-Executives are able to use 50% of their fees, after appropriate payroll withholdings, to purchase Centrica shares. Dealing commission and stamp duty is paid by the Non-Executive. The Non-Executives, including the Chairman, do not participate in any of the Company’s share schemes, incentive plans or pension schemes. Non-Executives will be reimbursed for business expenses relating to the performance of their duties including travel, accommodation and subsistence. In certain circumstances these, or other incidental items, may be considered a ‘benefit in kind’ and if so may be grossed up for any tax due. The policy on the recruitment of new Non-Executives during the policy period would be to apply the same remuneration elements as for the existing Non-Executives. It is not intended that variable pay, day rates or benefits in kind be offered, although in exceptional circumstances such remuneration may be required in currently unforeseen circumstances. The Committee will include in future Remuneration Reports details of the implementation of the policy as utilised during the policy period in respect of any such recruitment to the Board. 83 Centrica plc Annual Report and Accounts 2020Governance Other Statutory Information The Directors submit their Annual Report and Accounts for Centrica plc, together with the consolidated Financial Statements of the Centrica group of companies, for the year ended 31 December 2020. The Directors’ Report required under the Companies Act 2006 (the Act) comprises this Directors’ and Corporate Governance Report (pages 43 to 87) including the People and Planet section for disclosure of our carbon emissions in the Strategic Report (pages 28 to 33). The management report required under Disclosure Guidance and Transparency Rule 4.1.5R comprises the Strategic Report (pages 2 to 42) (which includes the risks relating to our business), Shareholder Information (page 219) and details of acquisitions and disposals made by the Group during the year in note 12 (pages 130 to 132). The Strategic Report on pages 2 to 54 fulfils the requirements set out in section 414 of the Act. This Directors’ and Corporate Governance Report fulfils the requirements of the corporate governance statement required under Disclosure Guidance and Transparency Rule 7.2.1. Articles of Association (Articles) The Company’s Articles were adopted at the 2019 AGM. They may only be amended by a special resolution of the shareholders. Centrica shares Substantial shareholdings At 31 December 2020, Centrica had received notification of the following interests in voting rights pursuant to the Disclosure and Transparency Rules: Schroders Investment Management Limited RWC Asset Management LLP Majedie Asset Management Limited Newton Investment Management Limited Standard Life Aberdeen plc % of share capital(1) 10.997 5.18 4.99 4.99 4.99 (1) Percentages are shown as a percentage of the Company’s issued share capital when the Company was notified of the change in holding. As at 24 February 2021, there were no further changes notified to the Company. Share capital The Company has a single share class which is divided into ordinary shares of 614/81 pence each. The Company was authorised at the 2020 AGM to allot up to 1,945,844,690 ordinary shares as permitted by the Act. A renewal of a similar authority will be proposed at the 2021 AGM. The Company’s issued share capital as at 31 December 2020, together with details of shares issued during the year, is set out in note 25 to the Financial Statements. Rights attaching to shares Each ordinary share of the Company carries one vote. Further information on the voting and other rights of shareholders is set out in the Articles and in explanatory notes which accompany notices of general meetings, all of which are available on our website. Repurchase of shares As permitted by the Articles, the Company obtained shareholder authority at the 2020 AGM to purchase its own shares up to a maximum of 583,753,407 ordinary shares. No shares were purchased under this authority in 2020. As at 31 December 2020, no shares were held as treasury shares. Shares held in employee benefit trusts The Centrica plc Employee Benefit Trust (EBT) is used to purchase shares on behalf of the Company for the benefit of employees, in connection with the Restricted Share Scheme. The Centrica plc Share Incentive Plan Trust (SIP Trust) is used to purchase shares on behalf of the Company for the benefit of employees, in connection with the SIP. Both the Trustees of the EBT and the SIP Trust, in accordance with best practice, have agreed not to vote any unallocated shares held in the EBT or SIP Trust at any general meeting and dividends are waived in respect of these shares. In respect of allocated shares in both the EBT and the SIP Trust, the Trustees shall vote in accordance with participants’ instructions. In the absence of any instruction, the Trustees shall not vote. 84 GovernanceCentrica plc Annual Report and Accounts 2020 Index to Directors’ Report and other disclosures 53 84 89 46 to 47 10 to 11 30 to 31 52 86 52, 81 and 83 72 86 29 Note 11 Page 129 Note 26 Page 157 Notes 19, S2 and S6 on pages 144, 158 and 179 2 to 42 85 56 84 28 86 Note S8 Page 183 6 and 30 2 34 25 84 32 22 to 24 224 AGM Articles of Association Audit Information Board of Directors Business Model Carbon emissions Conflicts of Interest Directors’ indemnities and insurance Directors’ service contracts and letters of appointment Directors’ share interests Disclosure required under Listing Rule 9.8.4R Diversity Dividends Events after the balance sheet date Financial instruments Future developments Human rights Internal control over financial reporting Material shareholdings People Political donations and expenditure Related party transactions Research and development activities Results Risk management Section 172(1) statement (Director’s Duty) Share capital Speak Up policy Stakeholder engagement (including employees, suppliers and customers) Sustainability Workforce Employee involvement We remain committed to employee involvement throughout the Group. Employees are kept well informed of the performance and strategy, including financial and economic, of the Group and other matters of concern through personal briefings, regular meetings, town halls, email and broadcasts by the Group Chief Executive and members of the Board at key points in the year. Equal opportunities The Group is committed to and has an active equal opportunities policy which includes, but is not limited to, recruitment and selection, training and development, performance reviews and promotion to retirement. Our culture is to create an environment free from discrimination, harassment and victimisation. Our policies are in place to ensure everyone receives equal treatment regardless of gender, identity, race, ethnic or national origin, disability, age, marital status, sexual orientation or religion. We have created channels for colleagues to voice concerns confidentially, through Speak Up support services. All decisions relating to employment practices will be objective, free from bias and based solely upon work criteria and individual merit. Employees with disabilities It is our policy that people with disabilities should have full and fair consideration for all vacancies. We continued to demonstrate our commitment to interviewing and enabling people with disabilities who fulfil the minimum criteria during the year. We endeavour to retain employees in the workforce if they become disabled during employment. This commitment was recognised in January 2018 by our achievement of level 1 Disability Confident Status and in 2017 we launched a Disability and Wellbeing Network to help employees impacted by disability to access the support they need to thrive at work. We are proud to support The Valuable 500 initiative and champion disability inclusion throughout Centrica. Launched at the World Economic Forum’s Annual Summit in 2020, The Valuable 500 seeks 500 global businesses to place disability inclusion on their board agendas as the first step to full inclusion for disabled people in business. Human rights We have a responsibility and are committed to upholding and protecting the human rights of individuals working for us in the communities and societies where we operate. We take steps to ensure that our people working in countries with a high risk of human rights abuses are safeguarded, as set out in Our Code. We also recognise the opportunity we have to contribute positively to global efforts to ensure human rights are understood and observed. Employee participation in share schemes The Company’s all-employee share schemes are a long established and successful part of our total reward package, encouraging the involvement of UK employees in the Company’s performance through employee share ownership. We offer tax-advantaged Sharesave (SAYE) schemes in the UK and Ireland, and a Share Incentive Plan (SIP) in the UK, with good levels of take-up for all share plans across the Group. Currently, 34% of eligible employees participate in Sharesave and 23% of eligible employees participate in the SIP. 85 Centrica plc Annual Report and Accounts 2020Governance Governance | Other Statutory Information continued Other information Directors’ indemnities and insurance In accordance with the Articles, the Company has granted a deed of indemnity, to the extent permitted by law, to the Directors of the Company. Qualifying third-party indemnity provisions (as defined by section 234 of the Act) were in force during the year ended 31 December 2020 and remain in force. The Company also maintains directors’ and officers’ liability insurance for its Directors and officers. Political donations The Company operates on a politically neutral basis. No political donations were made by the Group for political purposes during the year. However, in accordance with the United States Federal Election Campaign Act, a Political Action Committee (PAC) called Direct Energy Employee Political Action Committee (DEEPAC) was formed to facilitate voluntary political contributions by its US employees. DEEPAC was controlled by neither the Company nor Direct Energy but instead by a governing board of individual employee members of DEEPAC on a voluntary basis. Direct Energy, as authorised by law, provided limited administrative support to DEEPAC. DEEPAC was organised to provide a vehicle to dispense voluntary contributions from eligible employees. Participation in DEEPAC was entirely voluntary for eligible employees, and political donations from DEEPAC were determined by a governing board of DEEPAC members. In 2020, contributions to DEEPAC by employees amounted to $16,210, and DEEPAC made 134 political donations totalling $97,250. On 5 January 2021, Centrica completed its sale of Direct Energy to NRG Energy, Inc. Significant agreements – change of control There are a number of agreements to which the Company is party that take effect, alter or terminate upon a change of control of the Company following a takeover bid. The significant agreements of this kind relate to 2009, when the Company entered into certain transactions with EDF Group in relation to an investment in the former British Energy Group, which owned and operated a fleet of nuclear power stations in the UK. The transactions include rights for EDF Group and the Company to offtake power from these nuclear power stations. As part of the arrangements, on a change of control of the Company, the Group loses its right to participate on the boards of the companies in which it has invested. Furthermore, where the acquirer is not located in certain specified countries, EDF Group is able to require Centrica to sell out its investments to EDF Group. Payments policy We recognise the importance of good supplier relationships to the overall success of our business. We manage dealings with suppliers in a fair, consistent and transparent manner. Disclosures required under Listing Rule 9.8.4R The Company is required to disclose certain information under Listing Rule 9.8.4R in the Directors’ Report or advise where such relevant information is contained. All such disclosures are included in this Directors’ and Corporate Governance Report, other than the following sections of the 2020 Annual Report and Accounts: Information Capitalised interest (borrowing costs) Details of long-term incentive schemes Waiver of emoluments by a Director Location in Annual Report Financial Statements Page(s) 124, note 8 Remuneration Report Remuneration Report 78 71 Directors’ statements Accounting standards require that Directors satisfy themselves that it is reasonable for them to conclude whether it is appropriate to prepare the Financial Statements on a going concern basis. The Group’s business activities, together with factors that are likely to affect its future development and position, are set out in the Group Chief Executive’s Statement on pages 4 to 6 and the Business Reviews on pages 14 to 16. After making enquiries, the Board has a reasonable expectation that Centrica and the Group as a whole have adequate resources to continue in operational existence and meet their liabilities as they fall due, for the foreseeable future. For this reason, the Board continues to adopt the going concern basis in preparing the Financial Statements. Additionally, the Directors’ Viability Statement, which assesses the prospects for the Group over a longer period than the 12 months required for the going concern assessment, is set out on pages 40 to 42. Further details of the Group’s liquidity position are provided in notes 24 and S3 to the Financial Statements. 86 Centrica plc Annual Report and Accounts 2020 Responsibility statement The Directors confirm that to the best of their knowledge: • the Financial Statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; • the Strategic Report includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and • the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company’s position and performance, business model and strategy. Information to the independent auditors The Directors who held office at the date of this Report confirm that: • they have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information; and • there is no relevant audit information of which Deloitte LLP are unaware. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. Deloitte LLP have expressed their willingness to continue in office as auditors and a resolution to re-appoint them will be proposed at the forthcoming AGM. By order of the Board Raj Roy Group General Counsel & Company Secretary 24 February 2021 Directors’ responsibilities statement The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the group financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies to the European Union, and have elected to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including FRS 101 “Reduced Disclosure Framework”. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing the parent company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. In preparing the Group Financial Statements, International Accounting Standard 1 requires that Directors: • properly select and apply accounting policies; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and • make an assessment of the Company’s ability to continue as a going concern. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 87 Centrica plc Annual Report and Accounts 2020Governance Financial Statements Independent Auditor’s Report 89 100 Group Income Statement 101 Group Statement of Comprehensive Income 102 Group Statement of Changes in Equity 103 Group Balance Sheet 104 Group Cash Flow Statement 105 Notes to the Financial Statements 194 Company Financial Statements 196 Notes to the Company Financial Statements 205 Gas and Liquids Reserves (Unaudited) 206 Five Year Summary (Unaudited) 207 Ofgem Consolidated Segmental Statement 88 Centrica plc Annual Report and Accounts 2020 Independent Auditor’s Report Report on the audit of the financial statements Opinion In our opinion: • the financial statements of Centrica plc (the ‘Company’) and its subsidiaries (together the ‘Group’) give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 December 2020 and of the Group’s loss for the year then ended; • the Group financial statements have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) as adopted by the European Union; • the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including Financial Reporting Standard 101 “Reduced Disclosure Framework”; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the Financial Statements which comprise: • the Group Income Statement; • the Group Statement of Comprehensive Income; • the Group and Company Balance Sheets; • the Group and Company Statements of Changes in Equity; • the Group Cash Flow Statement; and • the related notes 1 to 26 and the supplementary notes S1 to S11 of the Group financial statements and notes I to XIV of the Company Financial Statements. Summary of our audit approach The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Accounting Standards in conformity with the requirements of the Companies Act 2006 and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Company financial statements is applicable law and United Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure Framework” (United Kingdom Generally Accepted Accounting Practice). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non-audit services provided to the Group and Company for the year are disclosed in note S9 to the financial statements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Company. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters The key audit matters that we identified in the current year were: • Presentation of the Group income statement; • Impairment of Exploration and Production (E&P) assets and related goodwill and the Group’s investment in Nuclear; • Classification, valuation and presentation of energy contracts; and • Credit losses on financial assets within the Group’s energy supply businesses (“the bad debt provisions”). Given the current macro-economic environment, particularly conditions arising from the lockdowns due to Covid-19, there is increased risk of bad debt within the Group’s energy supply businesses. Consequently this is considered to be a key audit matter this year. The estimation of accrued energy revenue in the UK and North America is no longer considered to be a key audit matter based on the level of estimation uncertainty and that limited errors have been identified in this area within prior year audits. All other key audit matters are consistent with the prior year; the key audit matter relating to the presentation of energy contracts was previously titled “Revenue and cost recognition for derivatives”. Materiality The materiality that we used for the audit of the Group financial statements was £30m (2019: £42m). This materiality was determined on the basis of a range of metrics including shareholders’ equity, operating cash flow and pre-tax profit adjusted for exceptional items and certain re-measurements. Materiality of £30m represents 6.3% of final pre-tax profit adjusted for exceptional items and certain re-measurements, from both continuing and discontinued operations, 2.2% of shareholders’ equity and non-controlling interests and 2.1% of operating cash flow. Scoping All components of the Group were subject to a full scope audit other than: • New Energy Services (within the Centrica Business Solutions segment), Centrica Storage (within the Upstream segment) and the Group’s investment in Nuclear (within the Upstream segment) which were subject to specified audit procedures; and • Direct Energy Services US and Direct Energy Canada which were subject to review procedures. Component materiality levels were set based on the size and audit risk associated with each component on a wider range of applicable metrics. Significant changes in our approach Key changes in our approach include a new key audit matter in respect of credit losses of financial assets within the Group’s energy supply businesses and updating the basis for determining materiality. We also aligned the identification of components to the Group’s new segmental reporting structure. 89 Centrica plc Annual Report and Accounts 2020Financial Statements Financial Statements | Independent Auditor’s Report continued Conclusions relating to going concern In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the Group’s and Company’s ability to continue to adopt the going concern basis of accounting included: • Assessing the Group’s 2021 and 2022 cash flow forecasts based on actual cash flow performance in 2020; • Agreeing the level of committed, undrawn facilities of £3.6bn to signed facility agreements; • Agreeing the proceeds of $3.625bn received on 5 January 2021, from the sale of Direct Energy to NRG Energy to bank statements and the sale and purchase agreement; • Recalculating the headroom within the forecasts based on the cash flow forecasts, the undrawn committed facilities and the proceeds received from the sale of Direct Energy to NRG Energy; • Assessing the sensitivities run by the directors including the linkage of these sensitivities to the Group’s principal risks disclosed on page 36 to 39 of the Annual Report & Accounts. These sensitivities include a reduction in the Group’s credit rating, a reduction in commodity prices impacting the profitability of the Group’s upstream assets and the continuation throughout 2021 of Covid-19 restrictions leading to a decrease in customer cash collection; and • Assessing the mitigating actions that could be taken by the directors to maximise liquidity headroom including continuing to not pay dividends, a reduction in capital expenditure and a reduction in discretionary spend. Based on the work performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group’s and Company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. In relation to the reporting on how the Group has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters include those which had the greatest effect on the overall audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. i F n a n c a i l S t a t e m e n t s 90 Centrica plc Annual Report and Accounts 2020 Key audit matter description How the scope of our audit responded to the key audit matter Presentation of the Group Income Statement The Group Income Statement set out on page 100 of the Annual Report & Accounts segregates Business Performance from Exceptional items and certain re-measurements (the ‘Middle Column’) in arriving at the results for the year, with additional information disclosed in Note 7. The Group’s policy on the presentation of exceptional items and certain re-measurements can be found in notes 2(a) and 2(b). The Audit and Risk Committee also discusses this area in its report on pages 58 to 61. Business Performance is a critical measure for stakeholders and underpins the Group’s segmental analysis and description of business results, and therefore the classification of items between Business Performance and the Middle Column is important for users of the accounts. The key items included within the Middle column are as follows: • Re-measurement and settlement of certain energy contracts (£786m); • Impairment of certain assets (£1,319m); • Restructuring costs (£154m); • Pension change net costs (£120m); • Related net tax credit (£187m); and • Similar items arising within discontinued operations. A net credit of £102m has been recognised in the Middle Column relating to discontinued operations (being the Direct Energy business) which includes the re-measurement and settlement of certain energy contracts (£184m), costs relating to the disposal of Direct Energy (£22m) and related tax charges and credits (£60m). The presentation of the results of Direct Energy within discontinued operations is also part of this key audit matter. The Group has an established policy which governs which items should be recognised in the Middle Column. However, judgement is applied in the application of this policy. This is a key area of focus for our audit. We identified a potential fraud risk in respect of the presentation of restructuring costs within the Middle column. The valuation and recording of the impairment of certain assets and the valuation and recording of the re-measurement of certain energy contracts are separate key audit matters. Please see pages 92 and 93 for further detail. The presentation of these items within either Business Performance or the Middle Column is, however, addressed within this key audit matter. Significant restructuring costs were incurred in 2020 in relation to the Group’s transformation programme. The costs of this restructuring activity are included within the Middle Column. Pension change costs relating to this restructuring are also included within the Middle Column. In July 2020, the Group announced it had agreed the sale of Direct Energy to NRG Energy for consideration of $3.625bn. The sale completed on the 5 January 2021. As the sale of Direct Energy represents the sale of a major line of business and geographical area, the results of Direct Energy have been presented as a discontinued operation. Audit procedures applicable to all items • We obtained an understanding of relevant controls around the presentation of items within either Business Performance or the Middle Column. • We evaluated the Group’s policy on the recording of items within Business Performance or the Middle Column and considered whether that policy was appropriate. We also evaluated the Group’s policy against guidance issued by the Financial Reporting Council (FRC) and the European Securities and Markets Authority (ESMA). • We challenged Management on the presentation of items within the Middle Column primarily by assessing whether their presentation within the Middle Column was consistently applied in line with the Group’s policy and the above guidance, and were appropriately disclosed. Audit procedures applicable to specific items • On impairment of certain assets, we challenged Management on the factors that caused the movement in value on each asset by interrogating the underlying impairment models, reviewing the size of the impairment recorded and assessing whether the impairment had been recorded within the correct column. This was done based on both the Group’s accounting policies and also its past practice for where impairments are presented and disclosed. • For restructuring and pension change costs, we evaluated the nature of the costs recorded by Management within the Middle Column, how they are linked to the Group’s transformation programme, and challenged whether those costs were correctly reported in line with the Group’s policy and appropriately disclosed. • We evaluated the presentation of the re-measurement of derivative energy contracts based on the nature and purpose of the underlying contract generating the fair value movement. In performing this work, we used data analytics to evaluate the nature of the underlying trade and allocation to the correct column. • We evaluated the presentation of Direct Energy as a discontinued operation in accordance with IFRS 5 ‘Non-current assets held for sale and discontinued operations,’ including how transactions between Direct Energy and the retained Group were presented and accounted for. • We reviewed the presentation and disclosure of Management’s conclusions in the Annual Report & Accounts to assess whether the disclosures are appropriate and consistent with the Group’s policy and relevant accounting standards. Key observations • The exploration, production and Nuclear asset impairments of £1,123m principally arose from a reduction in forecast gas, oil and power prices and are material in size and therefore under the Group’s policy, these impairments are appropriately recorded within the Middle Column. • Impairments of £72m in respect of the Centrica Home Solutions IT platform and £78m in respect of goodwill within Centrica Business Solutions are material in size and therefore, under the Group’s policy these impairments are appropriately recorded within the Middle Column. • The re-measurement of derivative energy contracts is correctly presented in the Middle Column. • The majority of restructuring costs relate to the Group’s restructuring programme (see page 5 of the Annual Report & Accounts). Costs to deliver this restructuring (including associated pension change costs) are material, relate to significant transformation programmes and are multi-year. Consequently, they are appropriately presented within the Middle Column. • The presentation of the results of Direct Energy as a discontinued operation is appropriate in accordance with IFRS 5 ‘Non-current assets held for sale and discontinued operations’. 91 Centrica plc Annual Report and Accounts 2020Financial Statements Financial Statements | Independent Auditor’s Report continued Key audit matter description How the scope of our audit responded to the key audit matter Impairment of Exploration and Production (E&P) assets and related goodwill and the investment in Nuclear The total book value of exploration and production assets is £2,103m and the total book value of the investment in Nuclear is £830m. In addition, goodwill of £414m is recorded in respect of the Group’s investment in Spirit Energy. Management have recorded a pre-tax impairment charge of £1,123m against these assets, including £580m on exploration and production assets, £62m against the goodwill in Spirit Energy and £481m on the investment in Nuclear, primarily due to lower forecast long term gas, oil and power prices and operational performance, as disclosed in note 7. Further details on the key sources of estimation certainty underpinning the impairment of those assets can be found in note 3(b). Details on the sensitivity of the above impairment reviews to changes in key assumptions such as commodity prices are disclosed in Note 7(c). This includes sensitivities associated with the Group’s commodity price curves if these curves were aligned with the Paris Accord to limit temperature rises to below 2˚C. The matter is also considered by the Audit and Risk Committee in its report on pages 58 to 61. The Group holds significant upstream exploration and production assets and a 20% investment in certain of the UK’s nuclear power stations, which are required to be reviewed for indicators of impairment and tested for impairment as appropriate. These assets are subject to the greatest estimation uncertainty, as set out below. They also represent the highest risk of impairment. We therefore identified a risk of material misstatement and a key audit matter that these assets are not recoverable. The impairments recorded in the year were primarily because of a reduction in gas, oil and baseload power prices due to Covid-19 and other market factors. The impairment assessment involves management judgement in considering whether the carrying value of those assets or cash generating units are recoverable. The key assumptions and judgements underpinning the impairment reviews of exploration and production assets and the investment in Nuclear include: • forecast future commodity prices, including the impact of the Paris Accord and climate change on those prices; • forecast future production or generation profiles of the assets; • forecast future cash flows for the assets; Procedures on the overall impairment review • We have understood management’s process for identifying indicators of impairment and for performing their impairment assessment. • We obtained an understanding of the relevant controls relating to the asset impairment models, the underlying forecasting process and the impairment reviews performed. • We evaluated and challenged the key assumptions and inputs into the impairment models, which included performing sensitivity analysis, to evaluate the impact of selecting alternative assumptions. We evaluated the current year changes to the key assumptions and assessed retrospectively whether prior year assumptions were appropriate. • We audited the arithmetical accuracy of the impairment models. We recalculated the impairment charges and headroom and agreed these to financial records. • We evaluated the impairment judgements taken, with reference to our assessment of the key assumptions as outlined above and the outcome of the sensitivities performed. • We involved our internal valuation specialists to evaluate management’s discount rates, which involved benchmarking against available market views and analysis. • We assessed the adequacy and clarity of management’s disclosures of the key assumptions and sensitivities. Procedures relating to forecast future cash flows • We confirmed that forecast cash flows were consistent with Board approved forecasts, and analysed reasonably possible downside sensitivities. • the Group’s ability and intent to fund the future development of certain assets; • We validated oil and gas production profiles to external reserve • estimates of oil and gas reserves specific to each asset; • availability forecasts in respect of the nuclear power stations; • useful life estimates; and • the discount rate. and operator estimates and agreed these to the cash flow forecasts. • We agreed estimates of oil and gas reserves to third-party reserve reports, assessing the competence, capabilities and objectivity of those third-party experts engaged by management. • We evaluated the Group’s estimation of future commodity prices using our own internal experts, benchmarked against externally available future commodity price estimates and performed sensitivity analysis with alternative future prices. This includes a scenario noted as being consistent with achieving the Paris Agreement to limit temperature rises to below 2˚C. We recalculated management’s disclosures relating to the sensitivity of the Group’s impairment tests to reduced commodity prices, including those that are consistent with the Paris Agreement. • We assessed the commitment of the Board to fund certain exploration and development activities and challenged whether an impairment of those assets should be recorded where the Board was not committed to providing the required funding. • We assessed the reasonableness of the nuclear plants’ availability forecast and estimated useful lives and sensitised the impact of a change in assumptions on the overall impairment charge. Key observations We are satisfied that the key assumptions used to determine the recoverable amount of long-life assets are appropriate, including estimates of reserves, production and generation profiles. We are also satisfied that the Group’s discount rate assumptions are determined based on acceptable valuation methodologies and when considered alongside other key assumptions, are appropriate. The Group’s future commodity price estimates are at the middle of the acceptable range of external sources, consistent with the prior year. We observed that generally none of the forecasts from acceptable external sources for oil and gas were consistent with the assumed impact of the Paris Agreement, with forecasts being above a Paris scenario. We considered the sensitivity disclosures relating to the impact on the Group’s impairment reviews of lower future commodity price estimates arising from climate change to be acceptable. Based on the procedures performed we are satisfied that the Group’s impairment charges are appropriate. 92 Centrica plc Annual Report and Accounts 2020 Key audit matter description How the scope of our audit responded to the key audit matter Classification, valuation and presentation of energy contracts Details on the Group’s energy contracts can be found in note 19 and note S3(a). The key sources of estimation uncertainty associated with energy contracts can be found in note 3(b) with further details on the presentation of certain re-measurement arising on derivatives disclosed in note 2(b). The matter is also considered by the Audit and Risk Committee in its report on pages 58 to 61. As disclosed in note 7 to the financial statements, certain re-measurements of £786m on energy derivative contracts have been recognised in the current year from continuing operations. In addition, certain re-measurements of £184m were recognised in respect of discontinued operations. The critical accounting judgement in respect of Liquefied Natural Gas (‘LNG’) is disclosed in note 3(a) and the long term LNG commitments are disclosed in note 23. The critical accounting judgement in respect of the Cheniere onerous contract assessment is disclosed in note 3(b). These matters are also reported on pages 58 to 61 of the Audit and Risk Committee’s report. The Group undertakes proprietary trading activities and also enters into forward commodity contracts to optimise the value of its production and generation assets as well as to meet the future needs of its customers. Certain of these arrangements are accounted for as derivative financial instruments and are recorded at fair value. Others are treated as “own use” activities as permitted by IFRS 9 Financial Instruments. We identified a key audit matter related to the following: Valuation of complex commodity trades We identified the valuation of complex commodity trades as having a risk of material misstatement due to error or fraud. This is because judgement is required in valuing derivative contracts, particularly where there is modelling complexity and bespoke contractual terms (Level 3 in accordance with IFRS 13 Fair Value Measurement). Own use contracts Certain commodity contracts have been entered into for the purposes of securing commodities for the energy supply businesses or for selling the Group’s commodity production. Where contracts have been entered into to satisfy Centrica’s normal business activities, these have been determined to be own-use contracts and consequently are not recorded at fair value. Due to the size and value of these contracts we identified the appropriateness of the own-use treatment as another aspect of this key audit matter. LNG contracts The Group does not consider its long term LNG supply contracts to be derivatives because these contracts are entered into for the receipt and delivery of physical commodity in accordance with expected purchase and sales requirements (i.e. are determined to be for the Group’s own use). Such contracts are therefore outside the scope of IFRS 9 Financial Instruments and are not marked to market. These contracts are significant commitments and therefore this judgement is important and our assessment of this judgement is therefore also part of our key audit matter. As part of its LNG activities, the Group is committed to purchase LNG from Cheniere Energy Partners LP (‘Cheniere’) from the Sabine pass liquefaction plant in the US. Following the reduction in gas spreads over 2020, there is a risk that the contract is onerous. The Group has judged this contract not to be onerous because of the combined potential value of the LNG (‘intrinsic value’) and the Group’s options as to where to sell the LNG (‘extrinsic value’). This judgement is also part of our key audit matter. Valuation of complex derivatives • We understood the Group’s processes and controls for authorising and recording commodity trades. • We have understood management’s process and tested the effectiveness of the relevant controls relating to the valuation of complex derivatives within the Group’s Energy, Marketing and Trading (‘EM&T’) business. We also assessed the competence, capability and objectivity of management’s own internal valuation specialists. • In the Group’s Direct Energy business, we obtained an understanding of the relevant controls around the valuation of complex derivatives. • We used financial instrument specialists to assist the audit team in assessing the value of material complex trades, either by creating an independent valuation or by verifying the reasonableness of the model methodology. We also assessed the movement in the fair value based on the change in significant inputs, while auditing each of these inputs. Own use contracts • We reviewed all the Group’s material ‘own use’ contracts to determine whether the application of the own use treatment under IFRS 9 was appropriate. • We audited the prospective and retrospective demand tests performed by the Group to determine whether the contract volumes exceed the amount of estimated own use demand in the relevant periods. This included an evaluation of the contracts for net settlement activity. LNG contracts • We assessed whether the Group’s LNG contracts meet the definition under IFRS 9 Financial Instruments to be classified as own use including analysing the LNG cargos in the year, assessing whether the cargos delivered were consistent with an own use business and that a past practice of net settling the LNG contracts had not been established. • We engaged complex valuation specialists to challenge the methodology adopted by management in assessing whether the Cheniere LNG contract is onerous. We assessed the assumptions and judgements in estimating the intrinsic and extrinsic value of the contract. A key assumption are the spreads between Henry Hub, NBP and JKM gas prices which we benchmarked against historic prices and a range of external comparator curves. Key observations We are satisfied that commodity trades are valued on a reasonable basis and that the accounting classification and valuation of trades is appropriate. We are satisfied with the appropriateness of the Group’s own use accounting. We are satisfied with the conclusion that LNG contracts should not be accounted for at fair value because they meet the criteria to be classified as ‘own use’. The headroom calculated by management on the Cheniere LNG contract has been reasonably estimated and the key assumptions adopted, including gas spreads, are reasonable and therefore that the contract is not currently onerous. However, this remains a key judgement and is subject to a number of different variables. 93 Centrica plc Annual Report and Accounts 2020Financial Statements Key audit matter description How the scope of our audit responded to the key audit matter Credit losses on financial assets (“bad debt provisions”) Details on the Group’s credit risk from continuing operations can be found in note 17 with further information included in note S3. Total financial assets in continuing operations at 31 December 2020 were £3,091m (2019: £3,560m). In addition, financial assets from discontinued operations at 31 December 2020 were £1,536m (2019: £1,510m). Total bad debt charges recorded in the year were £195m (2019: £112m). In addition, bad debt provisions of £90m were recognised from discontinued operations (2019: £85m). Total provisions held against financial assets in continuing operations at 31 December 2020 were £591m (2019: £589m). The key sources of estimation uncertainty associated with bad debt provisions are disclosed in note 3(b). The matter is also considered by the Audit and Risk Committee in its report on pages 58 to 61. Covid-19 and the uncertain economic environment has led to increased judgement and uncertainty in estimating bad debt provisions, in particular on amounts due from Home and Business energy supply customers in the UK and North America. Judgement is needed to estimate the timing and impact of an economic downturn and rising unemployment as a result of Covid-19 and how this impacts the ability of customers to pay their bills. Consequently, the bad debt charge recognised by management during the year was considerably higher than during the prior year. Our risk of material misstatement was focused on the accuracy of bad debt provisions and we pinpointed the risk on the additional losses booked by management in response to Covid-19 over and above the “business as usual” estimates. Our audit approach for bad debt provisions was a combination of data analytics, substantive audit procedures and tests of internal control. This included understanding the cash collection processes in the UK and US and relevant controls over the recording of bad debt provisions. In the UK, we tested and relied upon controls relevant to the calculation of provisions. • In the UK, our IT specialists tested the accuracy of the underlying debt books including the age of each debt, and our data analytic specialists recalculated Management’s provision rates based on historic cash collection. • In the US, given the larger number of IT systems, we performed substantive audit procedures to test the accuracy of the underlying debt books. We also assessed historic cash collection and recalculated the overall provisions. We assessed how amounts receivable in the UK and US held at 31 December 2019 were collected over 2020 in order to calculate an expected profile of the recovery of 31 December 2020 balances and beyond, on a “business as usual basis”. We applied this profile to 31 December 2020 debt and then assessed: – how cash collection could change, based on the timing and severity of economic and unemployment forecasts; and – the resulting impact on bad debt provisions. Based on the work done, we assessed the range of possible outcomes and how management’s provisions compared to this. We also assessed management’s disclosures of this key source of estimation uncertainty, and the range of sensitivities disclosed. Key observations • We are satisfied that the Group’s bad debt provisions are within an acceptable range and that the disclosures noted above are appropriate. 94 Centrica plc Annual Report and Accounts 2020Financial Statements | Independent Auditor’s Report continued Our application of materiality Materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group financial statements Company financial statements Materiality £30 million (2019: £42 million) £28 million (2019: £40 million) Basis for determining materiality Rationale for the benchmark applied We determined materiality on the basis of a range of applicable metrics including adjusted profit before exceptional items and certain re-measurements, net assets and operating cash flow. The range was £43m-£14m. Materiality selected represents 6.3% of final pre-tax profit adjusted for exceptional items and certain re-measurements (from both continuing and discontinued operations), 2.2% of net assets and 2.1% of operating cash flow. In the prior year materiality was based on pre-tax profit adjusted for exceptional items and certain re-measurements, and represented 6% of this metric. It also represented 2.3% of net assets and 3.4% of operating cash flow. We consider it appropriate to consider a range of applicable metrics in establishing materiality, because of the complexity of the income statement arising from significant exceptional items, re-measurements and discontinued operations, and the importance of cash flow and balance sheet metrics to users of the financial statements. This also reflects the impact of Covid-19 on pre-tax profit adjusted for exceptional items and certain re-measurements, which would have reduced materiality to a level which would not have reflected the size and scale of the Group. We considered our established materiality against the final audit results, and concluded that it remained appropriate in the context of the financial statements as a whole. We determined company materiality based on 1% (2019: 1%) of estimated net assets but capped materiality at 95% of Group materiality. Our final materiality constituted 0.6% of net assets (2019: 0.7% of net assets). We considered net assets to be the most appropriate benchmark given the primary purpose of the company is a holding company. Performance materiality We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole. Group financial statements Company financial statements Performance materiality 70% (2019: 70%) of Group materiality 70% (2019: 70%) of Company materiality Basis and rationale for determining performance materiality The factors we considered in setting performance materiality at 70% of Group and Company materiality included: • The overall quality of the control environment noting no significant control deficiencies have been identified in the year and that we were able to rely on controls in certain of the Group’s businesses including within British Gas and Spirit. • The nature, size and number of uncorrected misstatements identified in previous audits and management’s willingness to correct those adjustments. Error reporting threshold We agreed with the Audit and Risk Committee that we would report to the Committee all individual audit differences in excess of £5m (2019: £5m) and in aggregate all audit differences in excess of £1.5m (2019: £2.1m), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also reported to the Audit and Risk Committee on disclosure matters that we identify when assessing the overall presentation of the financial statements. 95 Centrica plc Annual Report and Accounts 2020Financial Statements An overview of the scope of our audit Identification and scoping of components The Group is organised into segments as outlined in note 4 across the UK, North America and Europe. These segments contain a number of individual businesses, and we use these businesses as the basis for identifying and scoping components. During 2020, as part of the Group’s restructuring programme, these segments were amended, however there was no substantial change in the underlying businesses. Our audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. Having performed this assessment, it was concluded on the following audit scope for each of the Group’s businesses. Segment British Gas Bord Gáis Energy Business British Gas Energy British Gas Services Centrica Hive Bord Gáis Energy Energy, Marketing & Trading Energy, Marketing & Trading Centrica Business Solutions Energy supply Audit scope Full scope audit Full scope audit Full scope audit Full scope audit Full scope audit Full scope audit Upstream New Energy solutions Audit of specified account balances Nuclear Spirit Energy Audit of specified account balances Full scope audit Centrica Storage Audit of specified account balances Direct Energy (Discontinued operation) Direct Energy Business Full scope audit Direct Energy Home US Direct Energy Home Canada Review scope Direct Energy Home Services We concluded that the following components were each individually not financially significant: • New Energy Services (within the Centrica Business Solutions segment); • Centrica Storage (within the Upstream segment); and • Direct Energy Home Services US and Direct Energy Home Energy Canada (within the Direct Energy segment). As such, we performed specified audit procedures over relevant audit risks in New Energy Services and Centrica Storage and review procedures within Direct Energy Home Services US and Direct Energy Home Canada. We also performed an audit of specified account balances on the Group’s investment in Nuclear. This scoping resulted in 95% of Group revenue, 99% of Group profit before tax and 90% of Group net assets being subject to audit. Our consideration of the control environment Our audit strategy is to rely on controls over certain processes within the more mature businesses of the Group. These included: revenue within British Gas, Bord Gáis Energy and Spirit Energy; credit loss provisions in British Gas; and the Group’s central payroll and expenditure processes. We did not rely on controls in Direct Energy given the large number of IT systems and that the business primarily relies on manual review controls. The use of data analytics in Energy, Marketing and Trading means the need for controls reliance is reduced as we are able to test close to 100% of all transactions. Given the importance of IT to the recording of financial information and transactions, we assessed the design and implementation of general IT controls, and placed reliance on those controls in certain areas. The key IT systems we included in scope includes 96 the Group’s SAP general ledger and consolidation financial reporting systems, the SAP revenue reporting systems in British Gas, Spirit Energy and Bord Gáis, the Endur trading system in Energy, Marketing and Trading and Workday used to manage the Group’s payroll processes. We also included in scope the key billing and trading systems within Direct Energy. Working with other auditors All components except for Direct Energy and Bord Gáis Energy are audited from the United Kingdom and we oversee all component audits through regular meetings and direct supervision. Due to Covid-19 and the restrictions on travel, we were not able to visit either the US or Ireland during the year, or the UK component teams. We consequently held a 3-day virtual planning meeting with all component teams and specialists to discuss our risk assessment (including risks of material misstatement due to fraud) and audit execution. The Group audit team was directly involved in overseeing the component audit planning and execution, through frequent conversations, virtual team meetings, debate, challenge and review of reporting and underlying work papers. In addition to our direct interactions, we sent detailed instructions to our component audit teams, attended audit closing meetings, and reviewed their audit working papers. We are satisfied that the level of involvement of the lead audit partner and team in the component audits has been extensive, despite the restrictions from Covid-19 and the impact of remote working, and has enabled us to conclude that sufficient appropriate audit evidence has been obtained in support of our opinion on the Group Financial Statements as a whole. Centrica plc Annual Report and Accounts 2020Financial Statements | Independent Auditor’s Report continued Other information The other information comprises the information included in the annual report other than the financial statements and our auditor’s report thereon. This other information comprises the Strategic report, the Directors’ and Corporate Governance report, the Committee reports, the Remuneration Report and the Other Statutory information. The directors are responsible for the other information contained within the annual report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of Directors As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group’s and the Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc. org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Extent to which the audit was considered capable of detecting irregularities, including fraud Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below. Identifying and assessing potential risks related to irregularities In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we considered the following: • the nature of the industry and sector, control environment and business performance including the design of the Group’s remuneration policies, key drivers for directors’ remuneration, bonus levels and performance targets; • The Group’s own assessment of the risks that irregularities may occur either as a result of fraud or error including the Group’s fraud risk programme; • results of our enquiries of management, internal audit and the Audit and Risk Committee about their own identification and assessment of the risks of irregularities; • any matters we identified having obtained and reviewed the Group’s documentation of their policies and procedures relating to: – identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance; – detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud; and – the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations. • the matters discussed among the audit engagement team including significant component audit teams and relevant internal specialists, including tax, valuations, pensions, treasury and IT regarding how and where fraud might occur in the financial statements and any potential indicators of fraud. As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified the greatest potential for fraud in the following areas: • The presentation of restructuring costs, as the presentation of these can impact the reporting of profit before exceptional items and certain re-measurements, which is the Group’s primary performance measure; • The valuation of complex derivatives given the inherent risk of bias in the valuations calculated; and • Credit losses on financial assets given the inherent judgement in the current economic environment. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override. 97 Centrica plc Annual Report and Accounts 2020Financial Statements We also obtained an understanding of the legal and regulatory framework that the Group operates in, focusing on provisions of those laws and regulations that: • had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and regulations we considered in this context included the UK Companies Act, the UK Listing Rules and pensions and tax legislation; and • do not have a direct effect on the financial statements but compliance with which may be fundamental to the group’s ability to operate or to avoid a material penalty. These included the Office of Gas and Electricity Markets (Ofgem) and Regulations levied by the UK Financial Conduct Authority and Prudential Regulatory Authority. Report on other legal and regulatory requirements Opinions on other matters prescribed by the Companies Act 2006 In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Group and the Company and their environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the directors’ report. Corporate Governance Statement The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the group’s compliance with the provisions of the UK Corporate Governance Code specified for our review. Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements and our knowledge obtained during the audit: • the directors’ statement with regards the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out on page 154 in note 24(b) • the directors’ explanation as to its assessment of the group’s prospects, the period this assessment covers and why the period is appropriate set out on pages 40 and 41. • the directors’ statement on fair, balanced and understandable set out on page 57 • the board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 35 • the section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on 56; and • the section describing the work of the Audit and Risk Committee set out on pages 55 to 61. Audit response to risks identified As a result of performing the above procedures, we identified the following as key audit matters related to the potential risk of fraud: (a) the presentation of the group income statement, (b) the classification, valuation and presentation of energy contracts and (c) credit losses on financial assets within the Group’s energy supply businesses. The key audit matters section of our report explains the matters in more detail and also describes the specific procedures we performed in response to those key audit matters. Our procedures to respond to risks identified included the following: • reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the financial statements; • enquiring of management, the Audit and Risk Committee, in-house legal counsel and the Group’s ethics team concerning actual and potential litigation and claims; • reviewing the reporting to the Audit and Risk Committee on matters relating to fraud and potential non-compliance with laws and regulations including the Group’s whistleblowing programme; • performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud; • reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with HMRC, Ofgem, the FCA and the PRA. • in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business. We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists and significant component audit teams, and remained alert to any indications of fraud or non- compliance with laws and regulations throughout the audit. 98 Centrica plc Annual Report and Accounts 2020Financial Statements | Independent Auditor’s Report continued Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Company financial statements are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made or the part of the directors’ remuneration report to be audited is not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Other matters which we are required to address Auditor tenure Following the recommendation of the Audit and Risk Committee, we were appointed by the Shareholders on 22 May 2020 to audit the financial statements for the year ending 31 December 2020 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 4 years, covering the years ending 31 December 2017 to 31 December 2020. Consistency of the audit report with the additional report to the Audit and Risk Committee Our audit opinion is consistent with the additional report to the Audit and Risk Committee we are required to provide in accordance with ISAs (UK). Use of our report This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. James Leigh FCA (Senior statutory auditor) For and on behalf of Deloitte LLP Statutory Auditor London, United Kingdom 24 February 2021 99 Centrica plc Annual Report and Accounts 2020Financial Statements Financial Statements Group Income Statement 2020 Business performance £m Exceptional items and certain re-measurements £m Notes Results for the year £m Business performance £m 2019 (restated) (i) Exceptional items and certain re-measurements £m Year ended 31 December Continuing operations Group revenue Cost of sales Re-measurement and settlement of energy contracts Gross profit/(loss) Operating costs before exceptional items and credit losses on financial assets Credit losses on financial assets Exceptional items – impairments Exceptional items – restructuring costs Exceptional items – net pension change (charge)/credit Exceptional items – net loss on significant disposals Operating costs Share of profits/(losses) of joint ventures and associates, net of interest and taxation Group operating profit/(loss) Net finance cost Profit/(loss) from continuing operations before taxation 4 5 7 5 5, 17 7 7 7 7 5 6, 7 4 8 Taxation on profit/(loss) from continuing operations 7, 9 Profit/(loss) from continuing operations after taxation Discontinued operations (ii) Profit/(loss) for the year Attributable to: Owners of the parent Non-controlling interests Earnings per ordinary share From continuing and discontinued operations Basic Diluted From continuing operations Basic Diluted Interim dividend paid per ordinary share Final dividend per ordinary share 7, 12 10 10 10 10 11 11 Results for the year £m 12,994 (8,358) (2,111) 2,525 (2,060) (112) (919) (323) 152 (33) 14,949 (12,616) – 2,333 (1,714) (195) – – – – (2,700) 4,118 (632) 786 – – (1,319) (154) (120) – 12,249 (8,498) (632) 3,119 (1,714) (195) (1,319) (154) (120) – 15,958 (13,124) – 2,834 (2,060) (112) – – – – (2,964) 4,766 (2,111) (309) – – (919) (323) 152 (33) (1,909) (1,593) (3,502) (2,172) (1,123) (3,295) 23 447 (215) 232 (42) 190 213 403 378 25 (2) (809) – (809) 187 (622) 102 (520) (337) (183) 21 (362) (215) (577) 145 (432) 315 (117) 41 (158) Pence 0.7 0.7 (4.7) (4.7) – – (12) 650 (251) 399 (142) 257 171 428 419 9 (1) (1,433) – (1,433) 132 (1,301) (230) (1,531) (13) (783) (251) (1,034) (10) (1,044) (59) (1,103) (1,442) (1,023) (89) (80) Pence (17.8) (17.8) (16.8) (16.8) 1.50 – (i) Prior year results have been restated to remove the Direct Energy business from continuing operations, as the business has been classified as a discontinued operation. See note 3. (ii) Profit/(loss) from discontinued operations is entirely attributable to equity holders of the parent. The notes on pages 105 to 193 form part of these Financial Statements. 100 Centrica plc Annual Report and Accounts 2020 Group Statement of Comprehensive Income Year ended 31 December Loss for the year Other comprehensive income/(loss) Items that will be or have been reclassified to the Group Income Statement: Impact of cash flow hedging (net of taxation) Exchange differences on translation of foreign operations Exchange differences reclassified to Group Income Statement on disposal Gains on net investment hedging (net of taxation) (i) Items that will not be reclassified to the Group Income Statement: Net actuarial losses on defined benefit pension schemes (net of taxation) (Losses)/gains on revaluation of equity instruments measured at fair value through other comprehensive income (net of taxation) Share of other comprehensive income of associates, net of taxation Other comprehensive loss, net of taxation Total comprehensive loss for the year Attributable to: Owners of the parent Non-controlling interests Total comprehensive (loss)/income attributable to owners of the parent arises from: Continuing operations Discontinued operations (i) The Group recommenced its strategy of net investment hedging in advance of the disposal of Direct Energy. See note S2 for details. The notes on pages 105 to 193 form part of these Financial Statements. Notes 2020 £m (117) 2019 £m (1,103) S4 12 S4 S4 S4 14, S4 S11 9 (4) (54) 12 40 (126) (18) – (379) (387) (4) 2 58 (318) (435) (277) (158) (571) 294 (277) 29 (504) (1,607) (1,511) (96) (1,386) (125) (1,511) i F n a n c a i l S t a t e m e n t s Centrica plc Annual Report and Accounts 2020 101 Financial Statements Group Statement of Changes in Equity 1 January 2019 Loss for the year Other comprehensive loss Employee share schemes and other share transactions Scrip dividend (note 11) Dividends paid to equity holders (note 11) Distributions to non-controlling interests 31 December 2019 Profit/(loss) for the year Other comprehensive loss Employee share schemes and other share transactions 31 December 2020 Share capital £m 354 Share premium £m 2,240 – – – 6 – – – – – 90 – – 360 2,330 – – 1 361 – – 17 2,347 Retained earnings £m 725 (1,023) – (10) – (561) – (869) 41 – (8) (836) Other equity £m (174) – (488) 53 – – – (609) – (318) 12 (915) Total £m 3,145 (1,023) (488) 43 96 (561) – 1,212 41 (318) 22 957 Non-controlling interests £m 803 (80) (16) – – – (124) 583 (158) – – 425 Total equity £m 3,948 (1,103) (504) 43 96 (561) (124) 1,795 (117) (318) 22 1,382 The notes on pages 105 to 193 form part of these Financial Statements. 102 Centrica plc Annual Report and Accounts 2020 Group Balance Sheet Non-current assets Property, plant and equipment Interests in joint ventures and associates Other intangible assets Goodwill Deferred tax assets Trade and other receivables, and contract-related assets Derivative financial instruments Retirement benefit assets Securities Current assets Trade and other receivables, and contract-related assets Inventories Derivative financial instruments Current tax assets Securities Cash and cash equivalents Assets of disposal groups classified as held for sale Total assets Current liabilities Derivative financial instruments Trade and other payables, and contract-related liabilities Current tax liabilities Provisions for other liabilities and charges Bank overdrafts, loans and other borrowings Liabilities of disposal groups classified as held for sale Non-current liabilities Deferred tax liabilities Derivative financial instruments Trade and other payables, and contract-related liabilities Provisions for other liabilities and charges Retirement benefit obligations Bank loans and other borrowings Total liabilities Net assets Share capital Share premium Retained earnings Other equity Total shareholders’ equity Non-controlling interests Total shareholders’ equity and non-controlling interests 31 December 2020 £m 31 December 2019 £m Notes 13 14 15 15 16 17 19 22 24 17 18 19 24 24 12 19 20 21 24 12 16 19 20 21 22 24 25 S4 S11 2,643 843 1,011 929 636 145 366 – 134 6,707 2,801 324 1,224 132 – 1,820 6,301 4,111 10,412 17,119 (747) (3,722) (235) (188) (787) (5,679) (1,986) (7,665) (149) (181) (114) (2,438) (601) (4,589) (8,072) 3,133 1,306 1,455 2,578 553 154 493 56 131 9,859 4,839 431 1,320 115 124 1,342 8,171 124 8,295 18,154 (1,854) (5,533) (339) (284) (857) (8,867) (18) (8,885) (151) (291) (152) (2,175) (219) (4,486) (7,474) (15,737) (16,359) 1,382 361 2,347 (836) (915) 957 425 1,382 1,795 360 2,330 (869) (609) 1,212 583 1,795 The Financial Statements on pages 100 to 193, of which the notes on pages 105 to 193 form part, were approved and authorised for issue by the Board of Directors on 24 February 2021 and were signed below on its behalf by: Chris O’Shea Group Chief Executive Kate Ringrose Group Chief Financial Officer Centrica plc Registered No: 03033654 Centrica plc Annual Report and Accounts 2020 103 i F n a n c a i l S t a t e m e n t s Financial Statements Group Cash Flow Statement Year ended 31 December Continuing operations: Group operating loss including share of results of joint ventures and associates (Deduct)/add back share of (profits)/losses of joint ventures and associates, net of interest and taxation Group operating loss before share of results of joint ventures and associates Add back/(deduct): Depreciation, amortisation, write-downs, impairments and write-backs Loss/(profit) on disposals Increase/(decrease) in provisions Cash contributions to defined benefit schemes in excess of service cost income statement charge Employee share scheme costs Unrealised (gains)/losses arising from re-measurement of energy contracts Exceptional charges reflected directly in operating profit Operating cash flows before movements in working capital relating to business performance and payments relating to taxes and exceptional charges Decrease/(increase) in inventories Decrease in trade and other receivables and contract-related assets relating to business performance Decrease in trade and other payables and contract-related liabilities relating to business performance Operating cash flows before payments relating to taxes and exceptional charges Taxes paid Payments relating to exceptional charges in operating costs Net cash flow from continuing operating activities Net cash flow from discontinued operating activities Net cash flow from operating activities Continuing operations: Purchase of businesses, net of cash acquired Sale of businesses Purchase of property, plant and equipment and intangible assets Sale of property, plant and equipment and intangible assets Investments in joint ventures and associates Dividends received from joint ventures and associates Receipt of sub-lease capital payments Interest received Settlement and sale of securities Net cash flow from continuing investing activities Net cash flow from discontinued investing activities Net cash flow from investing activities Continuing operations: Payments for own shares Proceeds from sale of forfeited share capital Distribution to non-controlling interests Financing interest paid Repayment of borrowings and capital element of leases Equity dividends paid Net cash flow from continuing financing activities Net cash flow from discontinued financing activities Net cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents including overdrafts at 1 January Effect of foreign exchange rate changes Notes 6 9 12 4 14 14 24 24 S4 2020 £m 2019 (restated) (i) £m (362) (21) (383) 2,217 28 46 (42) 34 (666) 49 1,283 4 363 (571) 1,079 (2) (120) 957 443 1,400 – 43 (489) – (10) 62 3 7 121 (263) (22) (285) (30) – – (202) (234) – (466) (16) (482) 633 794 (34) (783) 13 (770) 2,143 (32) (21) (493) 30 207 220 1,284 (28) 240 (182) 1,314 (80) (264) 970 280 1,250 (27) 63 (757) 6 (1) 1 3 11 50 (651) 148 (503) – 2 (124) (238) (227) (471) (1,058) (19) (1,077) (330) 1,128 (4) 794 1,342 (548) – Cash and cash equivalents including overdrafts at 31 December 24 1,393 Included in the following line of the Group Balance Sheet: Cash and cash equivalents Overdrafts included within current bank overdrafts, loans and other borrowings Assets of disposal groups classified as held for sale 1,820 (534) 107 (i) Prior year results have been restated to remove the Direct Energy business from continuing operations, as the business has been classified as a discontinued operation. See note 3. The notes on pages 105 to 193 form part of these Financial Statements. 104 Centrica plc Annual Report and Accounts 2020 Notes to the Financial Statements Notes to the Financial Statements provide additional information required by statute, accounting standards or Listing Rules to explain a particular feature of the consolidated Financial Statements. The notes to these Financial Statements focus on areas that are key to understanding our business. Additional information that we are required to disclose by accounting standards or regulation is disclosed in the Supplementary Information (notes S1 to S11). In addition, for clarity, notes begin with a simple introduction outlining its purpose. 1. Basis of preparation and summary of significant new accounting policies and reporting changes This section details new accounting standards, amendments to standards and interpretations, whether these are effective in 2020 or later years, and if and how these are expected to impact the financial position and performance of the Group. The principal accounting policies applied in the preparation of these consolidated Financial Statements are set out below and in the Supplementary Information (note S2). Unless otherwise stated, these policies have been consistently applied to the years presented. (a) Basis of preparation The consolidated Financial Statements have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. The consolidated Financial Statements have been prepared on the historical cost basis except for: certain gas and oil inventory, derivative financial instruments, financial instruments required to be measured at fair value through profit or loss or other comprehensive income, and those financial instruments so designated at initial recognition, and the assets of the Group’s defined benefit pension schemes that have been measured at fair value; the liabilities of the Group’s defined benefit pension schemes that have been measured using the projected unit credit valuation method; and the carrying values of recognised assets and liabilities qualifying as hedged items in fair value hedges that have been adjusted from cost by the changes in the fair values attributable to the risks that are being hedged. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity and areas where assumptions and estimates are significant to the consolidated Financial Statements are described in notes 2 and 3. (b) New accounting policies, standards, amendments and interpretations effective or adopted in 2020 From 1 January 2020, the following standards and amendments are effective in the Group’s consolidated Financial Statements: • Amendments to IFRS 3: ‘Business combinations’; • Amendments to IAS 1: ‘Presentation of financial statements’ and IAS 8: ‘Accounting policies, changes in accounting estimates and errors’; and • Conceptual Framework for Financial Reporting 2018. The amendments to IFRS 3 modify the definition of a business in order to assist entities in determining whether an acquisition falls within the scope of the standard. The amendments to IAS 1 and IAS 8 clarify the definition and application of the materiality concept in financial reporting. The amendments to the Conceptual Framework make a number of clarifications and modifications to the concepts underpinning IFRS. These changes and other amendments effective during the year did not materially impact the consolidated Financial Statements. As a result of the economic impacts of the COVID-19 pandemic, a number of government programmes have been put into place to support businesses and consumers. Examples of such initiatives include the UK’s Coronavirus Job Retention Scheme. In accounting for the impacts of these measures, the Group has applied IAS 20: ‘Government grants’. Under the Group’s accounting policy, grants are recognised when there is reasonable assurance that the Group will comply with the conditions attaching to them, and that the grant will be received. Government grants are recognised in the Group Income Statement on a systematic basis over the periods in which the related costs that they are intended to compensate are recognised. Grants related to income are deducted in reporting the related expense and are therefore presented net in the Group Income Statement. Government grants received in advance of the Group meeting the criteria for recognition in the Group Income Statement are deferred and presented within Trade and other payables. There is no impact of this policy on prior periods. During 2020, the Group recognised an amount totalling £27 million receivable under the UK Government’s Coronavirus Job Retention Scheme. This has been presented net in Cost of sales and Operating costs before exceptional items and credit losses on financial assets in the Group Income Statement. Additionally, under a customer support programme introduced by the Government of Alberta in Canada, the Group recognised a reduction in credit losses for receivables amounting to £4 million. A further £1 million was received under a Texas customer support programme. The amounts relating to North America have been presented net in discontinued operations costs. In Denmark a mandatory, temporary deferral of sales tax payments gave rise to a delay in cash outflows amounting to £158 million during 2020. There was no impact of this deferral at 31 December 2020, with sales tax having been paid according to the normal requirements by the year end. Centrica plc Annual Report and Accounts 2020 105 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued (d) Restatements The Group has redefined its operating segments during the year to reflect the way in which the business is now organised. Operating segments are now defined as: • British Gas; • Energy Marketing & Trading; • Centrica Business Solutions; • Bord Gáis Energy; and • Upstream The revised operating segments incorporate related products and services, as well as the major factors that influence the performance of these products and services. Following the restructuring of the Group these revised segments reflect the information and reporting Management receive to enable them to make decisions on performance and strategy. Further information on the operating segments of the Group is shown at note 4. As described in note 3, the disposal of the Group’s North American Direct Energy business, which completed on 5 January 2021, has led to the classification of Direct Energy as a discontinued operation. Comparatives in the Group Income Statement and Group Cash Flow Statement have been restated accordingly. 1. Basis of preparation and summary of significant new accounting policies and reporting changes (c) Standards and amendments that are issued but not yet applied by the Group At the date of authorisation of these consolidated Financial Statements, the Group has not applied the following new and revised standards and amendments that have been issued but are not yet effective: • IFRS 17: ‘Insurance contracts’, effective from 1 January 2023; • Amendments to IAS 37; ‘Provisions, Contingent Liabilities and Contingent Assets’, effective from 1 January 2022; • Amendments to IAS 1: ‘Presentation of financial statements’, effective from 1 January 2023; • ‘Annual Improvements to IFRS 2018-2020’, effective 1 January 2022; and • ‘Interest Rate Benchmark Reform – Phase 2 – Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16’, effective from 1 January 2021. IFRS 17 will not be effective before 1 January 2023. The Group currently has fixed-fee service contracts that it accounts for as insurance contracts under IFRS 4: ‘Insurance contracts’. Under IFRS 17, subject to certain conditions, there is an accounting policy choice to account for these contracts under IFRS 17 or IFRS 15, which is being evaluated as part of the implementation project. Work is ongoing to determine the full impact of application. The amendments to IAS 1 clarify the meaning of settlement in the context of liabilities, and the circumstances in which liabilities are classified as current or non-current. The amendments to IAS 37 specify the costs that an entity should include when assessing whether a contract is onerous and therefore requires a provision. The Group does not expect a significant financial reporting impact to arise as a result of the changes to IAS 1 and IAS 37 or the Annual Improvements to IFRS. Amendments to IFRS made as a result of Phase 2 of the International Accounting Standards Board’s project on interest rate benchmark reform provide relief from the discontinuation of hedge accounting that might otherwise be required on the transition to alternative rates in the hedged item or hedging instrument. The amendments also provide relief from the immediate recognition of gains or losses in the income statement where changes to contractual cash flows in leases or financial assets and liabilities are required as a result of interest rate benchmark reform. The Group holds interest rate derivatives in hedging relationships and is currently assessing the changes that will need to be made to these as a result of interest rate reform. The Group does not expect a significant financial reporting impact to arise as a result of these changes. Management does not expect other issued but not effective amendments or standards, or standards not discussed above to have a material impact on the consolidated Financial Statements. 106 Centrica plc Annual Report and Accounts 2020 2. Centrica specific accounting measures This section sets out the Group’s specific accounting measures applied in the preparation of the consolidated Financial Statements. These measures enable the users of the accounts to understand the Group’s underlying and statutory business performance separately. (a) Use of adjusted performance measures The Directors believe that reporting adjusted measures (revenue, margin, profit, earnings per share and cash flow) provides additional useful information on business performance and underlying trends. These measures are used for internal performance purposes, are not defined terms under IFRS and may not be comparable with similarly titled measures reported by other companies. Management uses adjusted revenue, gross margin and adjusted operating profit to evaluate segment performance. They are defined as revenue/gross margin/operating profit before: • exceptional items; and • certain re-measurements. Exceptional items and certain re-measurements are excluded because these items are considered by the Directors to distort the Group’s underlying business performance. See section (b) of this note for further details. Adjusted earnings is defined as earnings before: • exceptional items net of taxation; and • certain re-measurements net of taxation. A reconciliation of adjusted earnings and adjusted earnings per share is provided in note 10. Free cash flow is used by management to assess the cash generating performance of each segment. Segmental free cash flow is defined as net cash flow from operating and investing activities before: • deficit reduction payments made to the UK defined benefit pension schemes; • movements in variation margin and collateral that are included in net debt; • interest received; • sale, settlement and purchase of securities; and • taxes paid and refunded. Segmental free cash flow as assessed by management excludes cash flows relating to tax. This is because the effect of group relief and similar reliefs could distort the measure of segment performance. As a Group-wide measure, free cash flow includes taxes paid and refunded. Free cash flow gives a measure of the cash generation performance of the business after taking account of the need to maintain its capital asset base. By excluding deficit reduction payments and movements in variation margin and collateral, which are predominantly triggered by wider market factors and, in the case of collateral and margin movements, represent timing differences, free cash flow gives a measure of the underlying performance of the Group. Interest received and cash flows from the sale, settlement and purchase of securities are excluded from free cash flow as these items are included in the Group’s net debt measure, and are therefore viewed by the Directors as related to the manner in which the Group finances its operations. (b) Exceptional items and certain re-measurements The Group reflects its underlying financial results in the business performance column of the Group Income Statement. To be able to provide users with this clear and consistent presentation, the effects of ‘certain re-measurements’ of financial instruments, and ‘exceptional items’, are reported in a different column in the Group Income Statement. The Group is an integrated energy business. This means that it utilises its knowledge and experience across the gas and power (and related commodity) value chains to make profits across the core markets in which it operates. As part of this strategy, the Group enters into a number of forward energy trades to protect and optimise the value of its underlying production, generation, storage and transportation assets and contracts (and similar capacity or off-take arrangements), as well as to meet the future needs of its customers (downstream demand). These trades are designed to reduce the risk of holding such assets, contracts or downstream demand and are subject to strict risk limits and controls. Primarily because some of these trades include terms that permit net settlement, they are prohibited from being designated as ‘own use’ and so IFRS 9: Financial Instruments requires them to be individually fair valued. Fair value movements on these commodity derivative trades do not reflect the underlying performance of the business because they are economically related to our upstream assets, capacity/off-take contracts or downstream demand, which are typically not fair valued. Therefore, these certain re-measurements are reported separately and are subsequently reflected in business performance when the underlying transaction or asset impacts profit or loss. The effects of these certain re-measurements are presented within either revenue or cost of sales when recognised in business performance depending on the nature of the contract. They are managed separately from proprietary energy trading activities where trades are entered into speculatively for the purpose of making profits in their own right. These proprietary trades are included in revenue in the business performance column of the Group Income Statement. The Group’s result for the year presents both realised and unrealised fair value movements on all derivative energy contracts within the ‘Re-measurement and settlement of energy contracts’ line item. Exceptional items are those items that, in the judgement of the Directors, need to be disclosed separately by virtue of their nature, size or incidence. Again, to ensure the business performance column reflects the underlying results of the Group, these exceptional items are also reported in the separate column in the Group Income Statement. Items that may be considered exceptional in nature include disposals of businesses or significant assets, business restructurings (including property rationalisation costs), significant onerous contract charges/releases, debt repurchase costs, certain pension past service credits/costs, asset impairments/write-backs, the tax effects of these items and the effect of changes in UK upstream tax rates. The Group distinguishes between business performance asset impairments/write-backs and exceptional impairments/write-backs on the basis of the underlying driver of the impairment, as well as the magnitude of the impairment. Drivers that are deemed to be outside of the control of the Group (e.g. commodity price changes) give rise to exceptional impairments. Additionally, impairment charges that are of a one-off nature (e.g. reserve downgrades or one-time change in intended use of an asset) and significant enough value to distort the underlying results of the business are considered to be exceptional. Other impairments that would be expected in the normal course of business, such as unsuccessful exploration activity (dry holes), are reflected in business performance. Centrica plc Annual Report and Accounts 2020 107 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 3. Critical accounting judgements and key sources of estimation uncertainty This section sets out the key areas of judgement and estimation that have the most significant effect on the amounts recognised in the consolidated Financial Statements. (a) Critical judgements in applying the Group’s accounting policies In addition to the judgements described above, management has made the following key judgements in applying the Group’s accounting policies that have the most significant effect on the consolidated Group Financial Statements. Spirit Energy consolidation During 2017, the Group acquired Bayerngas Norge’s exploration and production business and combined this with the Group’s existing exploration and production business to form the Spirit Energy business (SE). The Group, through its board majority, can control decisions that represent Board Reserved Matters and the Directors consider that these rights provide control over the relevant activities that most significantly influence the variable returns of the SE business. The Group has concluded that it controls SE and consequently SE is fully consolidated with a non-controlling interest of 31%. Metering contracts In previous years, as part of the smart meter roll-out, the Group renewed meter rental arrangements with third parties. The Group assessed that these were not leases under IAS 17 and IFRIC 4 because at inception of the contract there were no specified assets, the Group did not have the right to physically or operationally control the smart meters and other parties took more than an insignificant amount of the output from the assets. This assessment was grandfathered on adoption of IFRS 16. A reassessment of the contracts was performed in accordance with IFRS 16, following renegotiations of the meter rental arrangements during 2019 and 2020. On the basis that the asset has a predetermined use and the Group neither has the right to operate the asset, nor was involved in its design, the conclusion that these arrangements are not leases continues to be appropriate. LNG contracts The Group is active in the liquified natural gas (LNG) market, both procuring long-term LNG supply arrangements and transacting in shorter-term LNG cargoes. As part of its operations in the market, the Group optimises its contractual positions in order to meet customer demand for physical commodity. In response to the continuing development of the global LNG market which, consistent with prior years, is not considered to be active, the Group has reviewed its portfolio of LNG transactions and contracts. It has judged that its activities are carried out for the purpose of receipt or delivery of physical commodity in accordance with its expected purchase and sale requirements. As a result, the Group’s contracts to buy and sell LNG are outside the scope of IFRS 9, and are accounted for on an accruals basis. Assets held for sale and discontinued operations On 24 July 2020, the Group announced that it had agreed to dispose of its North American supply, services and trading business, Direct Energy, to NRG for headline consideration of $3.6 billion (£2.7 billion) on a debt free, cash free basis. At the time of the announcement, the disposal was subject to shareholder and regulatory approvals, all of which were obtained before 31 December 2020. 108 Centrica plc Annual Report and Accounts 2020 In applying IFRS 5: ‘Non-current assets held for sale and discontinued operations’, the Group has judged that the assets and liabilities comprising the disposal group should be classified as held for sale as at 24 July 2020. This is on the basis that at that point, the disposal group was available for immediate sale, subject only to terms that are customary for sales of such assets, and the sale was highly probable. Additionally, because the disposal group represents a separate major line of business and geographical operations, its results have been presented as discontinued operations in the Group Income Statement, Group Statement of Other Comprehensive Income and Group Cash Flow Statement. The transaction completed on 5 January 2021. The Group’s investments in Spirit Energy and Nuclear were not judged to be assets held for sale at 31 December 2020 because, at that date, their disposal was not considered highly probable within the next year. (b) Key sources of estimation uncertainty The sections below detail the assumptions the Group makes about the future and other major sources of estimation uncertainty when measuring its assets and liabilities at the reporting date. The information given relates to the sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to those assets and liabilities in the next financial year. Estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, including current and expected economic conditions, and, in some cases, actuarial techniques. Although these estimates and associated assumptions are based on management’s best knowledge of current events and circumstances, actual results may differ. Impairment of long-lived assets The Group makes judgements in considering whether the carrying amounts of its long-lived assets (principally Upstream gas and oil assets, Nuclear investment (20% economic interest accounted for as an investment in associate) and goodwill) or cash generating units (CGUs) are recoverable and estimates their recoverable amounts. Upstream gas and oil assets The recoverable amount of the Group’s gas and oil assets is determined by discounting the post-tax cash flows expected to be generated by the assets over their lives taking into account those assumptions that market participants would consider when assessing fair value. The cash flows are derived from projected production profiles of each field, based predominantly on expected 2P reserves and take into account forward prices for gas and liquids over the relevant period. Where forward market prices are not available, prices are determined based on the median price of a collection of third- party comparator curves. 2020 has seen significant reductions in forward commodity prices, both in terms of observable market prices and forecast forward prices. This price suppression has been exacerbated by the reduction in demand for commodities experienced as a result of the COVID-19 pandemic. This has increased the level of estimation uncertainty in determining the value of gas and oil assets. Similarly, there is significant uncertainty around future investment by the Group in the Greater Warwick Area exploration and evaluation asset. As a result impairment charges have been booked. Further details of the assumptions used in determining the recoverable amounts, the impairments booked during the year and sensitivity to the assumptions are provided in note 7. 3. Critical accounting judgements and key sources of estimation uncertainty Nuclear investment The recoverable amount of the Nuclear investment is based on the value of the existing UK nuclear fleet operated by EDF. The existing fleet value is calculated by discounting pre-tax cash flows derived from the stations based on forecast power generation and power prices, whilst taking account of outages and the likely operational lives of the stations. Suppression of power prices as a result of the COVID-19 pandemic has increased the level of uncertainty in determining the value of the Group’s investment in Nuclear. Further details of the methodology, assumptions, impairment booked during the year and related sensitivities are provided in note 7. Goodwill Goodwill does not generate independent cash flows and accordingly is allocated at inception to specific CGUs or groups of CGUs for impairment testing purposes. The recoverable amounts of these CGUs are derived from estimates of future cash flows and hence the goodwill impairment tests are also subject to these key estimates. The results of these tests may then be verified by reference to external market valuation data. The impact of the COVID-19 pandemic on commodity prices has increased the level of estimation uncertainty surrounding the valuation of goodwill in the Upstream segment in particular. As described above, there is estimation uncertainty in determining the value of gas and oil assets, leading to a write off in Upstream goodwill. Additionally, the disposal of the Group’s Direct Energy business, along with the restructuring of the Group’s operations and reduced earnings expectations as a result of COVID-19 has impacted the carrying value of goodwill associated with the Centrica Business Solutions business, subjecting the measurement of the asset to increased estimation uncertainty. Further details on the goodwill balances, assumptions used in determining the recoverable amounts and impairment booked during the year are provided in notes 7, 15(b) and S2. Sensitivity to the assumptions is also found in note 7 for goodwill allocated to impaired CGUs in the year. Centrica Home Solutions intangible assets As a result of the restructuring of the Group’s operations, management have reassessed the strategic interaction between the Centrica Home Solutions and British Gas supply and services businesses and as a result have reduced forecast cash flow for the Centrica Home Solutions operations that are now part of the British Gas operating segment. This has given rise to an impairment of certain software assets. Further details of the methodology, assumptions, impairment booked during the year and related sensitivities are provided in note 7. Credit provisions for trade and other receivables The economic effects of the COVID-19 pandemic have impacted the ability of the Group’s customers to pay amounts due. While the effect on customers has been mitigated by a number of government support and stimulus schemes, the level of estimation uncertainty in determining the credit provisions required for customers in different sectors and geographies has increased. The methodology for determining provisions for credit losses on trade and other receivables and the level of such provision, along with associated sensitivities, are set out in note 17. Although the provisions recognised are considered appropriate, the use of different assumptions or changes in economic conditions could lead to movements in the provisions and therefore impact the Group Income Statement. Pensions and other post-employment benefits The cost of providing benefits under defined benefit pension schemes is determined separately for each of the Group’s schemes under the projected unit credit actuarial valuation method. Actuarial gains and losses are recognised in full in the period in which they occur. The key assumptions used for the actuarial valuation are based on the Group’s best estimate of the variables that will determine the ultimate cost of providing post-employment benefits. The Group is permitted to recognise a pension scheme asset because it has an unconditional right to a refund on any winding up of the schemes or if gradual settlement of liabilities over time is assumed. The Group’s defined benefit schemes hold part of their plan asset portfolio as unquoted assets. These include private equity and property interests that are typically subject to valuation uncertainty. The economic uncertainty arising as a result of the COVID-19 pandemic has increased this level of uncertainty. The valuation of these assets is based on the latest asset manager views and other relevant benchmarks. Further details, including sensitivities to these assumptions, are provided in note 22. Cheniere LNG contract valuation The Group’s 20-year agreement with Cheniere, under which LNG is purchased from the Sabine Pass liquefaction plant in the US, has been assessed to determine if the contract should be considered onerous. As at 31 December 2020, the Group is committed to make minimum payments of $5.1 billion (£3.7 billion) over the remaining life of the arrangement. Further details of the Cheniere contract are provided in note 23. The combined intrinsic and extrinsic value of the arrangement is estimated to be positive and therefore no onerous contract provision has been recognised. The intrinsic value is based on forecast future cash flows from the current optimal dispatch profile and based on the current forecast of gas price spreads between Henry Hub and NBP, and Henry Hub and the Asian LNG markets. The extrinsic value is based on the expected future cash flows from having contractual flexibility to deliver to alternate locations as demand changes, and from the potential that future gas price spreads could be higher than currently forecast due to volatility in market prices. During the year, gas spreads have narrowed considerably, meaning that the estimated intrinsic value of the contract is negative based on forecast spreads as at 31 December 2020. The value of the contract is therefore reliant on the anticipated extrinsic value calculated using a complex model with set parameters, which increases the level of estimation uncertainty. The key parameters in the model include price volatilities and the bounded range of future gas spreads which are both set using historical price data. The valuation is sensitive to these assumptions, and the relationship between a change in the range of gas spreads and the potential change in value is not linear, and there is a risk of a material onerous contact provision. However, based on forecasts as at the reporting date, a reasonably possible change of 50 cents in the bounded range of future gas spreads coupled with a 10% change in future price volatility would impact the overall contract value by +/- c.$90 million (c.£66 million), and this level of reduction in these parameters would not give rise to a material charge to the Group Income Statement. Centrica plc Annual Report and Accounts 2020 109 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Decommissioning costs The estimated cost of decommissioning at the end of the producing lives of gas and oil fields is reviewed periodically and is based on reserves, price levels and technology at the balance sheet date. Provision is made for the estimated cost of decommissioning at the balance sheet date. The payment dates of total expected future decommissioning costs are uncertain and dependent on the lives of the facilities, but are currently anticipated to be incurred until the 2040s. The level of provision held is also sensitive to the discount rate used to discount the estimated decommissioning costs. The real discount rate used to discount the decommissioning liabilities at 31 December 2020 is 0% (2019: 1.2%). This change was made in response to the continued suppression of market risk-free rates and increased the provision by approximately £220 million. A 1% change in this discount rate would change the decommissioning liability by approximately £180 million. Gas and liquids reserves The volume of proven and probable (2P) gas and liquids reserves is an estimate that affects the unit of production method of depreciating producing gas and liquids property, plant and equipment (PP&E) as well as being a significant estimate affecting decommissioning and impairment calculations. The factors impacting gas and liquids estimates, the process for estimating reserve quantities and reserve recognition is described on page 205. The impact of a change in estimated 2P reserves is dealt with prospectively by depreciating the remaining book value of producing assets over the expected future production. If 2P reserves estimates are revised downwards, earnings could be affected by higher depreciation expense or an immediate write-down (impairment) of the asset’s book value. A change in reserves estimates could also change the timing of decommissioning activity, which could change the carrying value of the Group’s provisions. The complex interaction of field-specific factors means that it is not possible to give a meaningful sensitivity of the Group’s financial position or performance to gas and liquids reserves estimates. Details of the Group’s 2P reserves are given on page 205. Details of impairments of exploration and production fields and goodwill, along with associated sensitivities, are given in note 7. Determination of fair values – energy derivatives Fair values of energy derivatives are estimated by reference in part to published price quotations in active markets and in part by using valuation techniques. More detail on the assumptions used in determining fair valuations of energy derivatives is provided in note S6 and on the sensitivities to these assumptions in note S3. 3. Critical accounting judgements and key sources of estimation uncertainty Revenue recognition – unread gas and electricity meters Revenue for energy supply activities includes an assessment of energy supplied to customers between the date of the last meter reading and the year end (known as unread revenue). Unread gas and electricity comprises both billed and unbilled revenue. It is estimated through the billing systems, using historical consumption patterns, on a customer- by-customer basis, taking into account weather patterns, load forecasts and the differences between actual meter readings being returned and system estimates. Actual meter readings continue to be compared to system estimates between the balance sheet date and the finalisation of the accounts. An assessment is also made of any factors that are likely to materially affect the ultimate economic benefits that will flow to the Group, including bill cancellation and re-bill rates. Estimated revenue is restricted to the amount the Group expects to be entitled to in exchange for energy supplied. The judgements applied, and the assumptions underpinning these judgements, are considered to be appropriate. However, a change in these assumptions would have an impact on the amount of revenue recognised. The primary source of estimation uncertainty relating to unread revenue arises in the respect of gas and electricity sales to UK downstream customers in British Gas and Centrica Business Solutions. At 31 December 2020 unread revenue arising from these customers amounted to £1,544 million (2019: £1,348 million). The judgements applied, and the assumptions underpinning these judgements in arriving at this estimated amount, are considered to be appropriate. However, a change in these assumptions would have an impact on the amount of revenue recognised. Based on prior experience of eventual outcomes, a change in assumptions made in reaching this estimate could impact the amount of unread revenue recognised by approximately £30 million. Industry reconciliation process – cost of sales Industry reconciliation procedures are required as differences arise between the estimated quantity of gas and electricity the Group deems to have supplied and billed customers, and the estimated quantity industry system operators deem the individual suppliers, including the Group, to have supplied to customers. The difference in deemed supply is referred to as imbalance. The reconciliation procedures can result in either a higher or a lower value of industry deemed supply than has been estimated as being supplied to customers by the Group, but in practice tends to result in a higher value of industry deemed supply. The Group reviews the difference to ascertain whether there is evidence that its estimate of amounts supplied to customers is inaccurate or whether the difference arises from other causes. The Group’s share of the resulting imbalance is included within commodity costs charged to cost of sales. Management estimates the level of recovery of imbalance that will be achieved either through subsequent customer billing or through developing industry settlement procedures. The adjustments for imbalance at 31 December 2020 are not significant. Changes resulting from these management estimates can be material with adjustments of up to £30 million having been made in the last few years, although it could possibly be higher than these amounts in the future. 110 Centrica plc Annual Report and Accounts 2020 4. Segmental analysis The Group’s reporting segments are those used internally by management to run the business and make decisions. The Group’s segments are based on products and services as well as the major factors that influence the performance of these products and services across the geographical locations in which the Group operates. (a) Segmental structure During the year the Group’s reportable operating segments have been amended due to a change in the way management review and make decisions about the business. The types of products and services from which each reportable segment derived its income during the year are detailed below. Income sources are reflected in Group revenue unless otherwise stated: Segment British Gas Bord Gáis Energy Description (i) The supply of gas and electricity to residential customers in the UK; (ii) the installation, repair and maintenance of domestic central heating and related appliances, and the provision of fixed-fee maintenance/breakdown service and insurance contracts in the UK; and (iii) the supply of new technologies and energy efficiency solutions in the UK. (i) The supply of gas and electricity to residential and commercial and industrial customers in the Republic of Ireland; (ii) the installation, repair and maintenance of domestic central heating and related appliances in the Republic of Ireland; and (iii) power generation in the Republic of Ireland (i) Energy Marketing & Trading (i) The procurement, trading and optimisation of energy in the UK and Europe (i); (ii) the global procurement and sale of LNG; and (iii) the generation of power from the Spalding combined cycle gas turbine tolling contract. Centrica Business Solutions Upstream Direct Energy (Discontinued operation) (i) The supply of gas and electricity and provision of energy-related services to business customers in the UK (i); and (ii) the supply of energy efficiency solutions, flexible generation and new technologies to commercial and industrial customers in all geographies in which the Group operates. Flexible merchant generation is also provided to the UK system operator. (i) The production and processing of gas and oil and the development of new fields, principally within Spirit Energy, to maintain reserves in the UK and Europe (i); and (ii) the sale of power generated from nuclear assets in the UK. (i) The supply of gas and electricity, and provision of energy-related services to residential and business customers in North America; (ii) the installation, repair and maintenance of domestic central heating and cooling systems and related appliances, and the provision of fixed-fee maintenance/breakdown service and insurance contracts in North America; and (iii) the procurement, trading and optimisation of energy in North America (i). (i) Where income is generated from contracts in the scope of IFRS 9, this is included in re-measurement and settlement of energy contracts. Centrica plc Annual Report and Accounts 2020 111 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 4. Segmental analysis (b) Revenue Gross segment revenue includes revenue generated from the sale of products and services to other reportable segments of the Group. Group revenue reflects only the sale of products and services to third parties. Sales between reportable segments are conducted on an arm’s length basis. Year ended 31 December Continuing operations British Gas Bord Gáis Energy Energy Marketing & Trading Centrica Business Solutions Upstream Group revenue included in business performance Discontinued operations Direct Energy Business performance revenue arising from continuing and discontinued operations Less: revenue arising on contracts in scope of IFRS 9 included in business performance Less: Discontinued operations Group Revenue 2020 Less inter- segment revenue £m (2) – (175) (8) (539) (724) Gross segment revenue £m 7,887 820 2,917 2,131 1,918 15,673 Group revenue £m 7,885 820 2,742 2,123 1,379 Gross segment revenue £m 8,327 897 3,357 2,331 2,290 2019 (restated) (i) Less inter- segment revenue £m (1) – (271) (9) (963) Group revenue £m 8,326 897 3,086 2,322 1,327 14,949 17,202 (1,244) 15,958 9,483 – 9,483 10,867 – 10,867 25,156 (724) 24,432 28,069 (1,244) 26,825 (2,700) (9,483) 12,249 (2,964) (10,867) 12,994 (i) Segmental revenues have been restated to reflect the new operating structure of the Group, and to treat Direct Energy as a discontinued operation (see note 3). As a result of the change in segments, gross segment revenue has been restated to reflect the updated inter-segment trading. The table below shows the Group revenue arising from contracts with customers, and therefore in the scope of IFRS 15, and revenue arising from contracts in the scope of other standards. The key economic factors impacting the nature, timing and uncertainty of revenue and cash flows are considered to be driven by the type and broad geographical location of the customer. The analysis of IFRS 15 revenue below reflects these factors. 2020 Revenue from fixed-fee service and insurance contracts in scope of IFRS 4, and leasing contracts in scope of IFRS 16 £m Revenue from contracts with customers in scope of IFRS 15 £m Revenue in business performance arising from contracts in scope of IFRS 9 £m Group Revenue included in business performance £m Group Revenue £m 6,386 545 6,931 725 725 1,317 1,317 1,380 262 1,642 672 672 954 7,885 725 – 95 7,885 820 – – 8 – 1,317 1,425 2,742 1,650 473 2,123 672 12,249 707 2,700 1,379 14,949 11,287 962 Year ended 31 December Continuing operations Energy supply – UK Energy services British Gas Energy supply – Republic of Ireland Bord Gáis Energy Energy sales to trading and energy procurement counterparties Energy Marketing & Trading Energy supply – UK Energy services and solutions Centrica Business Solutions Gas and oil production Upstream 112 Centrica plc Annual Report and Accounts 2020 4. Segmental analysis Year ended 31 December Continuing operations Energy supply – UK Energy services British Gas Energy supply – Republic of Ireland Bord Gáis Energy Energy sales to trading and energy procurement counterparties Energy Marketing & Trading Energy supply – UK Energy services and solutions Centrica Business Solutions Gas and oil production Upstream 2019 (restated) (i) Revenue from fixed-fee service and insurance contracts in scope of IFRS 4, and leasing contracts in scope of IFRS 16 £m Revenue from contracts with customers in scope of IFRS 15 £m Revenue in business performance arising from contracts in scope of IFRS 9 £m Group Revenue included in business performance £m Group Revenue £m 6,629 699 7,328 779 779 1,256 1,256 1,574 269 1,843 779 779 11,985 998 8,326 – 8,326 – – 779 118 897 1,256 1,830 3,086 11 1,854 468 2,322 – 1,009 779 12,994 548 2,964 1,327 15,958 (i) Segmental revenues have been restated to reflect the new operating structure of the Group, and to treat Direct Energy as a discontinued operation (see note 3). Geographical analysis of revenue and non-current assets The Group monitors and manages performance by reference to its operating segments and not solely on a geographical basis. However, provided below is an analysis of revenue and certain non-current assets by geography. Year ended 31 December Continuing operations UK Republic of Ireland Norway North America Rest of the world Group revenue (based on location of customer) (restated) (i) Non-current assets (based on location of assets) (ii) 2020 £m 2019 £m 2020 £m 2019 £m 9,787 10,437 725 265 266 1,206 12,249 777 322 205 1,253 12,994 3,691 114 1,149 34 552 5,540 4,653 135 1,474 1,903 421 8,586 (i) Group revenues have been restated to treat Direct Energy as a discontinued operation (see note 3). (ii) Non-current assets comprise goodwill, other intangible assets, PP&E, interests in joint ventures and associates and non-financial assets within trade and other receivables, and contract- related assets. In 2020, assets of disposal groups held for sale are not included, and 2019 has been re-presented. Centrica plc Annual Report and Accounts 2020 113 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 4. Segmental analysis (c) Adjusted gross margin and adjusted operating profit The measure of profit used by the Group is adjusted operating profit. Adjusted operating profit is operating profit before exceptional items and certain re-measurements. This includes business performance results of equity-accounted interests. This note also details adjusted gross margin. Both measures are reconciled to their statutory equivalents. Adjusted gross margin Adjusted operating profit 2020 £m 2019 (restated) (i) £m 2020 £m 2019 (restated) (i) £m 1,473 1,591 154 281 181 244 149 305 282 507 281 42 174 (140) 90 447 252 699 (252) 447 786 (2) 304 50 138 (20) 178 650 251 901 (251) 650 (309) (1) (1,593) (362) (1,123) (783) Year ended 31 December Continuing operations British Gas Bord Gáis Energy Energy Marketing & Trading Centrica Business Solutions Upstream Adjusted gross margin/adjusted operating profit 2,333 2,834 Discontinued operations Direct Energy Total Group adjusted gross margin/adjusted operating profit Less Discontinued operations Business performance gross margin/operating profit from continuing operations Certain re-measurements (continuing operations) Share of re-measurement of certain associates’ energy contracts (net of taxation) Gross profit Exceptional items in operating profit (continuing operations) Operating loss after exceptional items and certain re-measurements 862 3,195 (862) 2,333 786 – 3,119 1,018 3,852 (1,018) 2,834 (309) – 2,525 (i) Segmental results have been restated to reflect the new operating structure of the Group, and to treat Direct Energy as a discontinued operation (see note 3). 114 Centrica plc Annual Report and Accounts 2020 4. Segmental analysis (d) Included within adjusted operating profit Presented below are certain items included within adjusted operating profit, including a summary of impairments of property, plant and equipment and write-downs relating to exploration and evaluation assets. Year ended 31 December Continuing operations British Gas Bord Gáis Energy Energy Marketing & Trading Centrica Business Solutions Upstream Other (ii) Discontinued operations Direct Energy Depreciation and impairments of PP&E Amortisation, write-downs and impairments of intangibles 2020 £m 2019 (restated) (i) £m 2020 £m 2019 (restated) (i) £m (49) (5) (30) (16) (519) (40) (659) (55) (7) (47) (13) (690) (39) (851) (122) (113) (12) (12) (37) (26) (44) (10) (11) (30) (63) (38) (253) (265) (15) (29) (32) (61) (i) Segmental results have been restated to reflect the new operating structure of the Group, and to treat Direct Energy as a discontinued operation (see note 3). (ii) The Other segment includes corporate functions, subsequently recharged. Impairments of PP&E During 2020, £2 million of impairments of PP&E were recognised within business performance in British Gas and Upstream. During 2019, a £73 million impairment charge was recognised within business performance (£39 million within Upstream and £34 million within Energy Marketing & Trading). Write-downs and impairments of intangible assets During 2020, £24 million of write-downs (2019: £60 million) relating to exploration and evaluation assets were recognised in the Upstream segment. All such current and prior year write-downs were recognised within business performance as they were not deemed exceptional in nature. During 2020, £3 million of other intangible assets were impaired within business performance in British Gas and Other (2019: £nil). The recoverable amount of these assets was £nil. Centrica plc Annual Report and Accounts 2020 115 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 4. Segmental analysis (e) Capital expenditure Capital expenditure represents additions, other than assets acquired as part of business combinations, to property, plant and equipment and intangible assets. Capital expenditure has been reconciled to the related cash outflow. Year ended 31 December Continuing operations British Gas Bord Gáis Energy Energy Marketing & Trading (ii) Centrica Business Solutions Upstream Other Discontinued operations Direct Energy (iii) Group total capital expenditure Less Discontinued operations Related to continuing operations: Capitalised borrowing costs (note 8) Inception of new leases and movements in payables and prepayments related to capital expenditure Purchases of emissions allowances and renewable obligation certificates (iv) Net cash outflow (continuing operations) Capital expenditure on property, plant and equipment Capital expenditure on intangible assets other than goodwill 2020 £m 2019 (restated) (i) £m 2020 £m 2019 (restated) (i) £m 19 4 206 17 275 8 529 13 542 (13) (7) (230) – 292 26 2 4 46 328 17 423 16 439 (16) (11) (35) – 377 546 7 61 354 62 5 493 12 59 249 218 23 1,035 1,054 303 1,338 (303) (6) 43 (875) 197 295 1,349 (295) (2) (20) (652) 380 (i) Segmental results have been restated to reflect the new operating structure of the Group, and to treat Direct Energy as a discontinued operation (see note 3). (ii) During the year the Group commenced the lease of two new LNG vessels. See note 23 for further details. (iii) A portion of Direct Energy capital expenditure occurred after it was classified as a disposal group held for sale. This amounted to £6 million of property, plant and equipment and £122 million of intangible assets. (iv) Purchases of emissions allowances and renewable obligation certificates of £482 million (2019: £384 million) in British Gas, £55 million (2019: £45 million) in Energy Marketing & Trading, and £338 million (2019: £223 million) in Centrica Business Solutions. 116 Centrica plc Annual Report and Accounts 2020 4. Segmental analysis (f) Free cash flow Free cash flow is used by management to assess the cash generating performance of each segment, after taking account of the need to maintain its capital asset base. By excluding deficit reduction payments and movements in collateral and margin cash, which are predominantly triggered by wider market factors, and in the case of collateral and margin movements, represent timing movements, free cash flow gives a measure of the underlying cash generation of the business. Free cash flow excludes investing cash flows that are related to net debt. This measure is reconciled to the net cash flow from operating and investing activities. Year ended 31 December Continuing operations British Gas Bord Gáis Energy Energy Marketing & Trading Centrica Business Solutions Upstream Other (i) Segmental free cash flow excluding tax Discontinued operations Direct Energy Group total segmental free cash flow excluding tax Taxes paid from continuing operations Taxes paid from discontinued operations Group total free cash flow Less Discontinued operations free cash flow (including tax) Free cash flow from continuing operations UK Pension deficit payments (note 22) Movements in variation margin and collateral included in net debt (ii) Interest received Sale and settlement of securities Net cash flow from continuing operating activities Net cash flow used in continuing investing activities Total cash flow from continuing operating and investing activities (i) The Other segment includes corporate functions. (ii) Excludes movement in variation margin and collateral from discontinued operations of £45 million (2019: £(66) million). . 2020 £m 271 35 241 (90) 193 37 687 401 1,088 (2) (25) 1,061 (376) 685 (175) 56 7 121 694 957 (263) 694 2019 £m 177 60 41 (74) 329 19 552 506 1,058 (80) (12) 966 (494) 472 (235) 21 11 50 319 970 (651) 319 Centrica plc Annual Report and Accounts 2020 117 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 5. Costs This section details the types of costs the Group incurs and the number of employees in each of our operations. (a) Analysis of costs by nature Year ended 31 December Transportation, distribution, capacity market and metering costs Commodity costs Depreciation, amortisation, impairments and write-downs Employee costs Other direct costs 2020 2019 (restated) (i) Cost of sales and settlement of certain energy contracts £m (3,572) (6,442) (554) (515) (1,533) Operating costs £m – – (358) (685) (671) Cost of sales and settlement of certain energy contracts £m (3,452) (6,990) (671) (548) (1,463) Total costs £m (3,572) (6,442) (912) (1,200) (2,204) Operating costs £m – – (445) (954) (661) Total costs £m (3,452) (6,990) (1,116) (1,502) (2,124) Costs included within business performance before credit losses on financial assets (12,616) (1,714) (14,330) (13,124) (2,060) (15,184) Credit losses on financial assets (net of recovered amounts) (note 17) – (195) (195) – (112) (112) Total costs included within business performance (12,616) (1,909) (14,525) (13,124) (2,172) (15,296) Adjustment for gross cost of settled energy contracts in the scope of IFRS 9 Exceptional items and re-measurement and settlement of energy contracts (note 7) Total costs within Group operating profit 4,118 – 4,118 4,766 – 4,766 (632) (9,130) (1,593) (3,502) (2,225) (2,111) (12,632) (10,469) (1,123) (3,295) (3,234) (13,764) (i) Comparatives have been restated to treat Direct Energy as a discontinued operation (see note 3). COVID-19 Support Schemes During 2020, the Group recognised an amount totalling £27 million receivable under the UK Government’s Coronavirus Job Retention Scheme. This has been presented net in Cost of sales and Operating costs before exceptional items and credit losses on financial assets in the Group Income Statement. Additionally, under a customer support programme introduced by the Government of Alberta in Canada, the Group recognised a reduction in credit losses for receivables amounting to £4 million. A further £1 million was received under a Texas customer support programme. The amounts relating to North America have been presented net in discontinued operations costs. (b) Employee costs The below employee costs exclude the costs of redundancy and similar termination benefits. Year ended 31 December Wages and salaries Social security costs Pension and other post-employment benefits costs Share scheme costs (note S4) Capitalised employee costs Employee costs included in exceptional items Cost recovery via Coronavirus government support programmes (ii) Employee costs recognised in business performance in the Group Income Statement 2020 Continuing operations £m Discontinued operations £m 2019 (restated) (i) Continuing operations £m Discontinued operations £m Total £m (979) (108) (171) (34) (1,292) 32 33 27 (246) (21) – (18) (285) 3 – – (1,225) (1,275) (129) (171) (52) (140) (191) (30) (1,577) (1,636) 35 33 27 35 99 – (355) (25) – (11) (391) 5 – – Total £m (1,630) (165) (191) (41) (2,027) 40 99 – (1,200) (282) (1,482) (1,502) (386) (1,888) (i) Comparatives have been restated to treat Direct Energy as a discontinued operation (see note 3). (ii) See above and note 1 for details of support received by the Group under Coronavirus support programmes. 118 Centrica plc Annual Report and Accounts 2020 5. Costs (c) Average number of employees during the year Year ended 31 December British Gas Bord Gáis Energy Energy Marketing & Trading Centrica Business Solutions Upstream Group Functions Direct Energy 2020 Number 17,088 281 361 2,295 912 2,183 2,633 2019 Number 19,509 244 309 2,041 941 2,995 3,108 25,753 29,147 During 2020, the Group restructure saw both a reduction in number of roles and a general re-allocation towards the customer-facing businesses, alongside other business moves. 6. Share of results of joint ventures and associates Share of results of joint ventures and associates represents the results of businesses where we exercise joint control or significant influence and generally have an equity holding of up to 50%. Share of results of joint ventures and associates The Group’s share of results of joint ventures and associates for the year ended 31 December 2020 principally arises from its interest in Nuclear – Lake Acquisitions Limited, an associate, reported in the Upstream segment. Year ended 31 December Income Expenses before exceptional items and re-measurement of certain contracts Exceptional items and re-measurement of certain contracts Operating profit/(loss) Financing costs Taxation on profit/(loss) Share of post-taxation results of joint ventures and associates 2020 Share of exceptional items and certain re- measurements £m Share of business performance £m 557 (501) – 56 (8) (25) 23 – – (2) (2) – – (2) Share of results for the year £m 557 Share of business performance £m 505 (501) (508) (2) 54 (8) (25) 21 – (3) (10) 1 (12) 2019 Share of exceptional items and certain re- measurements £m – – (1) (1) – – (1) Share of results for the year £m 505 (508) (1) (4) (10) 1 (13) Further information on the Group’s investments in joint ventures and associates is provided in notes 14 and S10. Centrica plc Annual Report and Accounts 2020 119 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 7. Exceptional items and certain re-measurements (a) Certain re-measurements Certain re-measurements are the fair value movements on energy contracts entered into to meet the future needs of our customers or to sell the energy produced from our upstream assets. These contracts are economically related to our upstream assets, capacity/off-take contracts or downstream demand, which are typically not fair valued, and are therefore separately identified in the current period and reflected in business performance in future periods when the underlying transaction or asset impacts the Group Income Statement. Year ended 31 December Certain re-measurements recognised in relation to energy contracts: Net gains arising on delivery of contracts Net gains/(losses) arising on market price movements and new contracts Net re-measurements included within gross profit Net losses arising on re-measurement of certain associates’ contracts (net of taxation) Net re-measurements included within Group operating profit Taxation on certain re-measurements (note 9) Net re-measurements after taxation for continuing operations Discontinued operations Net re-measurements from discontinued operations before taxation Taxation on certain re-measurements in discontinued operations Net re-measurements after taxation from discontinued operations Total certain re-measurements Year ended 31 December Total re-measurement and settlement of derivative energy contracts Less: IFRS 9 business performance revenue Less: IFRS 9 business performance cost of sales Unrealised certain re-measurements recognised in relation to energy contracts included in gross profit 2020 £m 520 266 786 (2) 784 (86) 698 184 (46) 138 836 2020 £m (632) (2,700) 4,118 786 2019 £m 143 (452) (309) (1) (310) 2 (308) (337) 101 (236) (544) 2019 £m (2,111) (2,964) 4,766 (309) 120 Centrica plc Annual Report and Accounts 2020 7. Exceptional items and certain re-measurements (b) Exceptional items Exceptional items are those items that, in the judgement of the Directors, need to be disclosed separately by virtue of their nature, size or incidence. Items which may be considered exceptional in nature include disposals of businesses or significant assets, business restructurings, significant onerous contract charges and releases, pension change costs or credits, significant debt repurchase costs and asset write-downs/impairments and write-backs. Year ended 31 December Exceptional items recognised in continuing operations Impairment of exploration and production assets (including the disposal of Danish fields) (i) Impairment and derecognition of power assets (ii) Impairment of Centrica Home Solutions (iii) Impairment of Centrica Business Solutions goodwill (iv) Restructuring costs (v) Net pension change (charge)/credit (vi) Net loss on significant disposals (including impairment of assets sold or held for sale) Exceptional items included within Group operating profit Net taxation on exceptional items (note 9) Net exceptional items recognised in continuing operations after taxation Net exceptional items recognised in discontinued operations after taxation Total exceptional items recognised after taxation Exceptional items recognised in discontinued operations Direct Energy disposal related costs (vii) Impairment of Centrica Home Solutions Restructuring costs (v) Net gain on significant disposals (including impairment of assets sold or held for sale) Exceptional items before taxation Net taxation on exceptional items (vii) Net exceptional items recognised in discontinued operations after taxation 2020 £m (644) (525) (72) (78) (154) (120) – 2019 £m (476) (381) (62) – (323) 152 (33) (1,593) (1,123) 273 (1,320) (36) (1,356) (29) – 7 – (22) (14) (36) 130 (993) 6 (987) – (15) (33) 68 20 (14) 6 (i) (ii) In the Upstream segment, impairments of exploration and production assets have been booked relating to the value of certain UK and Norwegian gas and oil fields and to Goodwill. This amounted to £580 million (post-tax £313 million) of field assets and £62 million (post-tax £62 million) of Goodwill and was predominantly due to the impact of a reduction in both near-term liquid prices and long-term price forecasts. Also included is the net reduction of decommissioning provisions (pre-tax £2 million, post-tax £nil) related to assets previously impaired through exceptional items. Separately, in the taxation line, a net write-off of £63 million of deferred tax positions associated with exploration and production tax losses, decommissioning carry-back and PRT has also been recorded related to the reduction in forecast prices. The disposal of the Danish gas and oil assets gave rise to an initial £8 million impairment write-back (post-tax £8 million) immediately prior to the transfer to Assets Held for Sale and then an actual loss on disposal of £12 million (post-tax £12 million) predominantly from the recycling of the foreign currency translation reserve (see note 12). In the Upstream segment, an impairment of the nuclear investment has been booked as a result of a reduction in price forecasts, and lower output following generation issues at Hunterston, Hinkley and Dungeness. The pre and post-tax impact was £481 million. Similarly, in the Centrica Business Solutions segment, an impairment of gas-fired and battery power assets has also been recorded as a result of forecast price reductions. This gave rise to a charge of £23 million (post-tax £19 million). In the Bord Gáis Energy segment, an outage at the Whitegate power station led to the derecognition of £21 million (post-tax £18 million) of component parts. (iii) The Centrica Home Solutions business impaired intangible software assets by £72 million (post-tax £59 million). This was as a result of the decision to merge the business into the British Gas segment’s services and solutions arm and to reduce the scale and breadth of technology products offered in the portfolio. (iv) The Centrica Business Solutions customer cash generating unit impaired its Goodwill by £78 million (post-tax £78 million), as a result of reduced growth prospects, particularly in North America following the disposal of Direct Energy in January 2021. (v) The Group’s strategic restructure and headcount reduction has led to redundancy costs being recognised in relation to both incurred and expected future severance costs (excluding pension strains) of £94 million (post-tax £76 million). In addition, costs associated with projects in the Group’s cost efficiency programme principally related to property rationalisation costs and other transformational activity have also been incurred amounting to £42 million (post-tax £35 million). The project to modernise employee terms and conditions across the business saw one-off transition payments of £18 million (post-tax £15 million) also recognised. In discontinued operations, a reversal of previously booked redundancy provisions and property impairments of £7 million (post-tax £6 million) was recorded due to the change in circumstances with the Direct Energy business now being disposed in January 2021. (vi) A pension strain charge has been reflected in relation to redundancies arising as a result of Group’s restructuring programme (post-tax £97 million). (vii) In connection with the disposal of Direct Energy, which completed on 5 January 2021, £17 million (post-tax £13 million) of costs were incurred during the year related to professional assistance and assurance activities. At the same time, £12 million (post-tax £9 million) of other costs were incurred, predominantly related to Group intangible IT software assets write offs that were considered obsolete as a result of the imminent change in the wider business make-up. Separately, a historic Canadian exploration and production deferred tax asset of £20 million was also written-off as it would no longer be recoverable in the absence of a profitable Canadian business. Centrica plc Annual Report and Accounts 2020 121 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 7. Exceptional items and certain re-measurements (c) Impairment accounting policy, process and sensitivities The information provided below relates to the assets and CGUs (or groups of CGUs) that have been subject to impairment during the year. Details of the Group’s wider impairment assessment and measurement policy are provided in note S2. Exceptional impairments of assets measured on a FVLCD basis Segment Upstream Centrica Business Solutions Asset/CGU (or group of CGUs) Basis for impairment Goodwill (ii) Greater Warwick Area exploration and evaluation asset Significant deterioration in forecast commodity prices, and reduced forecast value on exploration and evaluation prospects Significant uncertainty over the field development UK and Norwegian fields (iii) Significant deterioration in forecast commodity prices Danish fields (disposal) Re-measurement prior to reclassification to disposal group held for sale Customer CGU goodwill Reduced growth prospects, particularly in North America Other Property Change in usage of assets (including right-of-use assets) Recoverable amount (i) £m FV hierarchy 585 – 135 N/A 220 45 L3 L3 L3 L3 L3 L3 Impairment £m 62 135 445 (8) 78 15 (i) The recoverable amounts are for the specific assets impaired, or in the case of goodwill to the wider CGU to which it relates. (ii) The recoverable amount stated for Upstream goodwill relates to the CGU associated with gas and oil fields and exploration and evaluation assets. This amount excludes working capital and non field-specific deferred tax assets. (iii) Relates to 6 individual fields that were impaired. Recoverable amount disclosed relates to those 6 fields. Fair value less costs of disposal (FVLCD) is determined by discounting the post-tax cash flows expected to be generated by the assets or CGU, net of associated selling costs, taking into account those assumptions that market participants would use in estimating fair value. Post-tax cash flows used in the FVLCD calculation are based on the Group’s Board-approved business plans and strategic shape assumptions, together with, where relevant, long-term production and cash flow forecasts. Upstream gas and oil assets (including goodwill) For Upstream gas and oil assets post-tax cash flows are derived from projected production profiles of each field, taking into account forward prices for gas and liquids over the relevant period. Where forward market prices are not available (i.e. outside the active period for each commodity), prices are determined based on the median of third-party market comparator curves. The date of cessation of production depends on the interaction of a number of variables, such as the recoverable quantities of hydrocarbons, production costs, the contractual duration of the licence area and the selling price of the gas and liquids produced. As each field has specific reservoir characteristics and economic circumstances, the post-tax cash flows for each field are computed using individual economic models. Price assumptions are critical and use liquid market prices for 2021 to 2024, blended over a one-year period to long-term price forecasts. Long-term price assumptions derived from third-party market comparator median curves are deemed best aligned with pricing that a reasonable market participant would use. The future post-tax cash flows are discounted using a post-tax nominal discount rate of 10.0% (2019: 9.0%). The recoverable amount for Goodwill is then assessed by taking the headroom on the individual field assessments (including exploration and evaluation prospects), calculated as described above and deducting the forecast general administration and corporate running costs of the business over the life of the fields. As forward commodity prices are a key assumption in these valuations, average prices and associated impairment sensitivities for the Group’s upstream gas and oil assets (including Goodwill) for the relevant periods are shown below. Five-year liquid and blended- period price (i) Ten-year long-term average price (i) 2021-2025 2020-2024 2026-2035 2025-2034 2020 40 47 2019 43 62 2020 46 65 2019 58 81 Change in post-tax headroom/(impairment) (ii) +10% -10% 2020 £m 289 2019 £m 180 2020 £m 2019 £m (266) (197) NBP (p/th) Brent ($/bbl) (i) Prices are shown in 2019 real terms. (ii) Sensitivity relates to Upstream exploration and production assets and CGUs. A 10% change is deemed to represent a reasonably possible variation across the entire period covered by the liquid market and comparator curves used in upstream gas and oil impairment tests. In the -10% scenario an impairment of £199 million of goodwill would arise. This is included in the sensitivity given above. 122 Centrica plc Annual Report and Accounts 2020 7. Exceptional items and certain re-measurements Furthermore, there is also uncertainty due to climate change and international governmental intervention to reduce CO2 emissions and the likely impact this will have on both gas and oil demand and forecast prices. As a result, a further sensitivity is disclosed below based on forecast prices aligned to the International Energy Agency’s (‘IEA’) Sustainable Development Scenarios, which assumes governmental policies are put in place to achieve the temperature goals under the Paris Agreement. This sensitivity retains the prices for the liquid period (4 years) but replaces the longer term thereafter with the IEA’s forecast prices for Sustainable Development. NBP (p/th) Brent ($/bbl) (i) Prices shown in 2019 real terms (ii) Change in impairment would all relate to Goodwill. Change in post -tax headroom/ (impairment) (ii) Ten-year long-term average price (i) 2026-2035 2020 33 55 £m (132) Centrica Business Solutions customer CGU A FVLCD calculation has been used to assess the recoverable amount of Centrica Business Solutions customer CGU, with the disposal of Direct Energy in early 2021 reducing growth prospects in North America. Cashflows have been projected over a 5-year period for each region and a terminal value has been applied to the 2025 cashflows using a growth rate in the range 1.7-2.2% which is jurisdictional and product specific. The future post-tax cashflows are predominantly discounted using a post-tax nominal discount rate of 7.5% (2019: 7.5%). The forecast assumes that the customer CGU achieves positive cash inflows by 2025. Were the cashflows used in the terminal value calculation reduced by 10%, a further impairment of Goodwill of £36 million would be required. Were the discount rate to be increased by 1% a further impairment of Goodwill of £66 million would be required. Exceptional impairments of assets measured on a VIU basis Segment Upstream Asset/CGU (or group of CGUs) Basis for impairment Nuclear Reduction in baseload power prices and lower output assumptions following the generation issues at Dungeness, Hunterston and Hinkley. Centrica Business Solutions Gas-fired power and Battery storage assets Decline in forecast prices British Gas Centrica Home Solutions intangible software assets Reduction in scale and breadth of products and consequent reduction in forecast future profitability Recoverable amount £m 830 49 2 Impairment £m 481 23 72 Nuclear A VIU calculation has been used to determine the recoverable amount of the Group’s investment in Nuclear. The post-tax cash flows incorporated in the valuation are derived from board approved forecasts, based on the expected generation profile of the fleet for its remaining life. Assumptions include forward commodity prices, capacity rates, transportation and fuel costs and balancing system charges. Price assumptions are based on liquid market prices for 2021 to 2024 which are then blended over a one-year period to long-term price forecasts. Long-term price assumptions derived from third-party market comparator median curves are used due to alignment with pricing that a reasonable market participant would use, and the inclusion of certain data points (e.g. impact of climate change). The VIU calculation assumes that the Sizewell plant operates until 2055, reflecting a 20-year extension beyond its original design life. In the absence of this extension, the Group’s investment in Nuclear would be impaired by a further £233 million. The VIU calculation is also sensitive to changes in outage assumptions. A 1% increase in the unplanned outages rate applied to volume across the nuclear fleet would increase impairment by £27 million. The future pre-tax cash flows generated by the investment in the associate are discounted using a pre-tax nominal discount rate 8.0% (2019: 8.4%). This is equivalent to post-tax nominal rate 6.5% (2019: 6.5%). A 1% increase in the post-tax discount rate would increase impairment by £68 million. A 1% reduction in the post-tax discount rate would lead to impairment write-back of £82 million. Centrica plc Annual Report and Accounts 2020 123 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 7. Exceptional items and certain re-measurements The asset is particularly sensitive to changes in commodity price and the table below details average prices for the relevant periods and associated sensitivities. Five-year liquid and blended- period price (i) Ten-year long-term average price (i) 2021-2025 2020-2024 2026-2035 2025-2034 Change in pre/post-tax headroom/(impairment) (ii) +10% -10% Baseload power 2020 £/MWh 48 2019 £/MWh 47 2020 £/MWh 52 2019 £/MWh 59 2020 £m 295 2019 £m 376 2020 £m (293) 2019 £m (376) (i) Prices are shown in 2019 real terms. (ii) A 10% change is deemed to represent a reasonably possible variation across the entire period covered by the liquid market and comparator curves used in the nuclear impairment test. Whilst there is uncertainty in the future forecast commodity prices due to climate change and the impact international government intervention to reduce CO2 emissions will have, there is no consensus on the likely effect on baseload power prices under sustainable development scenarios (Paris Agreement compliant). Nuclear is a carbon-free, firm power source and further sensitivities have not been provided to the base case and price sensitivities above as the Group does not currently believe that the prices obtained for such carbon-free output would be significantly reduced in a Paris-compliant scenario. Centrica Home Solutions software intangibles The VIU calculation for the Centrica Home Solutions CGU incorporates growth assumptions to generate positive cash inflows of £8 million in 2025, and includes a terminal value based on this final year. If the 2025 cash flow reduced by 10%, with a consequent fall in terminal value, a further impairment of the software intangibles of £2 million would be required. The discount rate and inflation rate used in the above calculations are determined in the same manner as the rates used in the VIU calculations described in note S2. Other impairments Within discontinued operations £8 million (2019: £nil) of Group assets were impaired. A £2 million impairment was booked in relation to other joint ventures. The recoverable amounts of these assets have been calculated as £nil on the basis of VIU. 8. Net finance cost Financing costs mainly comprise interest on bonds and bank debt, the results of hedging activities used to manage foreign exchange and interest rate movements on the Group’s borrowings, and notional interest arising on discounting of decommissioning provisions and pensions. An element of financing cost is capitalised on qualifying projects. Investment income predominantly includes interest received on short-term investments in money market funds, bank deposits and government bonds. Continuing operations Year ended 31 December Cost of servicing net debt: Interest income Interest cost on bonds, bank loans and overdrafts Interest cost on lease liabilities Net gains on revaluation Notional interest arising from discounting Capitalised borrowing costs (ii) Financing (cost)/income 2020 Financing costs £m Investment income £m – (206) (10) (216) – (23) (239) 13 (226) 7 – – 7 4 – 11 – 11 2019 (restated) (i) Financing costs £m Investment income £m – (232) (12) (244) – (33) (277) 13 (264) 13 – – 13 – – 13 – 13 Total £m 7 (206) (10) (209) 4 (23) (228) 13 (215) Total £m 13 (232) (12) (231) – (33) (264) 13 (251) (i) Comparatives have been restated to present the Direct Energy business as a discontinued operation. See note 3 for details. (ii) Borrowing costs have been capitalised using an average rate of 4.47% (2019: 4.77%). 124 Centrica plc Annual Report and Accounts 2020 9. Taxation The taxation note details the different tax charges and rates, including current and deferred tax arising in the Group. The current tax charge is the tax payable on this year’s taxable profits together with amendments in respect of tax provisions made in earlier years. This tax charge excludes the Group’s share of taxation on the results of joint ventures and associates. Deferred tax represents the tax on differences between the accounting carrying values of assets and liabilities and their tax bases. These differences are temporary and are expected to unwind in the future. (a) Analysis of tax charge Year ended 31 December Continuing operations: Current tax UK corporation tax UK petroleum revenue tax Non-UK tax Adjustments in respect of prior years – UK Adjustments in respect of prior years – non-UK Total current tax Deferred tax Origination and reversal of temporary differences – UK UK petroleum revenue tax Origination and reversal of temporary differences – non-UK Change in UK tax rate Adjustments in respect of prior years – UK Adjustments in respect of prior years – non-UK Total deferred tax Total taxation on profit/(loss) from continuing operations (ii) Discontinued operations: Current tax – non-UK Deferred tax – origination and reversal of temporary differences – non-UK Total taxation on profit/(loss) from discontinued operations Total taxation on profit/(loss) for the year 2020 Exceptional items and certain re-measurements £m Business performance £m Results for the year £m Business performance £m 2019 (restated) (i) Exceptional items and certain re-measurements £m Results for the year £m (12) 71 47 42 7 155 (38) (22) (38) (28) (52) (19) (197) (42) (23) (10) (33) (75) 7 – (7) 8 – 8 102 1 77 8 (9) – 179 187 6 (66) (60) 127 (5) 71 40 50 7 163 64 (21) 39 (20) (61) (19) (18) (37) 17 (102) 16 4 (102) 15 (5) (14) – (34) (2) (40) 145 (142) (17) (76) (93) 52 (58) (18) (76) (218) 37 – 1 (34) – 4 15 22 57 – 34 – 128 132 (33) 120 87 219 – 17 (101) (18) 4 (98) 30 17 43 – – (2) 88 (10) (91) 102 11 1 (i) Prior year results have been restated to remove the Direct Energy business from continuing operations, as the business has been classified as a discontinued operation. See note 3. (ii) Total taxation on profit/(loss) excludes taxation on the Group’s share of profits of joint ventures and associates. UK tax rates Most activities in the UK are subject to the standard rate for UK corporation tax of 19% (2019: 19%). Upstream gas and oil production activities are taxed at a rate of 30% (2019: 30%) plus a supplementary charge of 10% (2019: 10%) to give an overall rate of 40% (2019: 40%). Certain upstream assets in the UK under the petroleum revenue tax (PRT) regime have a current rate of 0% (2019: 0%). The UK corporation tax rate was scheduled to reduce to 17% from 1 April 2020 but the Government halted the reduction, to maintain the rate at 19%. During 2020, the relevant UK deferred tax assets and liabilities included in these consolidated Group Financial Statements were rebased to 19% accordingly. Non-UK tax rates Norwegian upstream profits are taxed at the standard rate of 22% (2019: 22%) plus a special tax of 56% (2019: 56%) resulting in an aggregate tax rate of 78% (2019: 78%). Profits earned in the US are taxed at a Federal rate of 21% (2019: 21%) together with state taxes at various rates dependent on the state, and in Canada at a Federal rate of 15% (2019: 15%) with provincial taxes at rates dependent on the province. Taxation for other jurisdictions is calculated at the rate prevailing in those respective jurisdictions, with rates ranging from 12.5% in the Republic of Ireland to 50% in the Netherlands. The tax charges were not material in such jurisdictions. Prior year adjustments reflect changes made to estimates or to judgements when further information becomes available. Movements in deferred tax liabilities and assets are disclosed in note 16. Tax on items taken directly to equity is disclosed in note S4. Centrica plc Annual Report and Accounts 2020 125 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 9. Taxation (b) Factors affecting the tax charge The Group is expected to continue carrying out most of its business activities in the UK and accordingly considers the standard UK rate to be the appropriate reference rate. The differences between the total taxation shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit/(loss) before taxation are as follows: Year ended 31 December Profit/(loss) before taxation from continuing operations Add back/(deduct) share of losses/(profits) of joint ventures and associates, net of interest and taxation Tax on profit/(loss) at standard UK corporation tax rate of 19% (2019: 19%) Effects of: Depreciation/impairment on non-qualifying assets Higher rates applicable to upstream profits/losses Non-UK tax rates Upstream investment incentives Movements in uncertain tax provisions Changes in UK tax rate Impairment of deferred tax assets relating to Upstream losses and decommissioning Other Taxation on profit/(loss) from continuing operations Less: movement in deferred tax Total current tax from continuing operations Current tax from discontinued operations Total current tax on profit/(loss) for the year 232 (23) 209 (40) (20) (28) 12 39 12 (28) (10) 21 (42) 197 155 (23) 132 2020 Exceptional items and certain re-measurements £m Business performance £m 2019 Exceptional items and certain re-measurements £m Business performance £m Results for the year £m 399 12 411 (1,433) (1,034) 1 13 (1,432) (1,021) Results for the year £m (577) (21) (598) (809) 2 (807) 153 113 (78) 272 194 (100) 203 17 – – 8 (79) (15) 187 (179) 8 6 14 (120) 175 29 39 12 (20) (89) 6 145 18 163 (17) 146 (31) (107) 29 37 8 – (2) 2 (142) 40 (102) (58) (160) (229) 42 93 (32) – – – (14) 132 (128) 4 (33) (29) (260) (65) 122 5 8 – (2) (12) (10) (88) (98) (91) (189) The Group is subject to taxation in a number of jurisdictions. The complexity of applicable rules may result in legitimate differences of interpretation between the Group and taxing authorities (or between different taxing authorities) especially where an economic judgement or valuation is involved. Resolution of these differences typically takes many years. The uncertain tax provisions represent multiple layers of estimation for different time periods and different jurisdictions. The Group has applied IFRIC 23: ‘Uncertainty over income tax treatments’. The interpretation requires consideration of the likelihood that the relevant taxing authority will accept an uncertain tax treatment in order to determine the measurement basis. The value is calculated in accordance with the rules of the relevant tax authority when acceptance is deemed probable. The principal element of the Group’s uncertain tax position relates to transfer pricing challenges in jurisdictions outside the UK. While the Group applies the arm’s length principle to all intra-group transactions, taking OECD guidance into account, taxing authorities may take different views. The outcome of resolving any disputes is not predictable and therefore in order to reflect the effect of uncertainties, the provisions represent management’s assessment of the most likely outcome of each issue. The assessment is reviewed and updated on a regular basis. At 31 December 2020, the Group held uncertain tax provisions of £180 million (2019: £197 million). 126 Centrica plc Annual Report and Accounts 2020 9. Taxation (c) Factors that may affect future tax charges The Group’s effective tax rates are impacted by changes to the mix of activities and production across the territories in which it operates. Effective tax rates may also fluctuate where profits and losses cannot be offset for tax purposes. Losses arising in one territory cannot be offset against profits in another. Profits from gas and oil production in the UK continue to be taxed at rates above the UK statutory rate (40% versus 19%). PRT is now set at 0% but may still give rise to historic refunds from the carry-back of excess reliefs (for example, from decommissioning). Income earned in territories outside the UK, particularly in Norway, is generally subject to higher effective rates of tax than the current UK statutory rate. The Group’s US profits are subject to a Federal rate of 21% plus applicable state taxes, and Canadian profits a Federal rate of 15% plus applicable provincial taxes. North American business will decrease substantially following the disposal of Direct Energy (see note 12). Globally, tax reform has significant potential to change tax charges, particularly in relation to the OECD’s Base Erosion and Profit Shifting (BEPS) project, which has widespread support. The Group does not expect its tax position to be impacted materially. Local tax laws and rates are subject to change, which may have a significant impact on the Group’s future tax charges. In the medium term, the Group’s effective tax rate is expected to remain above the UK statutory rate, reflecting higher rates applicable to profits earned outside the UK and in Upstream. The mix of upstream/downstream activities across regimes continues to be influential on the effective tax rate. (d) Relationship between current tax charge and taxes paid Year ended 31 December Current tax (credit)/charge: Corporation tax Petroleum revenue tax Taxes (refunded)/paid: Corporation tax Petroleum revenue tax Included in the following lines of the Group Cash Flow Statement: Taxes paid in net cash flows from continuing operating activities Net cash flow from discontinued operating activities Net cash inflow from discontinued investing activities 2020 UK £m Non-UK £m Total £m (45) (71) (116) 1 (36) (35) (30) – (30) 62 – 62 (75) (71) (146) 63 (36) 27 2 25 – UK £m 18 (17) 1 (43) (68) (111) 2019 Non-UK £m 188 – 188 239 – 239 Total £m 206 (17) 189 196 (68) 128 80 12 36 Differences between current tax charged and taxes paid arose principally due to the following factors: • Corporation tax payments are generally made by instalment, based on estimated taxable profits, or the prior period’s profits. Payments are made on account and the final liability is settled as the tax return is filed. Fluctuations in profits from year to year, one-off items and mark-to- market movements within the year may therefore give rise to divergence between the charge for the year and the taxes paid. In certain jurisdictions advance tax payments are required (based on estimated tax liabilities) which can result in overpayments. These are included as tax assets, to be refunded in a subsequent period (2019 saw a net refund in the UK); and • PRT refunds are based on results in the preceding six-monthly PRT period, therefore PRT cash movements will reflect refunds on a six- month delay. Centrica plc Annual Report and Accounts 2020 127 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 10. Earnings per ordinary share Earnings per share (EPS) is the amount of profit or loss attributable to each share. Basic EPS is the amount of profit or loss for the year divided by the weighted average number of shares in issue during the year. Diluted EPS includes the impact of outstanding share options. Basic earnings per ordinary share has been calculated by dividing the profit attributable to equity holders of the Company for the year of £41 million (2019: £1,023 million loss) by the weighted average number of ordinary shares in issue during the year of 5,825 million (2019: 5,758 million). The number of shares excludes 11 million ordinary shares (2019: 22 million), being the weighted average number of the Company’s own shares held in the employee share trust and treasury shares purchased by the Group as part of the share repurchase programme. The Directors believe that the presentation of adjusted basic earnings per ordinary share, being the basic earnings per ordinary share adjusted for certain re-measurements and exceptional items, assists with understanding the underlying performance of the Group, as explained in note 2. Information presented for diluted and adjusted diluted earnings per ordinary share uses the weighted average number of shares as adjusted for 91 million (2019: 44 million) potentially dilutive ordinary shares as the denominator, unless it has the effect of increasing the profit or decreasing the loss attributable to each share. Continuing and discontinued operations 2020 2019 Year ended 31 December Earnings – basic Net exceptional items after taxation (notes 2 and 7) (i) Certain re-measurement (gains)/losses after taxation (notes 2 and 7) (i) Earnings – adjusted basic Earnings – diluted Earnings – adjusted diluted Continuing operations Year ended 31 December Earnings – basic Net exceptional items after taxation (notes 2 and 7) (i) Certain re-measurement (gains)/losses after taxation (notes 2 and 7) (i) Earnings – adjusted basic Earnings – diluted (ii) Earnings – adjusted diluted Discontinued operations Year ended 31 December Earnings – basic Net exceptional items after taxation (notes 2 and 7) Certain re-measurement (gains)/losses after taxation (notes 2 and 7) Earnings – adjusted basic Earnings – diluted Earnings – adjusted diluted Pence per £m ordinary share £m (1,023) 862 580 419 Pence per ordinary share (17.8) 15.0 10.1 7.3 0.7 21.0 (15.2) 6.5 0.7 (1,023) (17.8) 6.4 419 7.2 41 1,220 (883) 378 41 378 2020 2019 Pence per £m ordinary share (274) 1,184 (745) 165 (4.7) 20.3 (12.8) 2.8 £m (964) 868 344 248 Pence per ordinary share (16.8) 15.1 6.0 4.3 (274) (4.7) (964) (16.8) 165 2.8 248 4.3 2020 Pence per £m ordinary share 5.4 0.7 (2.4) 3.7 315 36 (138) 213 315 213 2019 £m (59) (6) 236 171 Pence per ordinary share (1.0) (0.1) 4.1 3.0 5.3 (59) (1.0) 3.6 171 2.9 (i) Net exceptional items after taxation and certain re-measurement (gains)/losses after taxation are adjusted to reflect the share attributable to non-controlling interests. (ii) Potential ordinary shares are not treated as dilutive when they would decrease a loss per share. 128 Centrica plc Annual Report and Accounts 2020 11. Dividends Dividends represent the return of profits to shareholders. Dividends are paid as an amount per ordinary share held. The Group retains part of the profits generated to meet future investment plans or to fund share repurchase programmes. Prior year final dividend (i) Interim dividend 2020 Pence per share Date of payment – – – – – – £m – – – 2019 Pence per share Date of payment 8.40 27 Jun 2019 1.50 21 Nov 2019 £m 474 87 561 (i) Included within the prior year final dividend are forfeited dividends of £nil (2019: £5 million) older than 12 years that were written back in accordance with Group policy. On 2 April 2020 the Directors announced that the Board had taken the decision to cancel the 2019 final dividend payment of 3.5p per share, or £204 million, which was due to be paid in June 2020. The Directors do not propose the payment of an interim or final dividend for 2020. In prior years the Company offered a scrip dividend alternative to its shareholders. £96 million of the £474 million prior year final dividend was in the form of ordinary shares to shareholders opting in to the scrip dividend alternative. The market value per share at the date of payment was 94 pence per share resulting in the issue of 102 million new shares and £90 million of share premium. The scrip dividend alternative is no longer offered. The Group has sufficient distributable reserves to pay dividends to its ultimate shareholders. Distributable reserves are calculated on an individual legal entity basis and so, despite the consolidated Group Balance Sheet containing negative retained earnings, the ultimate parent company, Centrica plc, currently has adequate realised profits within its retained earnings to support dividend payments. Refer to the Centrica plc Company Balance Sheet on page 195. At 31 December 2020, Centrica plc’s company-only distributable reserves were c.£1.5 billion (2019: c.£2.7 billion). On an annual basis, the distributable reserve levels of the Group’s subsidiary undertakings are reviewed and dividends paid up to Centrica plc as appropriate to replenish its reserves. i F n a n c a i l S t a t e m e n t s Centrica plc Annual Report and Accounts 2020 129 Financial Statements | Notes to the Financial Statements continued 12. Acquisitions, disposals and disposal groups classified as held for sale (a) Business combinations and asset acquisitions On 16 September 2020, the Group acquired certain customers and assets from Robin Hood Energy Limited for headline consideration and initial cash payment of £8 million, with further amounts receivable or payable based on final working capital balances and the number of customers who transition to the Group. The transaction was accounted for as an asset acquisition and gave rise to the recognition of an intangible asset in respect of customer relationships valued at £9 million, trade receivable balances of £16 million and customer credit balances and other financial liabilities of £8 million. The assets acquired form part of the British Gas segment. No material measurement period adjustments have been made to acquisitions completed in prior periods. (b) Disposals On 23 December 2019 the Group agreed to sell its 382MW King’s Lynn combined cycle gas turbine power station to RWE Generation. The disposal group was classified as held for sale as at 31 December 2019. The transaction completed on 12 February 2020, resulting in the receipt of consideration of £102 million, after adjustments for final working capital balances and after transaction costs. Prior to disposal the results of the disposed business were presented in the Centrica Business Solutions segment. In March 2020 the Group announced the sale of its Danish gas and oil fields to INEOS and this completed on 19 November 2020. The Group received initial cash consideration of £25 million, and is required to make a contingent payment to the purchaser of £73 million in the event that the development of the fields does not progress. This contingent payment has been provided for and is included in consideration in the table below. The transaction resulted in a loss on disposal of £12 million after recycling of the foreign currency translation balance. Additional contingent consideration valued at £47 million could be due from INEOS based on the future development of the fields. No amount has been recognised in respect of this due to the level of uncertainty over any amount to be received. Immediately before the disposal, the Group settled an existing capital creditor by making a cash payment of £89 million. This has been included in cash flows from sales of businesses in the Group Cash Flow Statement. Prior to disposal the results of the disposed business were presented in the Upstream segment. Neither disposal group is deemed to be a discontinued operation as they did not represent a separate major line of business or geographical area of operation that was material to the Group’s results. Non-current assets Current assets Current liabilities Non-current liabilities Net assets/(liabilities) disposed of Recycling of foreign currency translation reserve on disposal Consideration received/(paid) Loss on disposal before and after taxation King’s Lynn power station £m Danish fields (i) £m 111 2 (4) (7) 102 – 102 – 7 5 (6) (54) (48) (12) (48) (12) (i) In June 2020 the Danish fields were reported as a disposal group and classified as held for sale. Immediately prior to classification as held for sale an impairment reversal of £8 million was recognised within Exceptional operating costs, arising from the re-measurement of the disposal group to fair value less costs of disposal. The loss recognised on disposal arises primarily due to the recycling of the foreign currency translation reserve relating to the business. Additionally, within the Upstream segment the disposal of the Group’s interest in a North Sea gas and oil field for cash consideration of £5 million gave rise to a profit on disposal of £2 million. All other disposals undertaken by the Group were immaterial, both individually and in aggregate. 130 Centrica plc Annual Report and Accounts 2020 12. Acquisitions, disposals and disposal groups classified as held for sale (c) Discontinued operations and assets and liabilities of disposal groups held for sale On 24 July 2020 the Group announced that it had agreed to sell its North American energy supply, services and trading business, Direct Energy, to NRG Energy Inc, for $3.6 billion in cash on a debt free, cash free basis. The transaction received all necessary approvals prior to 31 December 2020 and completed on 5 January 2021. The assets and liabilities of the disposal group have been classified as held for sale and are presented separately on the face of the Group Balance Sheet with effect from 24 July 2020. This is the date at which the disposal group was available for immediate sale, subject only to terms that are customary for sales of such assets, and from which the sale was considered highly probable. Details of the assets and liabilities of the disposal group at 31 December 2020 are shown below. Non-current assets Property, plant and equipment Other intangible assets Goodwill Deferred tax assets Derivative financial instruments Other non-current financial assets Current assets Trade and other receivables, and contract-related assets Inventories Derivative financial instruments Current tax assets Cash and cash equivalents Assets of disposal groups classified as held for sale Current liabilities Derivative financial instruments Trade and other payables, and contract-related liabilities Current tax liabilities Provisions for other liabilities and charges Lease liabilities Non-current liabilities Deferred tax liabilities Derivative financial instruments Provisions for other liabilities and charges Retirement benefit obligations Lease liabilities Liabilities of disposal groups classified as held for sale Net assets of disposal groups classified as held for sale Direct Energy £m 82 227 1,487 341 92 14 2,243 1,536 80 67 78 107 1,868 4,111 (180) (1,231) (21) (23) (12) (1,467) (402) (60) (13) (21) (23) (519) (1,986) 2,125 Included within the Group’s foreign currency translation and cash flow hedging reserves are £61 million and £5 million of credits respectively in respect of the disposal group. These amounts have previously been recognised in the Group Statement of Comprehensive Income and will be recycled to the Group Income Statement on disposal of the Direct Energy business. In addition, the Group’s actuarial gains and losses reserve includes accumulated losses of £30 million relating to the disposal group. Because the disposal group represents a separate major line of business and geographical operations, its results have been presented as discontinued operations in the Group Income Statement, Group Statement of Other Comprehensive Income and Group Cash Flow Statement. Centrica plc Annual Report and Accounts 2020 131 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 12. Acquisitions, disposals and disposal groups classified as held for sale The results of the Direct Energy business for 2020 and 2019 are as follows: Year ended 31 December Revenue Cost of sales Re-measurement and settlement of energy contracts Gross profit/(loss) Operating costs Operating profit/(loss) Finance costs Profit/(loss) before taxation Taxation on profit/(loss) (i) Profit/(loss) from discontinued operations, net of tax 2020 Exceptional items and certain re-measurements £m Results for the year £m Business performance £m 2019 Exceptional items and certain re-measurements £m (912) 1,495 (399) 184 (22) 162 – 162 (60) 102 8,571 (7,126) (399) 1,046 (632) 414 (6) 408 (93) 315 10,867 (9,849) – 1,018 (767) 251 (4) 247 (76) 171 (1,187) 2,412 (1,562) (337) 20 (317) – (317) 87 (230) Business performance £m 9,483 (8,621) – 862 (610) 252 (6) 246 (33) 213 Results for the year £m 9,680 (7,437) (1,562) 681 (747) (66) (4) (70) 11 (59) (i) During 2020 a historic Canadian exploration and production deferred tax asset was written off. The associated charge of £20 million is included as an exceptional item within discontinued operations. See note 7 for further details. 132 Centrica plc Annual Report and Accounts 2020 13. Property, plant and equipment PP&E includes significant investment in power stations and gas and liquid production assets. Once operational, all assets are depreciated over their useful lives. (a) Carrying amounts Cost 1 January prior to adoption of IFRS 16 in 2019 Right-of-use assets recognised on adoption of IFRS 16 in 2019 Additions and capitalised borrowing costs Acquisitions Disposals/retirements Write-downs Transfers Transfers to disposal groups held for sale (39) (152) Decommissioning liability and dilapidations revisions and additions (note 21) Lease modifications and re-measurements Exchange adjustments 31 December Accumulated depreciation and impairment 1 January Charge for the year Impairments/(write-backs) Disposals/retirements Transfers to disposal groups held for sale Exchange adjustments 31 December NBV at 31 December – (17) 1 303 90 38 8 (7) (16) – 113 190 2020 2019 Land and buildings £m Plant, equipment and vehicles £m Power generation £m Gas production and storage £m Land and buildings £m Plant, equipment and vehicles £m Power generation £m Gas production and storage £m Total £m Total £m 361 528 953 14,926 16,768 75 568 1,059 15,476 17,178 – 4 – (7) – – – 242 – (36) – – – 8 (14) 576 – 16 – – 274 – – 536 – (124) (133) (300) – – (6) 5 – (1) – 3 – 3 (120) (317) 252 – 94 257 (9) 80 254 19 1 – – – – 1 15 (4) 26 49 – (45) – (24) – – (39) (7) 65 44 – (3) 2 – 33 327 – 378 439 1 (491) (539) (3) 5 (1) (19) (208) (16) (224) – – (6) (127) – (278) (126) (24) (295) 843 15,296 17,018 361 528 953 14,926 16,768 279 762 12,504 13,635 97 8 (30) (97) – 257 319 29 23 (102) (5) – 707 136 508 443 (133) (116) 92 672 482 (272) (234) 92 13,298 14,375 23 45 23 – – (1) 90 211 782 12,038 13,054 91 11 (18) (12) (4) 279 249 27 57 (18) (85) (1) 762 191 644 478 (474) (5) (177) 807 569 (510) (102) (183) 12,504 13,635 2,422 3,133 i F n a n c a i l S t a t e m e n t s 1,998 2,643 271 (b) Assets in the course of construction included in above carrying amounts 31 December Plant, equipment and vehicles Gas production Power generation 2020 £m 10 232 7 (c) Additional information relating to right-of-use assets included in the above Additions Depreciation charge for the year NBV at 31 December (i) 2020 Plant, equipment and vehicles £m Land and buildings £m Gas production and storage £m Power generation £m 4 (37) 145 234 (55) 239 – (11) 8 10 (21) 47 2019 Plant, equipment and vehicles £m Gas Production and storage £m Power generation £m 15 (34) 83 – (11) 20 37 (13) 56 Total £m 248 (124) 439 Land and buildings £m 16 (43) 231 (i) In 2020 £36 million of transfers to held for sale have taken place, in addition to other movements relating to right-of-use assets not disclosed individually. Further information on the Group’s leasing arrangements is provided in note 23. 2019 £m 30 177 20 Total £m 68 (101) 390 Centrica plc Annual Report and Accounts 2020 133 Financial Statements | Notes to the Financial Statements continued 14. Interests in joint ventures and associates Investments in joint ventures and associates represent businesses where we exercise joint control or significant influence and generally have an equity holding of up to 50%. These include the investment in Lake Acquisitions Limited, which owns the existing EDF UK nuclear power station fleet. (a) Interests in joint ventures and associates 1 January Additions Impairment Share of profit/(loss) for the year Share of other comprehensive income Dividends (i) Other movements 31 December (i) In 2020, a non-cash £10 million tax credit was received in lieu of payment of a dividend. (b) Share of joint ventures’ and associates’ assets and liabilities 31 December Share of non-current assets Share of current assets Share of current liabilities Share of non-current liabilities Cumulative impairment Interests in joint ventures and associates 2020 2019 Investments in joint ventures and associates £m Investments in joint ventures and associates £m 1,306 10 (483) 21 58 (72) 3 1,661 1 (372) (13) 29 (1) 1 843 1,306 Associates Nuclear £m 2020 Other £m 4,440 751 5,191 (202) (2,720) (2,922) (1,439) 830 17 4 21 (3) – (3) (5) 13 Total £m 4,457 755 5,212 (205) (2,720) (2,925) (1,444) 843 2019 Total £m 4,425 697 5,122 (138) (2,717) (2,855) (961) 1,306 Net cash included in share of net assets 105 – 105 56 Further information on the Group’s investments in joint ventures and associates is provided in notes 6 and S10. 134 Centrica plc Annual Report and Accounts 2020 15. Other intangible assets and goodwill The Group Balance Sheet contains significant intangible assets. Goodwill, customer relationships and brands usually arise when we acquire a business. Goodwill is attributable to enhanced geographical presence, cost savings, synergies, growth opportunities, the assembled workforce and also arises from items such as deferred tax. Goodwill is not amortised but is assessed for recoverability each year. The Group uses European Union Allowances (EUAs) and Renewable Obligation Certificates/Renewable Energy Certificates (ROCs/RECs) to satisfy its related obligations. Upstream exploration and evaluation expenditure is capitalised as an intangible asset until development of the asset commences, at which point it is transferred to PP&E or is deemed not commercially viable and is written down. (a) Carrying amounts Cost 1 January Additions and capitalised borrowing costs Acquisitions Disposals/retirements and surrenders Write-downs Transfers Transfers to disposal groups held for sale 2020 2019 Customer relation- ships and brands £m Application software (i) (ii) £m EUA/ ROC/RECs £m Exploration and evaluation expenditure £m Goodwill £m Total £m Customer relation- ships and brands £m Application software (i) (ii) £m EUA/ ROC/RECs £m Exploration and evaluation expenditure £m Goodwill £m Total £m 764 2,021 179 320 3,171 6,455 830 1,837 321 304 3,298 6,590 9 – (3) – – 99 – 1,047 61 – (10) (818) – – – – – – (24) (3) (1) (1) – 3 – – – 1,216 3 – 7 200 6 933 – (831) (43) (28) (1,068) (24) (3) – – – – – 24 (18) – – – (7) 216 – (14) (178) – (5) (3) – 10 1,349 23 (76) (1,229) – – – (178) – 19 (61) (119) (576) (360) (195) (1,538) (2,670) Exchange adjustments 9 2 (5) 15 20 (30) i F n a n c a i l S t a t e m e n t s 31 December 203 1,752 208 352 1,651 4,166 764 2,021 179 320 3,171 6,455 Accumulated amortisation 1 January Amortisation (iii) Disposals/retirements and surrenders Impairments Transfers to disposal groups held for sale Exchange adjustments 31 December 580 27 1,132 231 (3) – (9) 83 (520) (269) 7 91 (2) 1,166 – – – – – – – NBV at 31 December 112 586 208 117 593 2,422 – – – – 130 140 258 (12) 353 – – 247 105 (10) (1) 722 929 (799) 4 2,226 1,940 596 38 (31) – – (23) 580 184 859 228 (22) 76 – (9) 1,132 – – – – – – – 889 179 117 562 2,134 – – – – – – – 31 – – 266 (53) 107 – (32) 117 203 593 2,422 2,578 4,033 (i) Application software includes assets under construction with a cost of £130 million (2019: £259 million). (ii) The remaining amortisation period of individually material application software assets, which had a carrying value of £239 million (2019: £270 million), is between three and six years. (iii) Amortisation of £258 million (2019: £266 million) has been recognised in operating costs from continuing and discontinued operations before exceptional items. Centrica plc Annual Report and Accounts 2020 135 Financial Statements | Notes to the Financial Statements continued 15. Other intangible assets and goodwill (b) Carrying amount of goodwill and intangible assets with indefinite useful lives allocated to CGUs Goodwill acquired through business combinations, and indefinite-lived intangible assets, have been allocated for impairment testing purposes to individual CGUs or groups of CGUs, each representing the lowest level within the Group at which the goodwill or indefinite-lived intangible asset is monitored for internal management purposes. Principal acquisitions to which goodwill and intangibles with indefinite useful lives relate 31 December CGUs Continuing operations: 2020 Carrying amount of indefinite- lived intangible assets (i) £m Carrying amount of goodwill £m 2019 Carrying amount of indefinite- lived intangible assets (i) £m Total £m Carrying amount of goodwill £m Total £m British Gas AlertMe/Dyno-Rod 63 57 120 63 57 120 Bord Gáis Energy Bord Gáis Energy Energy Marketing & Trading Neas Energy Centrica Business Solutions ENER-G/Panoramic Power/ REstore/SmartWatt Enron Direct/Electricity Direct Upstream Newfield/Heimdal/Venture/Bayerngas 16 151 104 181 414 – – – – – 16 151 104 181 414 15 142 178 181 474 – – 2 – – 15 142 180 181 474 Discontinued operations: Direct Energy (ii) Direct Energy/ATCO/ CPL/WTU/FCP/Bounce/Residential Services Group/Strategic Energy/HEM (i) The indefinite-lived intangible assets relate mainly to the Dyno-Rod brand. (ii) Direct Energy is included in assets held for sale at 31 December 2020. – 929 – 57 – 986 1,525 2,578 4 63 1,529 2,641 136 Centrica plc Annual Report and Accounts 2020 16. Deferred tax assets and liabilities Deferred tax is an accounting adjustment to provide for tax that is expected to arise in the future as a result of differences in the accounting and tax bases of assets and liabilities. The principal deferred tax assets and liabilities recognised by the Group relate to capital investments, decommissioning assets and provisions, tax losses, fair value movements on derivative financial instruments, PRT and pensions. 1 January 2019 Credit/(charge) to income (Charge)/credit to equity Disposal of businesses Exchange and other adjustments 31 December 2019 Credit/(charge) to income (Charge)/credit to equity Transferred to held for sale Exchange and other adjustments 31 December 2020 Accelerated tax depreciation (corporation tax) £m Net decommissioning (i) £m (1,056) 880 142 – (32) 22 (924) 225 – 37 – (2) – – (11) 867 9 – – – Losses carried forward (ii) £m Other timing differences (iii) £m Marked to market positions £m Net deferred PRT (iv) £m Retirement benefit obligation and other provisions £m 323 (70) – – 2 255 (114) – (6) 1 4 24 (1) – (12) 15 (18) – 69 6 72 (43) 159 2 – 16 134 (153) (12) (33) – (64) 127 11 – – – 138 (13) – – – 125 (87) (74) 78 – – (83) (30) 122 (5) – 4 (662) 876 136 Total £m 148 190 79 (32) 17 402 (94) 110 62 7 487 i F n a n c a i l S t a t e m e n t s (i) Net decommissioning includes deferred tax assets of £1,145 million (2019: £1,040 million) in respect of decommissioning provisions. (ii) The losses arise principally from accelerated allowances for upstream investment expenditure, for which equivalent deferred tax liabilities are included under accelerated tax depreciation. (iii) Other timing differences include a deferred tax asset of £60 million (2019: £55 million) in respect of unrelieved interest costs. (iv) The deferred PRT amounts include the effect of deferred corporation tax as PRT is chargeable to corporation tax. Certain deferred tax assets and liabilities have been offset where there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. 31 December Gross deferred tax balances Offsetting deferred tax balances Net deferred tax balances (after offsetting for financial reporting purposes) 2020 Assets £m 1,655 (1,019) 636 Liabilities £m (1,168) 1,019 (149) 2019 Assets £m 1,820 (1,267) 553 Liabilities £m (1,418) 1,267 (151) Deferred tax assets arise typically on decommissioning provisions, trading losses carried forward, retirement benefit obligations and marked to market positions. Forecasts indicate that there will be suitable taxable profits to utilise those deferred tax assets not offset against deferred tax liabilities. Specific legislative provisions applicable to gas and oil production provide assurance that deferred tax assets relating to decommissioning costs and certain trading losses will be utilised. At the balance sheet date, the Group had certain unrecognised deductible temporary differences of £2,205 million (2019: £3,537 million), of which £2,089 million (2019: £2,620 million) related to carried forward tax losses available for utilisation against future taxable profits. Some £2 million (2019: £44 million) of these losses will expire within one to five years. All other temporary differences have no expiry date. No deferred tax asset has been recognised in respect of these temporary differences, due to the unpredictability of future profit streams. At the balance sheet date, no taxable temporary differences existed in respect of the Group’s overseas investments (2019: £nil). Centrica plc Annual Report and Accounts 2020 137 Financial Statements | Notes to the Financial Statements continued 17. Trade and other receivables, and contract-related assets Trade and other receivables include accrued income, and are amounts owed by our customers for goods we have delivered or services we have provided. These balances are valued net of provisions for bad debt. Other receivables include payments made in advance to our suppliers. Contract-related assets are balances arising as a result of the Group’s contracts with customers in the scope of IFRS 15. 31 December Financial assets: Trade receivables Unbilled downstream energy income Other accrued energy income Other accrued income Cash collateral posted (note 24) Other receivables (including loans and contract assets) Less: provision for credit losses Non-financial assets: prepayments, other receivables and costs to obtain or fulfill a contract with a customer 2020 2019 Current £m Non-current £m Current £m Non-current £m 1,379 532 791 114 56 219 3,091 (591) 2,500 301 2,801 – – – – – 31 31 – 31 114 145 2,138 1,342 1,003 131 155 301 5,070 (589) 4,481 358 4,839 2 – – – – 38 40 – 40 114 154 The amounts above include gross amounts receivable arising from the Group’s IFRS 15 contracts with customers of £1,302 million (2019: £2,019 million). Additionally, accrued income of £624 million (2019: £1,481 million) arising under IFRS 15 contracts is included. Trade and other receivables include financial assets representing the contractual right to receive cash or other financial assets from residential customers, business customers and treasury, trading and energy procurement counterparties as follows: 31 December Financial assets by class: Residential customers Business customers Treasury, trading and energy procurement counterparties Less: provision for credit losses 2020 2019 Current £m Non-current £m Current £m Non-current £m 1,249 930 912 3,091 (591) 2,500 – 25 6 31 – 31 1,722 2,104 1,244 5,070 (589) 4,481 12 26 2 40 – 40 138 Centrica plc Annual Report and Accounts 2020 17. Trade and other receivables, and contract-related assets Credit losses and provisions for Trade and other receivables Receivables from residential and business customers are generally considered to be credit impaired when the payment is past the contractual due date. The Group applies different definitions of default for different groups of customers, ranging from 60 days past the due date to six to twelve months from the issuance of a final bill. Receivables are generally written off only once a period of time has elapsed since the final bill. Contractual due dates range from falling due upon receipt to falling due in 30 days from receipt. The table below shows credit impaired balances in gross receivables (those that are past due) and those that are not yet due and therefore not considered to be credit impaired. The disclosure includes trade and other receivables in the Direct Energy business which are presented as assets held for sale on the face of the Group Balance Sheet. Gross trade and other receivables (including those classified as assets held for sale) 31 December Balances that are not past due Included in trade and other receivables Included in assets held for sale Balances that are past due Included in trade and other receivables Included in assets held for sale Total gross financial assets within trade and other receivables and assets held for sale Included in: Trade and other receivables Assets held for sale 2020 £m 2,029 1,276 3,305 1,062 238 1,300 4,605 3,091 1,514 2019 £m 3,718 – 3,718 1,352 – 1,352 5,070 5,070 – The IFRS 9 impairment model is applicable to the Group’s financial assets including trade receivables, contract assets and other financial assets as described in note S3. As the majority of the relevant balances are trade receivables and contract assets to which the simplified model applies, this disclosure focuses on these balances. The provision for credit losses for trade receivables and contract assets is based on an expected credit loss model that calculates the expected loss applicable to the receivable balance over its lifetime. Expected credit losses on receivables due from treasury, trading and energy procurement counterparties are not significant (see note S3 for further analysis of this determination). For residential and business customers default rates are calculated initially by operating segment considering historical loss experience and applied to trade receivables within a provision matrix. The matrix approach allows application of different default rates to different groups of customers with similar characteristics. These groups are determined by a number of factors including; the nature of the customer, the payment method selected and where relevant, the sector in which they operate. The characteristics used to determine the groupings of receivables are the factors that have the greatest impact on the likelihood of default. The rate of default increases once the balance is 30 days past due. Concentration of credit risk in Trade and other receivables Treasury, trading and energy procurement counterparty receivables are typically with customers with external, published credit ratings. Such receivables have typically much lower credit risk than downstream counterparties, and that risk is assessed primarily by reference to the credit ratings rather than to the ageing of the relevant balance. Counterparty credit rating information is given in note S3. The majority of the Group’s credit exposure arises in the British Gas and Centrica Business Solutions segments and relates to residential and business energy customers. The credit risk associated with these customers is assessed as described above, using a combination of the age of the receivable in question, internal ratings based on a customer’s payment history, and external data from credit rating agencies. The disclosures below reflect the information that is reported internally for credit risk management purposes in these segments. Centrica plc Annual Report and Accounts 2020 139 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 17. Trade and other receivables, and contract-related assets British Gas residential energy credit risk Of the Group total of £1,379 million billed trade receivables, the British Gas reporting segment contributes £801 million. As described above, credit risk is concentrated in receivables from residential energy customers who pay in arrears. Gross receivables from these customers amount to £562 million and are analysed below. Trade receivables due from British Gas residential energy customers as at 31 December (i) Days beyond invoice date (ii) Risk profile Direct debits (iii) Gross receivables Provision Net Payment on receipt of bill (iii) Gross receivables Provision Net Final bills (iv) Gross receivables Provision Net 2020 2019 < 30 days £m 30-90 days £m >90 days £m Total £m < 30 days £m 30-90 days £m >90 days £m Total £m 28 – 28 76 (2) 74 11 (2) 9 20 – 20 21 (3) 18 10 (5) 5 34 (2) 32 222 (106) 116 140 (114) 26 82 (2) 80 319 (111) 208 161 (121) 40 37 – 37 95 (3) 92 9 (2) 7 19 – 19 19 (3) 16 10 (5) 5 38 (1) 37 171 (65) 106 139 (105) 34 94 (1) 93 285 (71) 214 158 (112) 46 Total net British Gas residential energy customers trade receivables 111 43 174 328 136 40 177 353 (i) The receivables information presented in this table relates to downstream customers who pay energy bills using the methods presented. It excludes low residual credit risk amounts, such as balances in the process of recovery through pay-as-you-go energy (PAYGE) arrangements and amounts receivable from PAYGE energy vendors. Gross amounts in the process of recovery through PAYGE arrangements at 31 December 2020 are £168 million (2019: £195 million), against which a provision of £126 million is held (2019: £139 million). (ii) This ageing analysis is presented relative to invoicing date, and presents receivables according to the oldest invoice outstanding with the customer. There are a range of payment terms extended to residential energy customers. Amounts paid on receipt of a bill (PORB), which are settled using bank transfers, cash or cheques are typically due within 14 days of invoicing. Direct debit customers typically pay in equal installments over a twelve-month period. (iii) Receivables settled by direct debit are deemed to present a lower credit risk than PORB amounts. This is reflected in the relative level of provision held for these types of receivables. (iv) Final bill customers are those who are no longer customers of the Group and have switched energy supplier. These balances are deemed to have the highest credit risk. Unbilled downstream energy income at 31 December 2020 includes gross balances of £324 million in respect of British Gas residential energy customers (2019: £342 million), against which a provision of £17 million is held (2019: £7 million). 140 Centrica plc Annual Report and Accounts 2020 17. Trade and other receivables, and contract-related assets Centrica Business Solutions energy credit risk Of the Group total of £1,379 million billed trade receivables, the Centrica Business Solutions reporting segment contributes £451 million. As described above, credit risk is concentrated in receivables from business energy customers who pay in arrears. Gross receivables from these customers amount to £375 million and are analysed below. Trade receivables due from Centrica Business Solutions business energy customers as at 31 December Days beyond invoice date (i) Risk profile Commercial and industrial (ii) Gross receivables Provision Net Small and medium-sized entities (SME) Gross receivables Provision Net Total net Centrica Business Solutions business energy customers trade receivables 2020 2019 < 30 days £m 30-90 days £m >90 days £m Total £m < 30 days £m 30-90 days £m >90 days £m Total £m 18 – 18 36 – 36 54 35 – 35 19 (1) 18 76 (27) 49 191 (132) 59 129 (27) 102 246 (133) 113 53 108 215 27 – 27 56 (1) 55 82 16 – 16 21 (3) 18 124 (42) 82 182 (106) 76 167 (42) 125 259 (110) 149 34 158 274 (i) This ageing analysis is presented relative to invoicing date, and presents receivables according to the oldest invoice outstanding with the customer. There are a range of payment terms extended to business energy customers. Average credit terms for SME customers are 10 working days. Credit terms for Commercial and Industrial customers are bespoke and are set based on the commercial agreement with each customer. (ii) This category includes low credit risk receivables, including those from public sector and customers with high turnover (greater than £100 million). Unbilled downstream energy income at 31 December 2020 includes gross balances of £167 million in respect of Centrica Business Solutions business energy customers (2019: £216 million), against which a provision of £8 million is held (2019: £7 million). Credit loss charge for trade and other receivables The impairment charge in trade receivables is stated net of credits for the release of specific provisions made in previous years, which are no longer required. These relate primarily to residential customers in the UK. Movements in the provision for credit losses by class are as follows: 1 January Increase in impairment of trade receivables (predominantly related to credit impaired trade receivables) (i) (ii) (iii) (iv) Receivables written off (v) 31 December (vi) 2020 2019 Residential customers £m Business customers £m (387) (198) (174) 129 (432) (126) 87 (237) Treasury, trading and energy procurement counterparties £m (4) – – (4) Total £m (589) (300) 216 (673) Residential customers £m Business customers £m (343) (222) (145) 101 (387) (58) 82 (198) Treasury, trading and energy procurement counterparties £m (4) – – (4) Includes £269 million (2019: £190 million) of credit losses related to trade receivables resulting from contracts in the scope of IFRS 15. (i) £90 million of this impairment relates to discontinued operations (2019: £85 million). (ii) (iii) All loss allowances reflect the lifetime expected credit losses on trade receivables and contract assets. (iv) Excludes recovery of previously written-off receivables of £15 million (2019: £6 million). Due to the large number of individual receivables and the matrix approach employed, any reduction in provision is reflected in a reduced charge for the relevant period, rather than in separately identifiable reversals of previous provisions. (v) Materially all write-offs relate to trade receivables where enforcement activity is ongoing. (vi) Included in the 31 December 2020 closing balance is £82 million, relating to Direct Energy and within assets held for sale. Year ended 31 December Increase in impairment provision for trade receivables (per above) Less discontinued operations Less recovery of previously written-off receivables Credit losses on financial assets from continuing operations (per Group Income Statement) 2020 £m (300) 90 15 (195) 2019 £m (203) 85 6 (112) Enforcement activity continues in respect of balances that have been written off unless there are specific known circumstances (such as bankruptcy) that render further action futile. COVID-19 restrictions caused a hiatus in enforcement activity during the second and third quarters of 2020. Centrica plc Annual Report and Accounts 2020 141 i F n a n c a i l S t a t e m e n t s Total £m (569) (203) 183 (589) Financial Statements | Notes to the Financial Statements continued 17. Trade and other receivables, and contract-related assets Sensitivity to changes in assumptions Typically, the most significant assumption included within the expected credit loss provisioning model that gives rise to estimation uncertainty is that future performance will be reflective of past performance and that there will be no significant change in the payment profile or recovery rates within each identified group of receivables. To address this risk, the Group reviews and updates default rates, by group, on a regular basis to ensure they incorporate the most up to date assumptions along with forward-looking information where available and relevant. The Group also considers regulatory changes and customer segment specific factors that may have an impact, now or in the future, on the recoverability of the balance. The specific consideration of forward-looking information in the impairment model does not usually give rise to significant changes in the levels of credit losses. However, the impacts of the global COVID-19 pandemic and associated government responses in geographies in which the Group operates have caused a significant deterioration in economic outlook. This has increased the level of estimation uncertainty inherent in determining credit loss provisions for the Group’s trade receivables. Where customers experience difficulties in settling balances, the increased ageing of these amounts results in an increase in provisions held in respect of them under the provision matrix approach employed. The Group has also considered changes in customer payment patterns, such as direct debit cancellations and, in the case of business counterparties, the specific circumstances of the customers and the economic impacts of COVID-19 on the sectors in which they operate. The Group has considered macroeconomic forecasts in determining the level of provisions for credit losses. Government support schemes currently in place for the benefit of customers are expected to mitigate, to some degree, the near-term impacts of any forecast economic decline on billed financial assets recognised at 31 December 2020. However, unbilled energy income is more susceptible to credit risk from such forward-looking factors due to the length of time between the balance sheet date and collection of the amounts in cash. During 2020 the Group recognised impairment charges of £195 million (2019: £112 million) in respect of financial assets, representing 1.6% of Group revenue (2019: 0.9%) and 1.3% of Group revenue from business performance (2019: 0.7%). As described above, the majority of the Group’s credit exposure arises in respect of downstream energy receivables in British Gas and Centrica Business Services. Credit losses in respect of these assets amounted to £179 million (2019: £105 million). This represents 2.2% (2019: 1.2%) of total UK downstream energy supply revenue from these segments of £8,239 million (2019: £8,671 million). Further details of segmental revenue are provided in note 4. This increase in credit loss charges reflects the increase in losses incurred by the Group as a result of the COVID-19 pandemic, and losses expected in the future as a result of a generally worsening macroeconomic outlook. Due to the different level of risks presented by billed and unbilled receivables, these asset groups are considered separately in the analysis below. Billed trade receivables Gross billed receivables Provision Net balance Provision coverage Sensitivity Impact on billed receivables/operating profit from 1 percentage point (increase)/decrease in provision coverage (i) 31 December 2020 £m 31 December 2019 £m (ii) 1,379 (566) 813 1,395 (502) 893 31 December 2020 % 31 December 2019 % 36 41 £m (14)/14 (i) Credit risk in the Group is impacted by a large number of interacting factors. (ii) Figures as at 31 December 2019 exclude the Direct Energy business, which is classified as a disposal group held for sale at 31 December 2020, therefore providing a meaningful comparison. Cash collection relative to billing has remained generally strong throughout the pandemic to date. While any delays in payment and changes to payment methods by customers in the Group’s downstream operations have driven some increase in provisions in the relevant segments, credit risk increases arising from macroeconomic conditions are expected to be mitigated by government support schemes in place for the benefit of customers. The average cash collection cycle of the Group means that significant amounts are expected to be collected before the mitigation offered by such schemes ends. However, as part of management’s assessment of the adequacy of the bad debt provision, a high- level increase of £30 million (for both billed and unbilled debt) was booked in addition to the initial matrix model output, which also gave rise to an increase. This was deemed to reflect the possible increase in bad debt as a result of an increase in forecast unemployment (using the Office for Budget Responsibility’s unemployment forecast peaking at 8% by mid-2021). It is highly uncertain when unemployment might peak and at what rate, how much debt recorded as at 31 December 2020 remains outstanding at that point, and how unemployment might ultimately reduce the collection of such debt. The table above and the unbilled section below provides details of the sensitivity of moving the bad provision by a further 1%. The Group’s services, upstream and trading operations are less susceptible to credit risk. No significant deterioration of credit risk has been experienced or is expected in the relevant segments in respect of billed trade receivables recognised at 31 December 2020, taking into account cash collection cycles in those areas of the Group and credit rating information (see note S3). 142 Centrica plc Annual Report and Accounts 2020 17. Trade and other receivables, and contract-related assets Unbilled downstream energy income The table below shows the impact of the worsening economic conditions and outlook on unbilled downstream energy income for the Group as a whole. Gross unbilled receivables Provision Net balance Provision coverage Sensitivity Impact on unbilled receivables/operating profit from 1 percentage point (increase)/decrease in provision coverage (i) 31 December 2020 £m 31 December 2019 £m (ii) 532 (25) 507 606 (13) 593 31 December 2020 % 31 December 2019 % 2 5 £m (5)/5 (i) Credit risk in the Group is impacted by a large number of interacting factors. (ii) Figures as at 31 December 2019 exclude the Direct Energy business, which has been classified as a disposal group held for sale at 31 December 2020, therefore providing a meaningful comparison. Unbilled downstream energy income is typically provided at a significantly lower rate than billed debt. This is because a large proportion of this debt once billed will be subject to the very short cash collection cycles of the Group’s downstream energy supply businesses. However, negative forward-looking macroeconomic information, coupled with the expected cessation of government support schemes for customers is reflected in a significantly increased rate of provision for unbilled downstream energy income when compared to the prior year. Assets held for sale The Direct Energy business has been classified as a disposal group held for sale. Assets held for sale on the Group Balance Sheet includes gross billed trade receivables of £712 million, against which a provision of £82 million was held, reflecting a provision coverage of 12%. In 2019 the Direct Energy business held trade receivables of £743 million against which a provision of £74 million was held, reflecting a provision coverage of 10%. Assets held for sale also includes gross unbilled downstream energy income of £635 million. In 2019 the Direct Energy business held unbilled downstream energy income of £736 million. North America trade and other receivables are typically subject to much lower credit risk than similar UK assets. This is reflected in the lower provision rates in the Direct Energy segment. In determining required provisions for expected credit losses for receivables at 31 December 2020, the methodology used by management has been updated to reflect current and forecast macroeconomic conditions, and no further provisions were deemed necessary. Trade and other receivables classified as held for sale were disposed of on completion of the sale of Direct Energy to NRG on 5 January 2021. 18. Inventories Inventories represent assets that we intend to use in future periods, either by selling the asset itself (for example gas in storage) or by using it to provide a service to a customer. 31 December Gas and oil in storage and transportation (i) Other raw materials and consumables Finished goods and goods for resale 2020 £m 103 169 52 324 2019 £m 157 190 84 431 (i) Includes oil inventory and gas in storage held at fair value of £83 million (2019: £43 million). Excluding discontinued operations, the Group consumed £423 million of inventories (2019: £560 million) during the year. Write-downs amounting to £15 million (2019: £28 million) were charged to the Group Income Statement in the year. Centrica plc Annual Report and Accounts 2020 143 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 19. Derivative financial instruments The Group generally uses derivative financial instruments to manage the risk arising from fluctuations in the value of certain assets or liabilities associated with treasury management and energy sales and procurement, and for proprietary energy trading purposes. During 2020 the Group also used derivatives to hedge the exchange risk arising on the net assets of its US dollar Direct Energy subsidiaries. Derivatives are held at fair value. For accounting purposes, derivatives are either classified as held for trading, in which case changes in their fair value are recognised in the Group Income Statement, or they are designated in hedging relationships. Where derivatives are in hedging relationships, the treatment of changes in their fair value depends on the nature of that relationship, and whether it represents a fair value hedge, a cash flow hedge, or a net investment hedge. Note S5 provides further detail on the Group’s hedge accounting. The table below gives a high-level summary of the Group’s accounting for its derivative contracts. Purpose Classification Accounting treatment Proprietary energy trading and treasury management. Treasury management and hedging of exchange risk on net assets of US dollar Direct Energy subsidiaries. Held for trading and fair value hedges. Cash flow and net investment hedges. Changes in fair value recognised in the Group’s business performance results for the year. Effective portion of hedge initially recognised in the Group Statement of Other Comprehensive Income. Gains and losses are recycled to the Group Income Statement when the hedged item impacts profit or loss. Ineffective portions of the hedge are recognised immediately in the Group’s business performance results for the year. Energy procurement and optimisation. Held for trading. Changes in fair value recognised in certain re-measurements. The carrying values of derivative financial instruments by product type for accounting purposes are as follows: 31 December Derivative financial instruments – held for trading under IFRS 9: Energy derivatives – for procurement/optimisation Energy derivatives – for proprietary trading Interest rate derivatives Foreign exchange derivatives Derivative financial instruments in hedge accounting relationships: Interest rate derivatives Foreign exchange derivatives Total derivative financial instruments Included within: Derivative financial instruments – current Derivative financial instruments – non-current Assets and liabilities held for sale 2020 Assets £m Liabilities £m 2019 Assets £m Liabilities £m 585 726 3 49 182 204 (445) (667) – (46) (1) (9) 553 917 3 104 105 131 (1,245) (769) (23) (104) (2) (2) 1,749 (1,168) 1,813 (2,145) 1,224 366 159 (747) (181) (240) 1,320 493 – (1,854) (291) – Included in derivative liabilities above is £77 million (2019: £12 million) relating to virtual gas storage arrangements. These contracts give the parties rights to put and call gas volumes over their term, economically mirroring physical storage arrangements. Optimisation of virtual storage contracts under related commodity sale and purchase arrangements with the same parties has given rise to net operating cash inflows of £40 million during 2020 (2019: £21 million). These cash flows arise from the normal commodity trading activities of the Group, and are therefore operating in nature, but are separately disclosed because the timing of cash flows under the arrangements can give rise to a cash flow benefit akin to a financing arrangement. 144 Centrica plc Annual Report and Accounts 2020 19. Derivative financial instruments The contracts included within energy derivatives are subject to a wide range of detailed specific terms, but comprise the following general components, analysed on a net carrying value basis: 31 December Short-term forward market purchases and sales of gas and electricity: UK and Europe North America (i) Other derivative contracts including structured gas sale and purchase arrangements Net total (i) Derivatives held by the Direct Energy business are classified as assets and liabilities held for sale at 31 December 2020. 2020 £m (26) (81) 306 199 Net gains/(losses) on derivative financial instruments due to re-measurement 31 December Financial assets and liabilities measured at fair value: Derivative financial instruments – held for trading Derivative financial instruments in hedge accounting relationships 20. Trade and other payables, and contract liabilities 2020 Income Statement £m 346 73 419 2019 Income Statement £m (551) 55 (496) Equity £m – 102 102 2019 £m 249 (165) (628) (544) Equity £m – (53) (53) Trade and other payables include accruals and are principally amounts we owe to our suppliers. Financial deferred income represents monies received from customers in advance of the delivery of goods or services that may be returned to the customer if future delivery does not occur. For example, downstream customers with a credit balance may request repayment of the outstanding amount in cash, rather than taking delivery of commodity. By contrast, contract liabilities and non-financial deferred income arise when the Group receives consideration from a customer in advance of performance, and has a non-financial liability to deliver future goods or services in return. 31 December Financial liabilities: Trade payables Deferred income (i) Capital payables Cash collateral received (note 24) Other payables Accruals: Commodity costs Transportation, distribution and metering costs Operating and other accruals Non-financial liabilities: Other payables and accruals Contract liabilities Deferred income 2020 2019 Current Non-current £m £m Current £m Non-current £m i F n a n c a i l (440) (331) (114) (68) (225) (1,019) (258) (584) (1,861) (3,039) (589) (26) (68) – – – – (92) – – – – (92) (2) (20) – (571) (328) (181) (35) (327) (1,866) (401) (783) (3,050) (4,492) (850) (55) (136) (3,722) (114) (5,533) S t a t e m e n t s (1) – (96) – (36) – – – – (133) (1) (15) (3) (152) 2019 £m Maturity profile of financial liabilities within current trade and other payables 31 December 2020 £m Less than 90 days 90 to 182 days 183 to 365 days (i) Includes downstream customer credit balances for amounts billed in advance of energy supply. (2,817) (4,245) (90) (132) (140) (107) (3,039) (4,492) Centrica plc Annual Report and Accounts 2020 145 Financial Statements | Notes to the Financial Statements continued 21. Provisions for other liabilities and charges Provisions are recognised when an obligation exists that can be reliably measured, but where there is uncertainty over the timing and/or amount of the payment. The main provisions relate to decommissioning costs for upstream assets we own, or have owned, which require restoration or remediation. Further provisions relate to sale and purchase contracts we have entered into that are now onerous, restructuring costs, and legal and regulatory matters. Current Restructuring costs Decommissioning costs (i) (ii) Sale/purchase contract loss provision Other (iii) Non-current Restructuring costs Decommissioning costs (i) (ii) Sale/purchase contract loss provision Other (iii) 1 January 2020 £m Charged in the year £m Notional interest £m Unused and reversed in the year £m Utilised £m Transfers (iv) £m Exchange adjustments £m 31 December 2020 £m (56) (152) (28) (48) (284) 1 January 2020 £m (8) (2,071) (36) (60) (2,175) (100) (2) (3) (48) (153) – – – – – 22 – 3 6 31 69 63 20 43 195 – 18 – 4 22 1 – – – 1 (64) (73) (8) (43) (188) Charged in the year £m Notional interest £m Unused and reversed in the year £m Revisions and additions £m Transfers (iv) £m Exchange adjustments £m 31 December 2020 £m – (32) (19) (8) (59) – (22) – (1) (23) 3 14 – 5 22 – (249) – (8) (257) – 35 28 1 64 (1) (10) – 1 (6) (2,335) (27) (70) (10) (2,438) Included within the above liabilities are the following financial liabilities: 31 December Restructuring costs Provisions other than restructuring costs 2020 Current £m (64) (43) (107) Non-current £m (6) (83) (89) 2019 Current £m Non-current £m (56) (71) (127) (8) (86) (94) (i) Provision has been made for the estimated net present cost of decommissioning gas production facilities at the end of their useful lives. The estimate has been based on 2P reserves, price levels and technology at the balance sheet date. The payment dates of decommissioning costs are dependent on the lives of the facilities, but utilisation of the provision is expected to occur until the 2040s. During the year the rate used to discount provisions was reduced to 0%. See note 3. Included in the provision balance as at 31 December 2020 is £2,055 million held in Spirit Energy, £332 million in relation to the Rough field, and £21 million in the remainder of the business. (ii) (iii) Other provisions have been made for dilapidations, insurance, legal, warranty and various other claims. (iv) Includes amounts transferred between current and non-current and transfers to disposal groups held for sale. The split is as below: Transfers 31 December 2020 Decommissioning costs (i) Sale/purchase contract loss provision Other (i) Planned decommissioning work postponed due to project deferrals. Current Non-current Transfer to/(from) non- current £m 17 (18) (1) (2) Transfer to disposal group held for sale £m 1 18 5 24 Transfer to/(from) current £m Transfer to disposal group held for sale £m (17) 18 1 2 52 10 – 62 146 Centrica plc Annual Report and Accounts 2020 22. Post-retirement benefits The Group manages a number of final salary and career average defined benefit pension schemes. It also has defined contribution schemes. The majority of these schemes are in the UK. (a) Summary of main post-retirement benefit schemes Name of scheme Centrica Engineers Pension Scheme Type of benefit Status Country Defined benefit final salary pension Closed to new members in 2006 Defined benefit career average pension Open to service engineers only Centrica Pension Plan Defined benefit final salary pension Closed to new members in 2003 Centrica Pension Scheme Defined benefit final salary pension Closed to new members in 2003 Bord Gáis Energy Company Defined Benefit Pension Scheme Bord Gáis Energy Company Defined Contribution Pension Plan Direct Energy Marketing Limited Pension Plan Defined benefit career average pension Closed to new members in 2008 Defined contribution pension Open to new members Defined benefit final salary pension Closed to new members in 2014 Defined contribution pension Open to new members Defined benefit final salary pension Closed to new members in 2004 Canada Direct Energy Marketing Limited Post-retirement benefits Closed to new members in 2012 Canada UK UK UK UK UK UK Republic of Ireland Republic of Ireland Number of active members as at 31 December 2020 Total membership as at 31 December 2020 2,416 2,959 1,775 2 866 10,318 121 244 6 10 8,429 5,552 8,368 10,356 4,050 18,504 172 329 361 254 i F n a n c a i l S t a t e m e n t s The Centrica Engineers Pension Scheme (CEPS), Centrica Pension Plan (CPP) and Centrica Pension Scheme (CPS) form the significant majority of the Group’s defined benefit obligation and are referred to below as the ‘Registered Pension Schemes’. The other schemes are individually, and in aggregate, immaterial. Independent valuations The Registered Pension Schemes are subject to independent valuations at least every three years, on the basis of which the qualified actuary certifies the rate of employer contributions, which together with the specified contributions payable by the employees and proceeds from the schemes’ assets, are expected to be sufficient to fund the benefits payable under the schemes. The latest full actuarial valuations were carried out at the following dates: the Registered Pension Schemes at 31 March 2018, the Bord Gáis Energy Company Defined Benefit Pension Scheme at 1 January 2020 and the Direct Energy Marketing Limited Pension Plan at 1 January 2018. These have been updated to 31 December 2020 for the purpose of meeting the requirements of IAS 19. Investments held in all schemes have been valued for this purpose at market value. Governance The Registered Pension Schemes are managed by trustee companies whose boards consist of both company-nominated and member- nominated Directors. Each scheme holds units in the Centrica Combined Common Investment Fund (CCCIF), which holds the majority of the combined assets of the Registered Pension Schemes. The board of the CCCIF is currently comprised of nine directors: three independent directors, three directors appointed by Centrica plc (including the Chairman) and one director appointed by each of the three Registered Pension Schemes. Under the terms of the Pensions Act 2004, Centrica plc and each trustee board must agree the funding rate for its defined benefit pension scheme and a recovery plan to fund any deficit against the scheme-specific statutory funding objective. This approach was first adopted for the triennial valuations completed at 31 March 2006, and has been reflected in subsequent valuations, including the 31 March 2018 valuation. Centrica plc Annual Report and Accounts 2020 147 Financial Statements | Notes to the Financial Statements continued 22. Post-retirement benefits (b) Risks The Registered Pension Schemes expose the Group to the following risks: Asset volatility The pension liabilities are calculated using a discount rate set with reference to AA corporate bond yields. If the growth in plan assets is lower than this, this will create an actuarial loss within other equity. The CCCIF is responsible for managing the assets of each scheme in line with the risk tolerances (which were updated in 2019) that have been set by the trustees of the schemes, and invests in a diversified portfolio of assets. The schemes are relatively young in nature (the schemes opened in 1997 on the formation of Centrica plc on demerger from BG plc (formerly British Gas plc)), and only took on past service liabilities in respect of active employees. The trustees significantly reduced their risk tolerance in 2019, increasing inflation and interest rate hedges from one third to two thirds. This has resulted in a significant reduction of return-seeking assets within the portfolio, as well as a higher weighting to assets that better manage downside risk. Interest rate A decrease in bond interest rates will increase the net present value of the pension liabilities. The relative immaturity of the schemes means that the duration of the liabilities is longer than average for typical UK pension schemes, resulting in a relatively higher exposure to interest rate risk. The trustees took further action to reduce this risk in 2020. Inflation Pensions in deferment, pensions in payment and pensions accrued under the career average schemes increase in line with the Retail Prices Index (RPI) and the Consumer Prices Index (CPI). Therefore, scheme liabilities will increase if inflation is higher than assumed, although in some cases caps are in place to limit the impact of significant movements in inflation. Furthermore, a pension increase exchange (PIE) option implemented in 2015 is available to future retirees, which gives the choice to receive a higher initial pension in return for giving up certain future increases linked to RPI, again limiting the impact of significant movements in inflation. Longevity The majority of the schemes’ obligations are to provide benefits for the life of scheme members and their surviving spouses; therefore increases in life expectancy will result in an increase in the pension liabilities. The relative immaturity of the schemes means that there is comparatively little observable mortality data to assess the rates of mortality experienced by the schemes, and means that the schemes’ liabilities will be paid over a long period of time, making it particularly difficult to predict the life expectancy of the current membership. Furthermore, pension payments are subject to inflationary increases, resulting in a higher sensitivity to changes in life expectancy. Salary Pension liabilities are calculated by reference to the future salaries of active members, and hence salary rises in excess of assumed increases will increase scheme liabilities. During 2011, changes were introduced to the final salary sections of CEPS and CPP such that annual increases in pensionable pay are capped to 2%, resulting in a reduction in salary risk. During 2016, a salary cap on pensionable pay for the CPS career average and CPP schemes was implemented, and in 2019 a similar change took place for CEPS. All of the 2011, 2016 and 2019 changes result in a reduction in salary risk. Foreign exchange Certain assets held by the CCCIF are denominated in foreign currencies, and hence their values are subject to exchange rate risk. The CCCIF has long-term hedging policies in place to manage interest rate, inflation and foreign exchange risks. The table below analyses the total liabilities of the Registered Pension Schemes, calculated in accordance with accounting principles, by type of liability, as at 31 December 2020. Total liabilities of the Registered Pension Schemes 31 December Actives – final salary – capped Actives – final salary – uncapped and crystallised benefits Actives – career average Deferred pensioners Pensioners 2020 % 18 4 6 33 39 100 148 Centrica plc Annual Report and Accounts 2020 22. Post-retirement benefits (c) Accounting assumptions The accounting assumptions for the Registered Pension Schemes are given below: Major assumptions used for the actuarial valuation 31 December Rate of increase in employee earnings: Subject to 2% cap Other not subject to cap Rate of increase in pensions in payment Rate of increase in deferred pensions: In line with CPI capped at 2.5% In line with RPI Discount rate 2020 % 2019 % 1.6 2.2 2.8 2.0 2.8 1.5 1.6 2.1 2.9 1.9 2.9 2.2 The assumptions relating to longevity underlying the pension liabilities at the balance sheet date have been based on a combination of standard actuarial mortality tables, scheme experience and other relevant data, and include an allowance for future improvements in mortality. The impact of COVID-19 has not been factored into the mortality assumptions, as the future impact is not yet reliably known. The longevity assumptions for members in normal health are as follows: Life expectancy at age 65 for a member 31 December Currently aged 65 Currently aged 45 2020 Male Years 22.6 24.0 Female Years 24.0 25.2 2019 Male Years 22.6 23.9 Female Years 24.1 25.6 The other demographic assumptions have been set having regard to the latest trends in scheme experience and other relevant data. The assumptions are reviewed and updated as necessary as part of the periodic actuarial valuations of the pension schemes. For the Registered Pension Schemes, marginal adjustments to the assumptions used to calculate the pension liability, or significant swings in bond yields or stock markets, can have a large impact in absolute terms on the net assets of the Group. Reasonably possible changes as at 31 December to one of the actuarial assumptions would have affected the scheme liabilities as set out below: Impact of changing material assumptions 31 December Rate of increase in employee earnings subject to 2% cap Rate of increase in pensions in payment and deferred pensions Discount rate Inflation assumption Longevity assumption 2020 2019 Increase/ decrease in assumption Indicative effect on scheme liabilities % Increase/ decrease in assumption Indicative effect on scheme liabilities % 0.25% 0.25% 0.25% 0.25% 1 year +/-0 +/-4 -/+6 +/-5 +/-4 0.25% 0.25% 0.25% 0.25% 1 year +/-0 +/-5 -/+6 +/-5 +/-3 The indicative effects on scheme liabilities have been calculated by changing each assumption in isolation and assessing the impact on the liabilities. For the reasonably possible change in the inflation assumption, it has been assumed that a change to the inflation assumption would lead to corresponding changes in the assumed rates of increase in uncapped pensionable pay, pensions in payment and deferred pensions. The remaining disclosures in this note cover all of the Group’s defined benefit schemes. (d) Amounts included in the Group Balance Sheet 31 December Fair value of plan assets Present value of defined benefit obligation Net liability recognised in the Group Balance Sheet Pension liability presented in the Group Balance Sheet as: Retirement benefit assets Retirement benefit liabilities 2020 £m 10,070 (10,671) (601) – (601) 2019 £m 8,999 (9,162) (163) 56 (219) The Trust Deed and Rules for the Registered Pension Schemes provide the Group with a right to a refund of surplus assets assuming the full settlement of scheme liabilities. No asset ceiling restrictions have been applied in the consolidated Financial Statements. Centrica plc Annual Report and Accounts 2020 149 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 22. Post-retirement benefits (e) Movements in the year 1 January Items included in the Group Income Statement: Current service cost Contributions by employer in respect of employee salary sacrifice arrangements (i) Total current service cost Past service credit (ii) Interest (expense)/income Termination benefit Items included in the Group Statement of Comprehensive Income: Returns on plan assets, excluding interest income Actuarial gain from changes to demographic assumptions Actuarial loss from changes in financial assumptions Actuarial (loss)/gain from experience adjustments Items included in the Group Cash Flow Statement: Employer contributions Contributions by employer in respect of employee salary sacrifice arrangements Other movements: Benefits paid from schemes Other Transfers from provisions for other liabilities and charges Transferred to held for sale 31 December 2020 Pension liabilities £m (9,162) Pension assets £m 8,999 2019 Pension liabilities £m (8,566) Pension assets £m 8,487 (79) (28) (107) – (197) (120) – 55 (1,434) (58) – – 286 (3) – 69 – – – – 197 – 936 – – – 241 28 (286) 3 – (48) (87) (29) (116) 260 (242) – – 229 (1,286) 388 – – 285 (3) (111) – – – – – 241 – 204 – – – 320 29 (285) 3 – – (10,671) 10,070 (9,162) 8,999 (i) A salary sacrifice arrangement was introduced on 1 April 2013 for pension scheme members. The contributions paid via the salary sacrifice arrangement have been treated as employer contributions and included within the current service cost, with a corresponding reduction in salary costs. (ii) A £252 million past service credit was recognised in the prior year in relation to a rule amendment during December 2019 to the UK defined benefit pension scheme arrangements to offer members an option to level up their ongoing pension, if they retire before the statutory retirement age, and an £8 million past service credit was recognised in relation to changes made to future service benefits from June 2019. In addition to current service cost on the Group’s defined benefit pension schemes, the Group also charged £64 million (2019: £75 million) to operating profit in respect of defined contribution pension schemes. This included contributions of £20 million (2019: £20 million) paid via a salary sacrifice arrangement. 150 Centrica plc Annual Report and Accounts 2020 22. Post-retirement benefits (f) Pension scheme assets The market values of plan assets were: 31 December Equities Corporate bonds High-yield debt Liability matching assets Property Cash pending investment Quoted £m 19 2,649 2,069 2,192 – 38 2020 Unquoted £m 396 – 1,286 1,069 352 – Total £m 415 2,649 3,355 3,261 352 38 Quoted £m 188 2,646 1,015 1,430 – 695 2019 Unquoted £m 346 – 1,288 1,075 316 – Total £m 534 2,646 2,303 2,505 316 695 6,967 3,103 10,070 5,974 3,025 8,999 Unquoted assets are valued by the fund managers with reference to the expected cash flows associated with the assets. These valuations are reviewed annually as part of the CCCIF audit. Included within equities are £nil of ordinary shares of Centrica plc (2019: £nil) via pooled funds that include a benchmark allocation to UK equities. Included within corporate bonds are £nil (2019: £nil) of bonds issued by Centrica plc, albeit minor exposure may be held within pooled funds over which the CCCIF has no ability to direct investment decisions. Apart from the investment in the Scottish Limited Partnerships which form part of the asset-backed contribution arrangements described in section (g) of this note, no direct investments are made in securities issued by Centrica plc or any of its subsidiaries or property leased to or owned by Centrica plc or any of its subsidiaries. Included within the Group Balance Sheet within non-current securities are £108 million (2019: £103 million) of investments, held in trust on behalf of the Group, as security in respect of the Centrica Unfunded Pension Scheme. Of the pension scheme liabilities above, £66 million (2019: £62 million) relate to this scheme. More information on the Centrica Unfunded Pension Scheme is included in the Remuneration Report on pages 66 to 75. Estimation uncertainty (Asset valuation) Within the plan asset portfolio, the proportion of unquoted assets remains broadly unchanged from last year. Within these assets, private equity and property have always exhibited the most valuation uncertainty, but they remain under 10% of the portfolio at 31 December 2020. A 10% reduction in the value of private equity and property assets would result in a £75 million reduction in the fair value of plan assets. Given the impact of COVID-19 versus more normal market conditions, there is potentially a greater level of uncertainty around these valuations. These asset values have been updated based on the latest asset manager views and other benchmarks where relevant, but no further adjustments have been deemed necessary. (g) Pension scheme contributions The Group estimates that it will pay £54 million of ordinary employer contributions during 2021 for its defined benefit schemes, at an average rate of 19% of pensionable pay, together with £27 million of contributions paid via a salary sacrifice arrangement. At 31 March 2018 (the date of the latest full agreed actuarial valuations) the weighted average duration of the liabilities of the Registered Pension Schemes was 22 years. For the Registered Pension Schemes the latest actuarial valuation agreed with the Pension Trustees was as at 31 March 2018. The technical provisions deficit (funding basis) at that time was £1,402 million. The Group committed to additional annual cash contributions to fund this pension deficit. The overall deficit contributions, including the previously disclosed asset-backed contribution arrangements, totalled £235 million in 2019 (including £12 million of pension strain payments), £175 million in 2020 and will amount to £175 million per annum from 2021 to 2025, with a balancing payment of £93 million in 2026. As part of this agreement, a deferral arrangement was also agreed for pension strain liabilities resulting from redundancies made between 1 July 2019 and 30 June 2021, up to a limit of £240 million. A security package over the Group’s equity shareholding in the Direct Energy business, enforceable in the unlikely event the Group was unable to meet its obligations, was also provided and amounted to £1,235 million. In January 2021, as part of the Direct Energy disposal, this security package was released by the Pension Trustees. In exchange, the Group provided replacement security of £745 million of letters of credit and £250 million cash in escrow. The pension strain liability deferral arrangement was cancelled, resulting in a payment of £115 million to the Schemes in January 2021, with further amounts expected later in the year as other redundancies are finalised. On a pure roll-forward basis, from 31 March 2018, using the same methodology and consequent assumptions, the technical provisions deficit (funding basis) would be c.£1.9 billion at the reporting date. Note that the next triennial review is scheduled for 31 March 2021, and the valuation methodology and assumptions may differ from those previously used. Centrica plc Annual Report and Accounts 2020 151 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 23. Leases, commitments and contingencies (a) Commitments and leases Commitments are not held on the Group’s Balance Sheet as these are executory arrangements, and relate to amounts that we are contractually required to pay in the future as long as the other party meets its contractual obligations. The Group’s commitments in relation to commodity purchase contracts disclosed below are stated net of amounts receivable under commodity sales contracts where there is a right of offset with the counterparty, and are based on the expected minimum quantities of gas and other commodities that the Group is contracted to buy at estimated future prices. The commitments in this note differ in scope and in basis from the maturity analysis of energy derivatives disclosed in note S3, as only certain procurement and sales contracts are within the scope of IFRS 9 and included in note S3 and the volumes used in calculating the maturity analysis in note S3 are estimated using valuation techniques, rather than being based on minimum contractual quantities. The Group’s 20-year agreement with Cheniere to purchase 89bcf per annum of LNG volumes for export from the Sabine Pass liquefaction plant in the US commits the Group to capacity payments of £3.7 billion (included in ‘LNG capacity’ below) between 2021 and 2039. It also allows the Group to make up to £4.8 billion of commodity purchases based on market gas prices and foreign exchange rates as at the balance sheet date. During 2019, the Group signed a 20-year agreement to purchase LNG volumes from Mozambique LNG1 Company. The commercial start date is 2025 and under this agreement the Group is committed to make commodity purchases expected to amount to £6.6 billion based on market gas and oil prices at the reporting date. 31 December Commitments in relation to the acquisition of PP&E Commitments in relation to the acquisition of intangible assets: Renewable obligation certificates Other intangible assets Other commitments: Commodity purchase contracts LNG capacity Transportation capacity Other long-term commitments (ii) (i) Of the commitments at 31 December 2020 £5,649 million relates to discontinued operations, predominantly from commodity purchase contracts. (ii) Other long-term commitments include amounts in respect of executory contracts, power station tolling fees and the smart meter roll-out programme. The maturity analysis for commodity purchase contract commitments at 31 December is given below: 2020 (i) £m 146 3,624 827 2019 £m 299 3,756 762 34,819 46,411 4,086 1,093 600 4,282 1,117 747 31 December <1 year 1–2 years 2–3 years 3–4 years 4–5 years >5 years Commodity purchase contract commitments Fixed price commodity commitments Commodity commitments that float with indices 2020 £billion 2019 £billion 2020 £billion 2019 £billion 5.2 1.8 0.6 0.2 0.1 0.4 8.3 6.8 2.3 0.7 0.3 0.1 0.2 10.4 4.4 3.3 3.0 2.5 2.1 11.2 26.5 4.5 3.9 3.4 3.4 3.1 17.7 36.0 152 Centrica plc Annual Report and Accounts 2020 23. Leases, commitments and contingencies The Group enters into lease arrangements for assets including property, vehicles, vessels and assets used within the exploration and production business. The carrying amount, additions and depreciation charge associated with right-of-use assets is disclosed in note 13 and the interest expense arising on the Group’s lease liability is disclosed in note 8. The total Group cash outflow in the year for capital and interest from lease arrangements was £195 million, and the maturity analysis of cash flows associated with the Group’s lease liability at the reporting date is shown in note S3. The table below provides further information on amounts not included in the lease liability and charged to the Group Income Statement during the year. Year ended 31 December Expense related to short-term leases Expense related to variable lease payments 2020 £m 47 32 2019 £m 47 23 During the year, the Group’s expense related to short-term lease commitments predominantly related to the hire of LNG vessels and exploration and production drilling rigs. The commitment at the balance sheet date also relates to assets of a similar nature. The Group does not have any material sub-lease or sale and leaseback arrangements. The Group does not have any material arrangements in which it acts as a lessor. The Group commenced the lease of two LNG vessels in April and July 2020. In each lease, the seven-year term excludes a six-year extension option for the Group because it is not reasonably certain that the option will be exercised. Similarly, the determination of the lease term does not reflect a termination option for the Group as it is reasonably certain that the option will not be exercised. Commencement of the leases gave rise to the recognition of right-of-use assets and lease liabilities of £206 million. The vessels are part of the operations of the Energy Marketing & Trading segment. (b) Guarantees and indemnities This section discloses any guarantees and indemnities that the Group has given, where we may have to provide security in the future against existing and future obligations that will remain for a specific period. In connection with the Group’s energy trading, transportation and upstream activities, certain Group companies have entered into contracts under which they may be required to prepay, provide credit support or provide other collateral in the event of a significant deterioration in creditworthiness. The extent of credit support is contingent upon the balance owing to the third party at the point of deterioration. As at 31 December 2020, £665 million (2019: £651 million) of letters of credit and on-demand payment bonds have been issued in respect of decommissioning obligations included in the Group Balance Sheet. (c) Contingent liabilities The Group has no material contingent liabilities. Centrica plc Annual Report and Accounts 2020 153 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 24. Sources of finance (a) Capital structure The Group seeks to maintain an efficient capital structure with a balance of net debt and equity as shown in the table below: 31 December Net debt Shareholders’ equity Capital 2020 £m 2,769 957 3,726 2019 £m 3,181 1,212 4,393 Debt levels are restricted to limit the risk of financial distress and, in particular, to maintain a strong credit profile. The Group’s credit standing is important for several reasons: to maintain a low cost of debt, limit collateral requirements in energy trading, hedging and decommissioning security arrangements, and to ensure the Group is an attractive counterparty to energy producers and long-term customers. The Group monitors its current and projected capital position on a regular basis, considering a medium-term view of at least three years, and different stress case scenarios, including the impact of changes in the Group’s credit ratings and significant movements in commodity prices. A number of financial ratios are monitored, including those used by the credit rating agencies. The level of debt that can be raised by the Group is restricted by the Company’s Articles of Association. Borrowings is limited to the higher of £10 billion and a gearing ratio of three times adjusted capital and reserves. The Group funds its long-term debt requirements through issuing bonds in the capital markets and taking bank debt. Short-term debt requirements are met primarily through commercial paper or short-term bank borrowings. The Group maintains substantial committed facilities and uses these to provide liquidity for general corporate purposes, including short-term business requirements and back-up for commercial paper. British Gas Insurance Limited (BGIL) is required under PRA regulations to hold a minimum capital amount and has complied with this requirement in 2020 (and 2019). BGIL’s capital management policy and plan is subject to review and approval by the BGIL board. Reporting processes provide relevant and timely capital information to management and the board. A medium-term capital management plan forms part of BGIL’s planning and forecasting process, embedded into approved timelines, management reviews and board approvals. (b) Liquidity risk management and going concern The Group has a number of treasury and risk policies to monitor and manage liquidity risk. Cash forecasts identifying the Group’s liquidity requirements are produced regularly and are stress tested for different scenarios, including, but not limited to, reasonably possible increases or decreases in commodity prices and the potential cash implications of a credit rating downgrade. The Group seeks to ensure that sufficient financial headroom exists for at least a 12-month period to safeguard the Group’s ability to continue as a going concern, and as at the reporting date, the analysis performed by the Group extends to 31 December 2022. It is the Group’s policy to maintain committed facilities and/or available surplus cash resources of at least £1,200 million, raise at least 75% of its gross debt (excluding non-recourse debt) in the capital market and to maintain an average term to maturity in the recourse long-term debt portfolio greater than five years. At 31 December 2020 the Group had undrawn committed credit facilities of £3,637 million (2019: £3,072 million) and £1,139 million (2019: £619 million) of unrestricted cash and cash equivalents, net of outstanding overdrafts. A further £107 million of cash and cash equivalents is included in assets held for sale. 93% (2019: 91%) of the Group’s gross debt has been raised in the long-term debt market and the average term to maturity of the long-term debt portfolio was 10.3 years (2019: 11.1 years). The completion of the disposal of the Direct Energy business on 5 January 2021 led to a cash receipt of $3.6 billion (£2.7 billion), significantly improving the Group’s net debt position. The Group’s liquidity is impacted by the cash posted or received under margin and collateral agreements. The terms and conditions of these agreements depend on the counterparty and the specific details of the transaction. Cash is generally returned to the Group or by the Group within two days of trade settlement. Refer to section (c) of this note for the movement in cash posted or received as collateral. The level of undrawn committed bank facilities and available cash resources has enabled the Directors to conclude that the Group has sufficient headroom to continue as a going concern. The statement of going concern is included in the Governance section – Other Statutory Information, on page 86. 154 Centrica plc Annual Report and Accounts 2020 24. Sources of finance (c) Net debt summary Net debt predominantly includes capital market borrowings offset by cash, cash posted or received as collateral, securities and certain hedging financial instruments used to manage interest rate and foreign exchange movements on borrowings. Presented in the derivatives and current and non-current borrowings, leases and interest accruals columns shown below are the assets and liabilities that give rise to financing cash flows. Other assets and liabilities Current and non-current borrowings, leases and interest accruals £m Cash and cash equivalents, net of bank overdrafts (i) (ii) £m Derivatives £m Gross debt £m Collateral posted/ (received) £m Current and non-current securities (iii) £m Sub-lease assets £m 1 January 2019 post-adoption of IFRS 16 (5,016) 233 (4,783) 1,128 290 Net cash inflow from sale and purchase of securities Cash outflow for payment of capital element of leases Cash outflow for repayment of borrowings Remaining cash inflow and movement in cash posted/received under margin and collateral agreements Revaluation Financing interest paid Increase in interest payable and amortisation of borrowings New lease agreements and re-measurement of existing lease liabilities Business disposals and asset purchases Exchange adjustments 31 December 2019 Cash inflow from settlement and purchase of securities Cash outflow for payment of capital element of leases Cash outflow for repayment of borrowings Remaining cash inflow and movement in cash posted/received under margin and collateral agreements Revaluation Financing interest paid Increase in interest payable and amortisation of borrowings New lease agreements and re-measurement of existing lease liabilities Exchange adjustments – 155 86 – (57) 220 (229) (47) 3 90 – – – – 11 (10) – – – – – 155 86 – (46) 210 (229) (47) 3 90 (4,795) 234 (4,561) – 184 63 – (79) 213 (218) (239) (6) – – – – 132 (20) – – – – 184 63 – 53 193 (218) (239) (6) 50 (155) (86) 104 – (243) – – – (4) 794 121 (184) (63) 963 – (204) – – (34) Group net debt at 31 December 2020 (4,877) 346 (4,531) 1,393 Less assets and liabilities held for sale (iv) 35 – 35 (107) – – – 46 – – – – – (10) 326 – – – (101) – – – – 4 229 (155) 307 (51) – – – 6 – – – (6) (1) 255 (121) – – – 5 – – – (1) 138 (4) Net debt excluding disposal groups held for sale at 31 December 2020 (4,842) 346 (4,496) 1,286 74 134 8 – – – (3) – – – – – – 5 – – – (3) – – – – – 2 – 2 Net debt £m (3,050) (1) – – 147 (40) (33) (229) (47) (3) 75 (3,181) – – – 859 58 (11) (218) (239) (37) (2,769) (231) (3,000) (i) Cash and cash equivalents includes £147 million (2019: £175 million) of restricted cash. This includes cash totaling £11 million (2019: £48 million) within the Spirit Energy business that is not restricted by regulation but is managed by Spirit Energy’s own treasury department. (ii) Cash and cash equivalents are net of £534 million bank overdrafts (2019: £548 million). (iii) Securities balances include £84 million (2019: £77 million) debt instruments and £50 million (2019: £54 million) equity instruments, all measured at fair value. Assets held for sale include £4 million of equity instruments measured at fair value. In the prior period securities balances also included £124 million index-linked gilts that the Group used for short-term liquidity management purposes. (iv) Included in the 31 December 2020 closing balance is £231 million, relating to Direct Energy and presented within assets and liabilities held for sale. Centrica plc Annual Report and Accounts 2020 155 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued 24. Sources of finance Collateral is posted or received to support energy trading and procurement activities. It is posted when contracts with marginable counterparties are out of the money and received when contracts are in the money. These positions reverse when contracts are settled and the collateral is returned. Collateral received or posted is included in the following lines of the Group Balance Sheet: 31 December Collateral posted/(received) included within: Trade and other payables Trade and other receivables Net derivative liabilities Inventories Net collateral posted (d) Borrowings, leases and interest accruals summary 31 December Bank overdrafts Bank loans (> 5 year maturity) Bonds (by maturity date): 25 September 2020 22 February 2022 10 March 2022 (i) 16 October 2023 (i) 4 September 2026 (i) 16 April 2027 13 March 2029 (i) 5 January 2032 (ii) 19 September 2033 (i) 16 October 2043 12 September 2044 25 September 2045 10 April 2075 (i) (iii) 10 April 2076 (iv) Obligations under lease arrangements Interest accruals Coupon rate % Principal m Current £m Non-current £m 2020 – (144) – (42) (253) (233) (59) (51) (604) (65) (823) (264) (538) (36) (472) (671) Floating US$80 3.680 6.375 4.000 6.400 5.900 4.375 Zero 7.000 5.375 4.250 5.250 5.250 3.000 HK$450 £246 US$302 £52 US$70 £552 €50 £770 US$367 £550 US$50 £450 €750 (534) – – – – – – – – – – – – – – – – (171) (82) (787) 2020 £m (68) 56 86 – 74 Total £m (534) (144) – (42) (253) (233) (59) (51) (604) (65) (823) (264) (538) (36) (472) (671) 2019 Current £m Non-current £m (548) – (60) – – – – – – – – – – – – – – (144) – (44) (254) (234) (57) (52) (574) (59) (790) (272) (538) (37) (460) (634) 2019 £m (35) 155 199 7 326 Total £m (548) (144) (60) (44) (254) (234) (57) (52) (574) (59) (790) (272) (538) (37) (460) (634) (4,111) (4,111) (334) – (505) (82) (4,589) (5,376) (60) (166) (83) (857) (4,005) (4,065) (337) – (503) (83) (4,486) (5,343) (i) Bonds or portions of bonds maturing in 2022, 2023, 2026, 2029, 2033 and 2075 have been designated in a fair value hedge relationship. See note S5 for details of hedge relationships. (ii) €50 million of zero coupon notes have an accrual yield of 4.200%, which will result in a €114 million repayment on maturity. (iii) The Group has the right to repay at par on 10 April 2025 and every interest payment date thereafter. (iv) The Group has the right to repay at par on 10 April 2021 and every interest payment date thereafter. 156 Centrica plc Annual Report and Accounts 2020 25. Share capital Ordinary share capital represents the total number of shares issued which are publicly traded. We also disclose the number of own and treasury shares the Company holds, which the Company has bought, principally as part of share repurchase programmes. Allotted and fully paid share capital of the Company 31 December 5,842,518,658 ordinary shares of 614/81 pence each (2019: 5,829,597,044) 2020 £m 361 2019 £m 360 During the year 13 million ordinary shares were issued at an average original purchase price of 135.5 pence for employee share awards. In 2019 102 million ordinary shares were issued at an average price of 94.4 pence for scrip dividends, amounting to a total value of £96 million. The closing price of one Centrica ordinary share on 31 December 2020 was 46.6 pence (2019: 89.3 pence). Centrica employee share ownership trusts purchase Centrica ordinary shares from the open market and receive treasury shares to satisfy future obligations of certain employee share schemes. The movements in own and treasury shares during the year are shown below: 1 January Shares purchased Treasury shares placed into trust Shares released to employees on vesting (ii) 31 December (i) Own shares (i) Treasury shares (i) (ii) 2020 million shares 3.7 60.7 1.0 (5.8) 59.6 2019 million shares 5.8 1.6 1.0 (4.7) 3.7 2020 million shares 10.2 – (1.0) (9.2) – 2019 million shares 31.3 – (1.0) (20.1) 10.2 (i) The closing balance in the treasury and own share reserve of own shares was £31 million (2019: £5 million) and treasury shares was £nil (2019: £32 million). (ii) Includes shares purchased by employees under share purchase schemes for a value of £1 million. 26. Events after the balance sheet date The Group updates disclosures in light of new information being received, or a significant event occurring, in the period between 31 December 2020 and the date of this report. Sale of Direct Energy On 5 January 2021, Centrica completed the sale of its North American energy supply, services and trading business, Direct Energy, to NRG Energy Inc for $3.6 billion (£2.7 billion). This is expected to lead to a profit on disposal of c. £0.6 billion. Immediately prior to the disposal, the Pension Trustees for the UK Registered Pensions Schemes released the security they held over the shares in the Direct Energy business. In exchange, the Group provided replacement security of £745 million of letters of credit and £250 million cash in escrow. Centrica plc Annual Report and Accounts 2020 157 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information Supplementary information includes additional information and disclosures we are required to make by accounting standards or regulation. S1. General information Centrica plc (the ‘Company’) is a public company limited by shares, domiciled and incorporated in the UK, and registered in England and Wales. The address of the registered office is Millstream, Maidenhead Road, Windsor, Berkshire, SL4 5GD. The Company, together with its subsidiaries comprise the ‘Group’. The nature of the Group’s operations and principal activities are set out in note 4(a) and on pages 1 to 42. The consolidated Financial Statements of Centrica plc are presented in pounds sterling. Operations and transactions conducted in currencies other than pounds sterling are included in the consolidated Financial Statements in accordance with the foreign currencies accounting policy set out in note S2. S2. Summary of significant accounting policies This section sets out the Group’s significant accounting policies in addition to the critical accounting policies applied in the preparation of these consolidated Financial Statements. Unless otherwise stated, these accounting policies have been consistently applied to the years presented. Basis of consolidation The Group Financial Statements consolidate the Financial Statements of the Company and entities controlled by the Company. Subsidiaries are all entities (including structured entities) over which the Group has control. Control is exercised over an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Transactions with non-controlling interests that relate to their ownership interests and do not result in a loss of control are accounted for as equity transactions. The results of subsidiaries acquired or disposed of during the year are consolidated from the effective date of acquisition (at which point the Group gains control over a business as defined by IFRS 3, and applies the acquisition method to account for the transaction as a business combination) or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries, associates and joint ventures to align the accounting policies with those used by the Group. When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value with the change in carrying amount recognised in profit or loss. This fair value becomes the initial carrying amount for the purposes of subsequently accounting for the retained interest as a joint venture, associate or financial asset. Segmental reporting The Group’s operating segments are reported in a manner consistent with the internal reporting provided to and regularly reviewed by the Group’s Executive Committee (which is the Group’s Chief Operating Decision Maker as defined by IFRS 8: ‘Operating segments’) for the purposes of evaluating segment performance and allocating resources. The Group redefined its operating segments during the year, to reflect the way the business is now organised. Information relating to the prior year has been represented in line with the new segmental structure. Revenue Energy supply to business and residential customers The vast majority of contractual energy supply arrangements have no fixed duration, require no minimum consumption by the customer and can be terminated by either party at any time. No enforceable rights and obligations exist at inception of the contract and arise only once the cooling off period is complete and the Group is the legal supplier of energy to the customer. The performance obligation is the supply of energy over the contractual term; the units of supply represent a series of distinct goods that are substantially the same with the same pattern of transfer to the customer. The performance obligation is considered to be satisfied as the customer consumes based on the units of energy delivered. This is the point at which revenue is recognised. In respect of energy supply contracts, the Group considers that it has the right to consideration from the customer for an amount that corresponds directly with the invoiced value delivered to the customer through their consumption. The Group’s assessment of the amount that it has a right to invoice includes an assessment of energy supplied to customers between the date of the last meter reading and the year end (known as unread revenue). Unread gas and electricity comprises both billed and unbilled revenue and is estimated through the billing systems, using historical consumption patterns, on a customer-by-customer basis, taking into account weather patterns, load forecasts and the differences between actual meter readings being returned and system estimates. Actual meter readings continue to be compared to system estimates between the balance sheet date and the finalisation of the accounts. The Group holds a number of energy supply contracts that specify a minimum consumption volume over a specified contractual term. The transaction price for these contracts is the minimum supply volume multiplied by the contractually agreed price per unit of energy. Revenue from the sale of additional volumes is considered to be variable and not included in the transaction price. Revenue for these contracts continues to be recognised as invoiced. In making disclosures under IFRS 15, the Group applies the practical expedient in paragraph 121 of IFRS 15 and therefore does not disclose information related to the transaction price allocated to remaining performance obligations on the basis that the Group recognises revenue from the satisfaction of the performance obligations within energy supply contracts in accordance with Paragraph B16. 158 Centrica plc Annual Report and Accounts 2020 S2. Summary of significant accounting policies Energy services provided to business and residential customers Energy services relate to the installation, repair and maintenance of central heating, ventilation and air conditioning systems. In the UK, delivery of an item is considered a separate performance obligation to the installation of the item, both satisfied at a point in time. Delivery is the point at which control passes to the customer as the customer takes physical possession of the asset. It is also the point at which the Group has the right to consideration. Delivery and installation usually occur at the same point in time and consequently revenue is recognised for both performance obligations simultaneously. Certain heating, ventilation and air conditioning (HVAC) system installations in North America are considered to be a single performance obligation satisfied over time, representing the Group’s promise to deliver to the customer a functioning HVAC system. Revenue is recognised on an input basis with reference to costs incurred. Sales of LNG Revenue arising from sales of LNG is recognised when control of the commodity passes to the counterparty, with each cargo representing a separate performance obligation satisfied at a point in time. Sales of own gas and liquid production Revenue arising from the sale of produced gas is recognised in a manner consistent with energy supply contracts with the revenue recognition profile reflecting the supply of gas to the customer. In respect of oil sales, each barrel of oil is considered a separate performance obligation satisfied at a point in time – on delivery. The rights and obligations identifiable within a contract where the Group holds sellers’ nomination rights are considered to be enforceable from inception of the contract. The transaction price for the contract will include variable consideration based on forecast production and market prices. The point at which the performance obligation is satisfied and revenue recognised is the point at which control of the commodity passes to the customer according to the contractual trading terms, usually on shipment or delivery to a specified location. Revenue arising from contracts outside the scope of IFRS 15 Revenue from sources other than the Group’s contracts with customers is recognised in accordance with the relevant standard, as detailed below: Fixed-fee service and insurance contracts: revenue from these contracts is recognised in the Group Income Statement with regard to the incidence of risk over the life of the contract, reflecting the seasonal propensity of claims to be made under the contracts and the benefits receivable by the customer, which span the life of the contract as a result of emergency maintenance being available throughout the contract term. Power generation: revenue is recognised on the basis of power supplied during the year. Amounts paid in advance are treated as deferred income, with any amount in arrears recognised as accrued income. Cost of sales Energy supply includes the cost of gas and electricity produced and purchased during the year for own-use contracts, taking into account the industry reconciliation process for total gas and total electricity usage by supplier and related transportation, distribution, royalty costs and bought-in materials and services. Cost of sales relating to fixed-fee service and insurance contracts includes direct labour and related overheads on installation work, repairs and service contracts in the year. Cost of sales relating to gas and oil production includes depreciation of assets used in production of gas and oil, royalty costs and direct labour costs. Cost of sales within power generation businesses includes the depreciation of assets included in generating power, fuel purchase costs, direct labour costs and carbon emissions costs. Re-measurement and settlement of energy contracts Re-measurement and settlement of energy contracts includes both realised (settled) commodity sales and purchase contracts in the scope of IFRS 9, as well as unrealised (fair value changes) on active contracts, as detailed further in note 2. Financing costs Financing costs that arise in connection with the acquisition, construction or production of a qualifying asset are capitalised and subsequently amortised in line with the depreciation of the related asset. Financing costs not arising in connection with the acquisition, construction or production of a qualifying asset are expensed. Centrica plc Annual Report and Accounts 2020 159 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information continued S2. Summary of significant accounting policies Foreign currencies The consolidated Financial Statements are presented in pounds sterling, the functional currency of the Company and the Group’s presentational currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded in the functional currency of the entity at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency of the relevant entity at the rate of exchange ruling at the balance sheet date and exchange movements included in the Group Income Statement for the period. Non-monetary items that are measured at historical cost in a currency other than the functional currency of the entity concerned are translated using the exchange rate prevailing at the dates of the initial transaction. For the purpose of presenting consolidated Financial Statements, the assets and liabilities of the Group’s non-sterling functional currency subsidiary undertakings, joint ventures and associates are translated into pounds sterling at exchange rates prevailing at the balance sheet date. The monthly results of these (generally foreign) subsidiary undertakings, joint ventures and associates are translated into pounds sterling each month at the average rates of exchange for that month. The closing exchange rates, and the average of the rates used to translate the results of foreign operations to pounds sterling are shown below. Exchange rate per pound sterling (£) US dollars Canadian dollars Euro Norwegian krone Danish krone Closing rate at 31 December Average rate for the year ended 31 December 2020 1.37 1.74 1.12 11.72 8.31 2019 1.33 1.72 1.18 11.65 8.83 2020 1.29 1.73 1.13 12.13 8.42 2019 1.28 1.69 1.14 11.25 8.52 Exchange adjustments arising from the retranslation of the opening net assets and results of non-sterling functional currency operations are transferred to the Group’s foreign currency translation reserve, a separate component of equity, and are reported in other comprehensive income. In the event of the disposal of a non-sterling functional currency subsidiary, the cumulative translation difference arising in the foreign currency translation reserve is charged or credited to the Group Income Statement on disposal. Where the Group utilises net investment hedging, changes in the fair value of the hedging instrument are recognised in equity and remain there until the disposal of the specific, related investments, at which point the gains and losses are recycled to profit or loss. The Group previously employed net investment hedging but ceased in 2009, with historic hedging gains and losses remaining in equity until the disposal of the related investment. During 2020 the Group recommenced net investment hedging in respect of the US dollar functional currency subsidiaries in its Direct Energy business. Employee share schemes The Group operates a number of employee share schemes, detailed in the Remuneration Report on pages 66 to 75, under which it makes equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant (excluding the effect of non-market-based vesting conditions). The fair value determined at the grant date is expensed on a straight-line basis together with a corresponding increase in equity over the vesting period, based on the Group’s estimate of the number of awards that will vest, and adjusted for the effect of non-market-based vesting conditions. The majority of the share-based payment charge arises from the On Track Incentive Plan. This scheme is applicable to senior executives, and senior and middle management. Shares issued under the scheme vest subject to continued employment within the Group in two stages (half after two years and the other half after three years). Employees leaving prior to the vesting date will normally forfeit their rights to unvested share awards. The fair value of the awards is measured using the market value at the date of grant. More information is included in the Remuneration Report on pages 66 to 75. 160 Centrica plc Annual Report and Accounts 2020 S2. Summary of significant accounting policies Business combinations and goodwill The acquisition of subsidiaries is accounted for using the acquisition method (at the point the Group gains control over a business as defined by IFRS 3). The cost of the acquisition is measured as the cash paid and the aggregate of the fair values, at the date of exchange, of other assets transferred, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement at the acquisition date. Acquisition-related costs are expensed as incurred. The identifiable assets, liabilities and contingent liabilities are recognised at their fair value at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5. The Group recognises any non-controlling interests in the acquiree either at fair value or at the non-controlling interests’ proportionate share of the recognised amounts of the acquiree’s identifiable net assets. Goodwill arising on a business combination represents the excess of the consideration transferred, the amount of the non-controlling interests and the acquisition date fair value of any previously held interest in the acquiree over the Group’s interest in the fair value of the identifiable net assets acquired. Goodwill arising on the acquisition of a stake in a joint venture or an associate represents the excess of the consideration transferred over the Group’s interest in the fair value of the identifiable assets and liabilities of the investee at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. The goodwill arising on an investment in a joint venture or in an associate is not recognised separately, but is shown under ‘Interests in joint ventures and associates’ in the Group Balance Sheet. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in the Group Income Statement. Acquisitions of joint operations that meet the definition of a business as defined in IFRS 3 are accounted for as business combinations. On disposal of a subsidiary, associate or joint venture entity, any amount of goodwill attributed to that entity is included in the determination of the profit or loss on disposal. A similar accounting treatment is applied on disposal of assets that represent a business. Other intangible assets Intangible assets acquired separately are measured on initial recognition at cost. Capitalisation begins when expenditure for the asset is being incurred and activities necessary to prepare the asset for use are in progress and ceases when substantially all the activities that are necessary to prepare the asset for use are complete. Amortisation commences at the point of commercial deployment. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Intangible assets with finite lives are amortised over their useful lives and are tested for impairment, as part of the CGU to which they relate where necessary, annually and whenever there is an indication that the asset could be impaired. The amortisation period and method for an intangible asset are reviewed at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for on a prospective basis by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. Intangible assets are derecognised on disposal, or when no future economic benefits are expected from their use. Intangible assets with indefinite useful lives are not amortised but tested for impairment annually, and whenever there is an indication that the intangible asset could be impaired, either individually or at the CGU level. The indefinite life assessment is reviewed annually and, if not supportable, the change in the useful life assessment from indefinite to finite is made on a prospective basis. The useful economic lives for the principal categories of intangible assets are as follows: Customer relationships and other contractual assets Strategic identifiable acquired brands Application software Up to 20 years Indefinite Up to 15 years Strategic identifiable acquired brands are deemed to have indefinite lives where evidence suggests that the brand will generate net cash inflows for the Group for an indefinite period. Centrica plc Annual Report and Accounts 2020 161 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information continued S2. Summary of significant accounting policies EU Emissions Trading Scheme and renewable obligation certificates Purchased carbon dioxide emissions allowances are recognised initially at cost (purchase price) within intangible assets. The liability is measured at the cost of purchased allowances up to the level of purchased allowances held, and then at the market price of allowances ruling at the balance sheet date, with movements in the liability recognised in operating profit. Forward contracts for the purchase or sale of carbon dioxide emissions allowances are measured at fair value with gains and losses arising from changes in fair value recognised in the Group Income Statement. The intangible asset is surrendered and the liability is extinguished at the end of the compliance period to reflect the consumption of economic benefits. Purchased renewable obligation certificates (and similar North America schemes) are recognised initially at cost within intangible assets. A liability for the renewables obligation is recognised based on the level of electricity supplied to customers, and is calculated in accordance with percentages set by the UK Government and the renewable obligation certificate buyout price for that period. The intangible asset is surrendered and the liability is extinguished at the end of the compliance period to reflect the consumption of economic benefits. Any recycling benefit related to the submission of renewable obligation certificates is recognised in the Group Income Statement when received. Cash flows relating to renewable obligation certificates and similar North America schemes are recognised within cash flows from operating activities. Exploration, evaluation, development and production assets The Group uses the successful efforts method of accounting for exploration and evaluation expenditure. Exploration and evaluation expenditures associated with an exploration well, including acquisition costs related to exploration and evaluation activities are capitalised initially as intangible assets. Certain expenditures such as geological and geophysical exploration costs are expensed. If the prospects are subsequently determined to be successful on completion of evaluation, the relevant expenditure is transferred to PP&E. If the prospects are subsequently determined to be unsuccessful, the associated costs are expensed in the period in which that determination is made. All field development costs are capitalised as PP&E. Such costs relate to the acquisition and installation of production facilities and include development drilling costs, project-related engineering and other technical services costs. PP&E, including rights and concessions related to production activities, are depreciated from the commencement of production in the fields concerned, using the unit of production method, based on all of the 2P reserves of those fields. Changes in these estimates are dealt with prospectively. The net carrying value of fields in production and development is compared annually on a field-by-field basis with the likely discounted future net revenues to be derived from the remaining commercial reserves. An impairment loss is recognised where it is considered that recorded amounts are unlikely to be fully recovered from the net present value of future net revenues. Exploration assets are reviewed annually for indicators of impairment and production and development assets are tested annually for impairment. Interests in joint arrangements and associates The Group’s joint ventures and associates (as defined in note 6) are accounted for using the equity method. The Group’s interests in joint operations (gas and oil exploration and production licence arrangements) are accounted for by recognising its assets (including its share of assets held jointly), its liabilities (including its share of liabilities incurred jointly), its revenue from the sale of its share of the output arising from the joint operation, its share of the revenue from the sale of the output by the joint operation and its expenses (including its share of any expenses incurred jointly). Where the Group has an equity stake or a participating interest in operations governed by a joint arrangement for which it is acting as operator, an assessment is carried out to confirm whether the Group is acting as agent or principal. As the terms and conditions negotiated between business partners usually provide joint control to the parties over the relevant activities of the gas and oil fields that are governed by joint arrangements, the Group is usually deemed to be an agent when it is appointed as operator and not as principal (as the contracts entered into presents gross liabilities and gross receivables of joint operations (including amounts due to or from non-operating partners) in the Group Balance Sheet in accordance with the netting rules of IAS 32: ‘Financial instruments – presentation’. Property, plant and equipment PP&E is included in the Group Balance Sheet at cost, less accumulated depreciation and any provisions for impairment. Subsequent expenditure in respect of items of PP&E, such as the replacement of major parts, major inspections or overhauls, are capitalised as part of the cost of the related asset where it is probable that future economic benefits will arise as a result of the expenditure and the cost can be reliably measured. All other subsequent expenditure is expensed as incurred. 162 Centrica plc Annual Report and Accounts 2020 S2. Summary of significant accounting policies Freehold land is not depreciated. Other PP&E, with the exception of upstream production assets (see above), are depreciated on a straight-line basis at rates sufficient to write off the cost, less estimated residual values, of individual assets over their estimated useful lives. The depreciation periods for the principal categories of assets are as follows: Freehold and leasehold buildings Plant Equipment and vehicles Power generation assets Up to 50 years Five to 20 years Three to 10 years Up to 30 years The carrying values of PP&E are tested annually for impairment and are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Residual values and useful lives are reassessed annually and, if necessary, changes are accounted for prospectively. Impairment assumptions The Group tests the carrying amounts of goodwill, PP&E and intangible assets (with the exception of exploration assets) for impairment at least annually. Interests in joint ventures and associates and exploration assets are reviewed annually for indicators of impairment and tested for impairment where such an indicator arises. Where an asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the CGU to which the asset belongs. The recoverable amount is the higher of value in use (VIU) and fair value less costs of disposal (FVLCD). At inception, goodwill is allocated to each of the Group’s CGUs or groups of CGUs that expect to benefit from the business combination in which the goodwill arose. If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. Any impairment is expensed immediately in the Group Income Statement. Any CGU impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other assets of the CGU pro rata on the basis of the carrying amount of each asset in the CGU. Further information on the assumptions used in the VIU calculations and FVLCD calculations that resulted in impairment or impairment reversals during the year can be found at note 7. VIU – Key assumptions used Pre-tax cash flows used in the VIU calculations are derived from the Group’s Board-approved business plans, and assumptions specific to the nature and life of the asset. The Group’s business plans and assumptions are based on past experience and adjusted to reflect market trends, economic conditions and key risks. Commodity prices used in the planning process are based in part on observable market data and in part on estimates. Note S6 provides additional detail on the active period of each of the commodity markets in which the Group operates. i F n a n c a i l (a) VIU – Growth rates and discount rates Unless stated otherwise in the table below, cash flows beyond the planned period have been extrapolated using long-term growth rates in the market where the CGU operates. Long-term growth rates are determined using a blend of publicly available historical data and long-term growth rate forecasts published by external analysts. Cash flows are discounted using a discount rate specific to each CGU. Discount rates reflect the current market assessments of the time value of money and are based on the estimated cost of capital of each CGU. Additionally, risks specific to the cash flows of the CGUs are reflected within cash flow forecasts. Each CGU’s weighted average cost of capital is then adjusted to reflect the impact of tax in order to calculate an equivalent pre-tax discount rate. S t a t e m e n t s Long-term growth rates and pre-tax discount rates used in the VIU calculations for each of the Group’s CGUs are shown below. Centrica Business Solutions Energy Supply % British Gas % Bord Gáis Energy % North America Home (i) % North America Business (i) % Centrica Home Solutions % Centrica Business Solutions (turbines/engines/ battery) (ii) % Energy Marketing & Trading % Nuclear (ii) % 1.4 7.4 1.4 7.4 0.8 6.9 N/A N/A N/A N/A 1.4 11.1 N/A 8.0 1.4 8.6 N/A 8.0 Centrica Business Solutions Energy Supply % British Gas % Bord Gáis Energy % North America Home (iii) % North America Business (iii) % Centrica Home Solutions (iii) % Centrica Business Solutions (turbines/engines/ battery) (ii) % Energy Marketing & Trading % Nuclear (ii) % 2.0 7.8 2.0 7.8 1.2 7.4 2.1/2.0 2.1/2.0 8.7 9.0 2.0 10.8 N/A 9.0 2.0 8.4 N/A 8.4 2020 Growth rate to perpetuity (including inflation) Pre-tax discount rate 2019 Growth rate to perpetuity (including inflation) Pre-tax discount rate (i) In 2020, the impairment review for Direct Energy (North America Business and North America Home) has been performed using the FVLCD methodology, based on the agreed sales consideration for the business. No impairment was required. (ii) Cash flows arising after the plan period have been derived from forecasts to the end of the asset lives. Due to the nature of these finite-lived assets this provides a more appropriate valuation in later years. (iii) US/Canada respectively. Centrica plc Annual Report and Accounts 2020 163 Financial Statements | Notes to the Financial Statements continued Supplementary information continued S2. Summary of significant accounting policies (b) VIU – Inflation rates Inflation rates used in the business plan were based on a blend of publicly available inflation forecasts and range from 0.8% to 1.4%. (c) Key operating assumptions by CGUs using VIU The key operating assumptions across all CGUs are gross margin, revenues and operating costs. These assumptions are tailored to the specific CGU using management’s knowledge of the environment, as shown in the table below: CGU All – base assumptions Gross margin Revenues Operating costs Existing customers: based on contractual terms. Losses are forecast based on historic data and future expectations of the market. New customers and renewals: based on gross margins achieved in the period leading up to the date of the business plan. Both adjusted for current market conditions and cost of goods inflation. For the Services business, future sales and related gross margins are based on planned future product sales and contract losses based upon past performance and future expectations of the competitive environment. Existing customers: based on contractual terms. Losses are forecast based on historic data and future expectations of the market. Adjusted for: growth forecasts which are based on sales and marketing activity, recent customer acquisitions and the current economic environment in the relevant geography. Gas and electricity revenues based on forward market prices. Market share: percentage immediately prior to business plan. Wages: projected headcount in line with expected efficiency programme. Salary increases based on inflation expectations. Credit losses: historical assumptions regarding realised cash losses have been updated to reflect the current environment. Energy Marketing & Trading Existing and new markets: As above. management’s estimate of future trading performance. Centrica Business Solutions (turbines/ engines/battery) Based on forecast revenues, operations and maintenance costs, grid network and balancing system charges for the asset life. Based on forward and contracted prices for commodity, capacity market and grid ancillary service contracts for the asset life. Future development: increase in costs to support growth forecasts, adjusted for planned business process efficiencies. Based on run-rate and forecast changes, including expected inflation for the asset life. Overlift and underlift Off-take arrangements for gas and oil produced from joint operations are often such that it is not practical for each participant to receive or sell its precise share of the overall production during the period. This results in short-term imbalances between cumulative production entitlement and cumulative sales, referred to as overlift and underlift. An overlift payable, or underlift receivable, is recognised at the balance sheet date within trade and other payables or trade and other receivables respectively, and is measured at market value, with movements in the period recognised within cost of sales. 164 Centrica plc Annual Report and Accounts 2020 S2. Summary of significant accounting policies Leases The Group assesses its contractual arrangements to determine whether they are or contain leases based on whether they convey the right to control the use of an identified asset for a period of time in exchange for consideration. The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. The liabilities for the majority of the Group’s lease portfolio are calculated using the incremental borrowing rate. This rate is calculated on a lease-by-lease basis, taking into account the credit rating of the Group at the inception of the lease and the lease term. The credit adjustment used in this calculation is modified to reflect the security implicit in a lease arrangement based on the specific class of asset being leased. Lease payments included in the measurement of the lease liability comprise: fixed payments (including in-substance fixed payments), variable lease payments that depend on an index or a rate (initially measured using the index or rate as at the commencement date), amounts expected to be payable under a residual value guarantee, the exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early. When considering whether the Group is reasonably certain to exercise extension or termination options, various factors are considered, such as the level of lease payments relative to the market rate, the importance of the specific asset to the Group’s operations and the period remaining until the option becomes exercisable. Such judgements are reconsidered when there is a significant event or change of circumstances that is within the control of the Group. Variable lease payments that do not depend on an index or rate are recognised in profit or loss in the period in which the event or condition that triggers those payments occurs The lease liability is subsequently measured at amortised cost using the effective interest method. It is re-measured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group's estimate of the amount expected to be payable under a residual value guarantee, or if the Group changes its assessment of whether it will exercise a purchase, lease-term extension or termination option. Cash flows reflecting payment of capital and interest on leases are shown in cash flows from financing activities. When the lease liability is re-measured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use of asset or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. The Group recognises the lease payments associated with short-term leases (leases expiring within twelve months from commencement) and leases of low value assets (underlying asset value less than £5,000) on a straight-line basis over the lease term. The Group holds interests in a number of joint operations within its exploration and production business. The Group has applied judgement in identifying the customer where a lease arrangement is to be used by a jointly controlled operation. If the leased asset is dedicated to a specific joint operation and its usage is dictated by the joint operating agreement, the joint operation is deemed the customer. In such instances: • When the Group signs a lease agreement on behalf of a joint operation and has primary responsibility for payments to the lessor, the Group recognises 100% of the lease liability and a right-of-use asset on its balance sheet. When the partner is obliged to reimburse the Group for its share of lease payments, a sub-lease receivable is recognised and an equal adjustment to the right-of-use asset is made. • When the partner has the primary responsibility for payments to the lessor and the Group is obliged to reimburse its share of the lease payments, a lease liability due to the partner and equal right-of-use asset are recognised. If the leased asset is not dedicated to a specific joint operation or its usage is not dictated by the joint operating agreement of a joint operation to which it is dedicated, the signatory to the lease agreement is deemed the customer. If this is the Group, the lease liability and right-of-use asset are recognised in full. If it is the partner, no lease liability or right-of-use asset is recognised. Centrica plc Annual Report and Accounts 2020 165 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information continued S2. Summary of significant accounting policies Inventories Inventories of finished goods are valued at the lower of cost (using weighted-average cost) or estimated net realisable value after allowance for redundant and slow-moving items. The cost of inventories includes the purchase price plus costs of conversion incurred in bringing the inventories to their present location and condition. Inventory of gas in storage is valued either on a weighted-average cost basis or at fair value less any costs to sell depending on the business model for holding the inventory. Changes in fair value less costs to sell are recognised in the Group Income Statement. Oil inventory is measured at fair value, being the spot price at the balance sheet date. Decommissioning costs Provision is made for the net present value of the estimated cost of decommissioning gas and oil production facilities at the end of the producing lives of fields and power stations at the end of their useful lives, based on price levels and technology at the balance sheet date. When this provision relates to an asset with sufficient future economic benefits, a decommissioning asset is recognised and included as part of the associated PP&E and depreciated accordingly. The asset is subject to impairment review as detailed above. Changes in estimates and discount rates are dealt with prospectively and reflected as an adjustment to the provision and corresponding decommissioning asset included within PP&E. The discount rate used to calculate the provision was reduced from 1.2% to 0% in 2020 as discussed in note 3. The unwinding of the discount on the provision is included in the Group Income Statement within financing costs. Non-current assets and disposal groups held for sale and discontinued operations Non-current assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs of disposal. No depreciation is charged in respect of non-current assets classified as held for sale. Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable, the asset or disposal group is available for immediate sale in its present condition and the Directors are committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification. The profits or losses and cash flows that relate to a major component of the Group that has been sold or is classified as held for sale are presented separately from continuing operations as discontinued operations within the Group Income Statement and Group Cash Flow Statement. Pensions and other post-employment benefits The Group operates a number of defined benefit and defined contribution pension schemes. The cost of providing benefits under the defined benefit schemes is determined separately for each scheme using the projected unit credit actuarial valuation method. Actuarial gains and losses are recognised in the period in which they occur in other comprehensive income. The cost of providing retirement pensions and other benefits is charged to the Group Income Statement over the periods benefiting from employees’ service. Past service cost is recognised immediately. Costs of administering the schemes are charged to the Group Income Statement. Net interest, being the change in the net defined benefit liability or asset due to the passage of time, is recognised in the Group Income Statement within net finance cost. The net defined benefit liability or asset recognised in the Group Balance Sheet represents the present value of the defined benefit obligation of the schemes and the fair value of the schemes’ assets. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits are paid, and that have terms of maturity approximating to the terms of the related pension liability. Payments to defined contribution retirement benefit schemes are recognised in the Group Income Statement as they fall due. 166 Centrica plc Annual Report and Accounts 2020 S2. Summary of significant accounting policies Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, that can be measured reliably, and it is probable that the Group will be required to settle that obligation. Provisions are discounted to present value where the effect is material. Where discounting is used, the increase in the provision due to the passage of time is recognised in the Group Income Statement within interest expense. Onerous contract provisions are recognised where the unavoidable costs of meeting the obligations under a contract exceed the economic benefits expected to be received under it. Contracts to purchase or sell energy are reviewed on a portfolio basis given the fungible nature of energy, whereby it is assumed that the highest priced purchase contract supplies the highest priced sales contract and the lowest priced sales contract is supplied by the lowest priced purchase contract. Taxation Current tax, including UK corporation tax, UK petroleum revenue tax and foreign tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. From time to time, the Group may have open tax issues with a number of revenue authorities. Where an outflow of funds is believed to be probable and a reliable estimate of the dispute can be made, management provides for its best estimate of the liability. These estimates take into account the specific circumstances of each dispute and relevant external advice as well as the rules and regulations of the relevant tax authority in the jurisdiction of the dispute. Often the Group is unable to predict whether an uncertain tax treatment will be accepted by the relevant authority. In such instances the effects of uncertainty are reflected in management’s assessment of the most likely outcome of each issue, as reviewed and updated on a regular basis. Each item is considered separately and on a basis that provides the better prediction of the outcome, unless the Group determines that it is appropriate to group certain items for consideration. See note 9 for further details on uncertain tax provisions. Deferred tax is recognised in respect of all temporary differences identified at the balance sheet date, except to the extent that the deferred tax arises from the initial recognition of goodwill, or the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting profit nor taxable profit and loss. Temporary differences are differences between the carrying amount of the Group’s assets and liabilities and their tax base. Deferred tax liabilities may be offset against deferred tax assets within the same taxable entity or qualifying local tax group. Any remaining deferred tax asset is recognised only when, on the basis of all available evidence, it can be regarded as probable that there will be suitable taxable profits, within the same jurisdiction, in the foreseeable future, against which the deductible temporary difference can be utilised. Deferred tax is provided on temporary differences arising on subsidiaries, joint ventures and associates, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the asset is realised or liability settled, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Measurement of deferred tax liabilities and assets reflects the tax consequences expected from the manner in which the asset or liability is recovered or settled. Centrica plc Annual Report and Accounts 2020 167 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information continued S2. Summary of significant accounting policies Financial instruments Financial assets and financial liabilities are recognised in the Group Balance Sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when the Group no longer has the rights to cash flows, the risks and rewards of ownership or control of the asset. Financial liabilities are derecognised when the obligation under the liability is discharged, cancelled or expires. (a) Trade receivables Trade receivables are initially recognised at fair value, which is usually the original invoice amount, and are subsequently held at amortised cost using the effective interest method (taking into account the Group’s business model, which is to collect the contractual cash flows owing) less an allowance for impairment losses. Balances are written off when recoverability is assessed as being remote. If collection is due in one year or less, receivables are classified as current assets. If not, they are presented as non-current assets. (b) Trade payables Trade payables are initially recognised at fair value, which is usually the original invoice amount and are subsequently held at amortised cost using the effective interest method. If payment is due within one year or less, payables are classified as current liabilities. If not, they are presented as non-current liabilities. (c) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds received. Own equity instruments that are reacquired (treasury or own shares) are deducted from equity. No gain or loss is recognised in the Group Income Statement on the purchase, sale, issue or cancellation of the Group’s own equity instruments. (d) Cash and cash equivalents Cash and cash equivalents comprise cash in hand and current balances with banks and similar institutions and money market deposits, which are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value and have an original maturity of three months or less. Cash and cash equivalents are presented net of outstanding bank overdrafts where there is a legal right of set off and, for the Group’s cash pooling arrangements, to the extent the Group expects to settle its subsidiaries’ year-end account balances on a net basis. For the purpose of the Group Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. (e) Interest-bearing loans and other borrowings All interest-bearing loans and other borrowings with banks and similar institutions are initially recognised at fair value net of directly attributable transaction costs. After initial recognition, interest-bearing loans and other borrowings are subsequently measured at amortised cost using the effective interest method, except when they are hedged items in an effective fair value hedge relationship where the carrying value is also adjusted to reflect the fair value movements associated with the hedged risks. Such fair value movements are recognised in the Group Income Statement. Amortised cost is calculated by taking into account any issue costs, discount or premium. (f) Financial instruments at fair value through other comprehensive income Financial assets at fair value through other comprehensive income are equity instruments that the Group has elected to recognise the changes in fair value of in other comprehensive income. They are recognised initially at fair value in the Group Balance Sheet and are re-measured subsequently at fair value with gains and losses arising from changes in fair value recognised directly in equity and presented in other comprehensive income. Accrued interest or dividends arising on these financial assets are recognised in the Group Income Statement. If the Group assesses the need to recognise a loss allowance on a financial asset carried at fair value through other comprehensive income, the loss allowance is recognised in other comprehensive income; however, the recognition of a loss allowance does not impact the carrying value of the asset on the Group’s Balance Sheet. Cumulative gains and losses on equity instruments at fair value through other comprehensive income are not recycled to the Group Income Statement. (g) Financial assets at fair value through profit or loss The Group previously held investments in gilts which it designated at fair value through profit or loss in order to eliminate asymmetry arising from the measurement of an index-linked derivative. These gilts matured during 2020. Other debt instruments and money market funds (which are classified as cash equivalents) are required to be measured at fair value through profit or loss under IFRS 9, as the assets are not held solely for the purpose of collecting contractual cash flows related to principal and interest. Both mandatory and designated instruments are measured at fair value on initial recognition and are re-measured to fair value in each subsequent reporting period. Gains and losses arising from changes in fair value are recognised in the Group Income Statement within investment income or financing costs. 168 Centrica plc Annual Report and Accounts 2020 S2. Summary of significant accounting policies (h) Derivative financial instruments The Group routinely enters into sale and purchase transactions for physical delivery of gas, power and oil. A portion of these transactions take the form of contracts that were entered into and continue to be held for the purpose of receipt or delivery of the physical commodity in accordance with the Group’s expected sale, purchase or usage requirements (‘own use’), and are not within the scope of IFRS 9. The assessment of whether a contract is deemed to be ‘own use’ is conducted on a Group basis without reference to underlying book structures, business units or legal entities. Certain purchase and sales contracts for the physical delivery of gas, power and oil are within the scope of IFRS 9 due to the fact that they net settle or contain written options. Such contracts are accounted for as derivatives under IFRS 9 and are recognised in the Group Balance Sheet at fair value. Gains and losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to the Group Income Statement for the year. The Group uses a range of derivatives for both trading and to hedge exposures to financial risks, such as interest rates, foreign exchange and energy price risks, arising in the normal course of business. Where considered appropriate, the Group may use weather derivatives to protect against earnings volatility arising from unseasonal weather variations. The use of such derivatives did not have a material financial statement impact in 2020 or 2019. The use of derivative financial instruments is governed by the Group’s policies which are approved by the Board of Directors. Further detail on the Group’s risk management policies is included within the Strategic Report – Principal Risks and Uncertainties on pages 34 to 39 and in note S3. The accounting treatment of derivatives is dependent on whether they are entered into for trading or hedging purposes. A derivative instrument is considered to be used for hedging purposes when it alters the risk profile of an underlying exposure of the Group in line with the Group’s risk management policies and is in accordance with established guidelines. Certain derivative instruments used for hedging purposes are designated in hedge accounting relationships as described by IAS 39 (the Group has not applied the hedge accounting requirements of IFRS 9). In order to qualify for hedge accounting, the effectiveness of the hedge must be reliably measurable and documentation describing the formal hedging relationship must be prepared at the point of designation. The hedge must be highly effective in achieving its objective. The Group also holds derivatives that are used for hedging purposes which are not designated in hedge accounting relationships and are held for trading. All derivatives are recognised at fair value on the date on which the derivative is entered into and are re-measured to fair value at each reporting date. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Derivative assets and derivative liabilities are offset and presented on a net basis only when there is a currently enforceable legal right of set-off, and the intention to net settle the derivative contracts is present. The Group enters into certain energy derivative contracts covering periods for which observable market data does not exist. The fair value of such derivatives is estimated by reference in part to published price quotations from active markets, to the extent that such observable market data exists, and in part by using valuation techniques, the inputs to which include data that is not based on or derived from observable markets. Where the fair value at initial recognition for such contracts differs from the transaction price, a fair value gain or fair value loss will arise. This is referred to as a day-one gain or day-one loss. Such gains and losses are deferred (not recognised) and amortised to the Group Income Statement based on volumes purchased or delivered over the contractual period until such time as observable market data becomes available. When observable market data becomes available, any remaining deferred day-one gains or losses are recognised within the Group Income Statement. Recognition of the gains or losses resulting from changes in fair value depends on the purpose for issuing or holding the derivative. For derivatives that do not qualify for cash flow or net investment hedge accounting, any gains or losses arising from changes in fair value are taken directly to the Group Income Statement and are included within gross profit or investment income and financing costs. Where derivatives qualify for cash flow or net investment hedging, changes in fair value arising from the effective element of the hedge are recognised initially in the Group Statement of Comprehensive Income and are recycled to the Group Income Statement when the hedged item impacts profit or loss. Further details on the treatment of energy derivatives in the Group Income Statement is provided in note 2. Further detail on the treatment of derivatives in hedging relationships is provided in note S5. Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value, with gains or losses reported in the Group Income Statement. The closely related nature of embedded derivatives is reassessed when there is a change in the terms of the contract that significantly modifies the future cash flows under the contract. Where a contract contains one or more embedded derivatives, and providing that the embedded derivative significantly modifies the cash flows under the contract, the option to fair value the entire contract may be taken and the contract will be recognised at fair value with changes in fair value recognised in the Group Income Statement. Gains and losses arising from changes in the fair value of energy derivative contracts are recognised within Re-measurement and settlement of energy contracts in the Group’s Results for the period under IFRS. Centrica plc Annual Report and Accounts 2020 169 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information continued S2. Summary of significant accounting policies (i) Hedge accounting The Group continues to apply the hedge accounting requirements of IAS 39 and has not adopted IFRS 9 hedge accounting. For the purposes of hedge accounting, hedges are classified as either net investment hedges, fair value hedges or cash flow hedges. Note S5 details the Group’s accounting policies in relation to derivatives qualifying for hedge accounting under IAS 39. (j) Impairment of financial assets In accordance with IFRS 9, the Group has applied the expected credit loss model to financial assets measured at amortised cost and fair value through other comprehensive income. For trade receivables and contract assets the simplified approach is taken and the lifetime expected credit loss provided for. For all other in-scope financial assets at the balance sheet date either the lifetime expected credit loss or a 12-month expected credit loss is provided for, depending on the Group’s assessment of whether the credit risk associated with the specific asset has increased significantly since initial recognition. As the Group’s financial assets are predominantly short term (less than 12 months), the impairment loss recognised is not materially different using either approach. Further details of the assumptions and inputs used to calculate expected credit losses are shown in note 17. Nuclear activity The Group’s investment in Lake Acquisitions Limited (‘Nuclear’) is accounted for as an associate. The following accounting policies are specific to this nuclear activity. (a) Fuel costs – nuclear front end Front-end fuel costs consist of the costs of procurement of uranium, conversion and enrichment services, and fuel element fabrication. All costs are capitalised into inventory and charged to the Group Income Statement in proportion to the amount of fuel burnt. (b) Fuel costs – nuclear back end Advanced gas-cooled reactors (AGR) Spent fuel extracted from the reactors is sent for reprocessing and/or long-term storage and eventual disposal of resulting waste products. Back-end fuel costs comprise of a loading-related cost per tonne of uranium and a rebate/surcharge to this cost which is dependent on the out-turn market electricity price and the amount of electricity generated from AGR stations in the year. These costs are capitalised into inventory and charged to the Group Income Statement in proportion to the amount of fuel burnt. Pressurised water reactor (PWR) Back-end fuel costs are based on wet storage in station ponds followed by dry storage and subsequent direct disposal of fuel. Back-end fuel costs are capitalised into inventory on loading and are charged to the Group Income Statement in proportion to the amount of fuel burnt. (c) Nuclear PP&E – depreciation The majority of the cost of the nuclear fleet is depreciated from the date of the Group acquiring its share of the fleet on a straight-line basis, with remaining depreciable periods currently of up to 15 years. Other expenditure including amounts spent on major inspections and overhauls of production plant is depreciated over the period until the next outage which for AGR power stations is 2 to 3 years and for the PWR power station is 18 months. (d) Nuclear Liabilities Fund (NLF) funding arrangements Under the arrangements in place with the Secretary of State, the NLF will fund, subject to certain exceptions, qualifying uncontracted nuclear liabilities and qualifying decommissioning costs. In part consideration for the assumption of these liabilities by the Secretary of State and the NLF, the former British Energy Group agreed to pay fixed decommissioning contributions each year and £150,000 (indexed to RPI) for every tonne of uranium in PWR fuel loaded into the Sizewell B reactor after the date of these arrangements. (e) NLF and nuclear liabilities receivables The UK Government indemnity is provided to indemnify any future shortfall on NLF funding of qualifying uncontracted nuclear liabilities (including PWR back-end fuel services) and qualifying nuclear decommissioning costs such that the receivable equals the present value of the associated qualifying nuclear liabilities (apart from a small timing difference due to timing of receipts from NLF). (f) Nuclear liabilities Nuclear liabilities represent provision for liabilities in respect of the costs of waste management of spent fuel and nuclear decommissioning. (g) Unburnt fuels at shutdown Due to the nature of the nuclear fuel process there will be quantities of unburnt fuel in the reactors at station closure. The costs relating to this unburnt fuel (final core) are fully provided for at the balance sheet date. The provision is based on a projected value per tonne of fuel remaining at closure, discounted back to the balance sheet date and recorded as a long-term liability. 170 Centrica plc Annual Report and Accounts 2020 S3. Financial risk management The Group’s normal operating, investing and financing activities expose it to a variety of financial risks: market risk (including commodity price risk, currency risk and interest rate risk), credit risk and liquidity risk. The Group’s overall financial risk management processes are designed to identify, manage and mitigate these risks. Further detail on the Group’s overall risk management processes is included within the Strategic Report – Principal Risks and Uncertainties on pages 34 to 39. Commodity price risk management is carried out in accordance with individual business unit policies and directives including appropriate escalation routes. Treasury risk management, including management of currency risk, interest rate risk and liquidity risk is carried out by a central Group Treasury function in accordance with the Group’s financing and treasury policy, as approved by the Board. The wholesale credit risks associated with commodity trading and treasury positions are managed in accordance with the Group’s credit risk policy. Downstream customer credit risk management is carried out in accordance with appropriate group wide and individual business unit credit policies. Market risk management Market risk is the risk of loss that results from changes in market prices (commodity prices, foreign exchange rates and interest rates). The level of market risk to which the Group is exposed at a point in time varies depending on market conditions, expectations of future price or market rate movements and the composition of the Group’s physical asset and contract portfolios. (a) Commodity price risk management The Group is exposed to commodity price risk in its energy procurement and supply activities, production, generation and trading operations and uses specific limits to manage the exposure to commodity prices associated with the Group’s activities to an acceptable level. The Group uses Profit at Risk (PaR) limits to control exposures to market prices. These are complemented by other limits including Value at Risk (VaR), volumetric or stop-loss limits to control risk around trading activities. (i) Energy price exposed business activities The Group’s price exposed business activities consist of equity gas and liquids production, equity power generation, bilateral procurement and sales contracts, market-traded purchase and sales contracts and derivative positions primarily transacted with the intent of securing gas and power for the Group’s supply customers, from a variety of sources at an optimal cost. The Group actively manages commodity price risk by optimising its asset and contract portfolios and making use of volume flexibility. The Group’s commodity price risk exposure within its business activities is driven by the cost of procuring gas and electricity to serve its supply customers and selling gas, oil and electricity from its upstream production and generation, which varies with wholesale commodity prices. The primary risk is that market prices for commodities will fluctuate between the time that sales prices are fixed or tariffs are set and the time at which the corresponding procurement cost is fixed, thereby potentially reducing expected margins or making sales unprofitable. The Group’s supply activities are also exposed to volumetric risk in the form of an uncertain consumption profile arising from a range of factors, including the weather, energy consumption changes, customer attrition and the economic climate. There is also risk associated with ensuring that there is sufficient commodity available to secure supply to customers. The Group’s production and generation activities are also exposed to volumetric risk in the form of uncertain production profiles. In order to manage the exposure to market prices associated with the Group’s business operations the Group uses a specific set of risk limits (including VaR and PaR) established by the Board, and sub-delegated downwards through the delegation lines to the commercial leaders. PaR measures the estimated potential loss in a position or portfolio of positions associated with the movement of a commodity price for a given confidence level, over the remaining term of the position or contract. VaR measures the estimated potential loss for a given confidence level over a predetermined holding period. The standard confidence level used is 95%. In addition, regular stress and scenario tests are performed to evaluate the impact on the portfolio of possible substantial movements in commodity prices. The Group measures and manages the commodity price risk associated with the Group’s entire energy price exposed business portfolio. Only certain of the Group’s energy contracts constitute financial instruments under IFRS 9 (see note S6). As a result, while the Group manages the commodity price risk associated with both financial and non-financial energy procurement and sales contracts, it is the notional value of energy contracts being carried at fair value that represents the exposure of the Group’s energy price exposed business activities to commodity price risk according to IFRS 7: ‘Financial instruments: disclosures’. This is because energy contracts that are financial instruments under IFRS 9 are accounted for on a fair value basis and changes in fair value immediately impact profit. Conversely, energy contracts that are not financial instruments under IFRS 9 are accounted for as executory contracts and changes in fair value do not immediately impact profit and, as such, are not exposed to commodity price risk as defined by IFRS 7. So, whilst the PaR or VaR associated with energy procurement and supply contracts that are outside the scope of IFRS 9 are monitored for internal risk management purposes, only those energy contracts within the scope of IFRS 9 are within the scope of the IFRS 7 disclosure requirements. Centrica plc Annual Report and Accounts 2020 171 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information continued S3. Financial risk management (ii) Proprietary energy trading The Group’s proprietary energy trading activities consist of physical and financial commodity purchases and sales contracts taken on with the intent of benefiting from changes in market prices or differences between buying and selling prices. The Group conducts its trading activities in the over-the-counter market and through exchanges in the UK, North America and continental Europe. The Group is exposed to commodity price risk as a result of its proprietary energy trading activities because the value of its trading assets and liabilities will fluctuate with changes in market prices for commodities. The Group sets volumetric and VaR limits to manage the commodity price risk exposure associated with the Group’s proprietary energy trading activities. VaR measures the estimated potential loss at a 95% confidence level over a one-day holding period. The carrying value of energy contracts used in proprietary energy trading activities at 31 December 2020 is disclosed in note 19. As with any modelled risk measure, there are certain limitations that arise from the assumptions used in the VaR calculation. VaR assumes that historical price behaviours will continue in the future and that the Group’s trading positions can be unwound or hedged within the predetermined holding period. Furthermore, the use of a 95% confidence level, by definition, does not take into account changes in value that might occur beyond this confidence level. (b) Currency risk management The Group is exposed to currency risk on foreign currency denominated forecast transactions, firm commitments, monetary assets and liabilities (transactional exposure) and on its net investments in foreign operations (translational exposure). IFRS 7 only requires disclosure of currency risk arising on financial instruments denominated in a currency other than the functional currency of the commercial operation transacting. As a result, for the purposes of IFRS 7, currency risk excludes items that are not financial instruments, such as the Group’s net investments in international operations as well as foreign currency denominated forecast transactions and firm commitments. (i) Transactional currency risk The Group is exposed to transactional currency risk on transactions denominated in currencies other than the underlying functional currency of the commercial operation transacting. The primary functional currencies remain pounds sterling in the UK, Canadian dollars in Canada, US dollars in the US, Norwegian krone in Norway, Danish krone in Denmark and euros in the Netherlands and the Republic of Ireland. The risk is that the functional currency value of cash flows will vary as a result of movements in exchange rates. Transactional exposure arises from the Group’s energy procurement, production and generation activities, where many transactions are denominated in foreign currencies. In addition, in order to optimise the cost of funding, the Group has, in certain cases, issued foreign currency denominated debt or entered into foreign currency loans, primarily in US dollars, euros and Japanese yen. It is the Group’s policy to hedge material transactional exposures using derivatives (either applying formal hedge accounting or economic hedge relationships) to fix the functional currency value of non-functional currency cash flows, except where there is an economic hedge inherent in the transaction. At 31 December 2020, there were no material unhedged non-functional currency monetary assets or liabilities, firm commitments or probable forecast transactions (2019: £nil), other than transactions which have an inherent economic hedge and foreign currency borrowings used to hedge translational exposures. (ii) Translational currency risk The Group is exposed to translational currency risk as a result of its net investments in North America and Europe. The risk is that the pound sterling value of the net assets of foreign operations will decrease with changes in foreign exchange rates. The Group’s policy is to protect the pounds sterling book value of its net investments in foreign operations where appropriate, subject to certain parameters, by holding foreign currency debt, entering into foreign currency derivatives, or a mixture of both. The Group manages translational currency risk taking into consideration the cash impact of any hedging activity as well as the risk to the net asset carrying values in the Group’s Financial Statements. The translation hedging programme including the potential cash impact is managed by the Group Treasury function and monitored by the Chief Financial Officer. (c) Interest rate risk management In the normal course of business the Group borrows to finance its operations. The Group is exposed to interest rate risk because the fair value of fixed-rate borrowings and the cash flows associated with floating rate borrowings will fluctuate with changes in interest rates. The Group’s policy is to manage the interest rate risk on long-term borrowings by ensuring the exposure to floating interest rates remains within a 30% to 70% range, including the impact of interest rate derivatives. The return generated on the Group’s cash balance is also exposed to movements in short-term interest rates. The Group manages cash balances to protect against adverse changes in rates whilst retaining liquidity. (d) Sensitivity analysis IFRS 7 requires disclosure of a sensitivity analysis that is intended to illustrate the sensitivity of the Group’s financial position and performance to changes in market variables (commodity prices, foreign exchange rates and interest rates) as a result of changes in the fair value or cash flows associated with the Group’s financial instruments. The sensitivity analysis provided discloses the effect on profit or loss and equity at 31 December 2020, assuming that a reasonably possible change in the relevant risk variable had occurred at 31 December 2020, and has been applied to the risk exposures in existence at that date to show the effects of reasonably possible changes in price on profit or loss and equity. Reasonably possible changes in market variables used in the sensitivity analysis are based on implied volatilities, where available, or historical data for energy prices and foreign exchange rates. Reasonably possible changes in interest rates are based on management judgement and historical experience. 172 Centrica plc Annual Report and Accounts 2020 S3. Financial risk management The sensitivity analysis has been prepared based on 31 December 2020 balances and on the basis that the balances, the ratio of fixed to floating rates of debt and derivatives, the proportion of energy contracts that are financial instruments, the proportion of financial instruments in foreign currencies and the hedge designations in place at 31 December 2020 are all constant. Excluded from this analysis are all non-financial assets and liabilities and energy contracts that are not financial instruments under IFRS 9. The sensitivity to foreign exchange rates relates only to monetary assets and liabilities denominated in a currency other than the functional currency of the commercial operation transacting, and excludes the translation of the net assets of foreign operations to pounds sterling. The sensitivity analysis provided is hypothetical only and should be used with caution as the impacts provided are not necessarily indicative of the actual impacts that would be experienced. This is because the Group’s actual exposure to market rates is changing constantly as the Group’s portfolio of commodity, debt and foreign currency contracts changes. Changes in fair values or cash flows based on a variation in a market variable cannot be extrapolated because the relationship between the change in market variable and the change in fair value or cash flows may not be linear. In addition, the effect of a change in a particular market variable on fair values or cash flows is calculated without considering interrelationships between the various market rates or mitigating actions that would be taken by the Group. The sensitivity analysis provided excludes the impact of proprietary energy trading assets and liabilities because the VaR associated with the Group’s proprietary energy trading activities is less than £5 million. (i) Transactional currency risk The Group has performed an analysis of the sensitivity of the Group’s financial position and performance to changes in foreign exchange rates. The Group deems 10% movements to US dollar, Canadian dollar and euro currency rates relative to pounds sterling to be reasonably possible. The impact of such movements on profit and equity, both before and after taxation, is immaterial. (ii) Interest rate risk The Group has performed an analysis of the sensitivity of the Group’s financial position and performance to changes in interest rates. The Group deems a one percentage point move in UK, US and euro interest rates to be reasonably possible. The impact of such movements on profit and equity, both after taxation, is immaterial. (iii) Commodity price risk The impacts of reasonably possible changes in commodity prices on profit and equity, both after taxation, based on the assumptions set out above are as follows: Energy prices UK gas (p/therm) European gas (p/therm) UK power (£/MWh) UK emissions (€/tonne) UK oil (US$/bbl) North American gas (US cents/therm) North American power (US$/MWh) Incremental profit/(loss) UK and European energy prices (combined) – increase/(decrease) North American energy prices (combined) – increase/(decrease) 2020 2019 Reasonably possible change in variable (ii) Base price (i) % Base price (i) 44 44 53 33 50 26 25 +/-22 +/-22 +/-17 +/-7 +/-15 +/-4 +/-6 40 40 45 25 60 24 27 Reasonably possible change in variable (ii) % +/-15 +/-15 +/-13 +/-7 +/-9 +/-4 +/-6 2020 Impact on profit (ii) £m 2019 Impact on profit (ii) £m 83/(84) 39/(43) 304/(304) 287/(287) (i) The base price represents the average forward market price over the duration of the active market curve used in the sensitivity analysis provided. (ii) The reasonably possible change in variable and the impact on profit are calculated using both the active and inactive market curves for energy prices. The impact on other comprehensive income of such price changes is immaterial. Credit risk management Credit risk is the risk of loss associated with a counterparty’s inability or failure to discharge its obligations under a contract. The Group continually reviews its rating thresholds for relevant counterparty credit limits and updates these as necessary, based on a consistent set of principles. It continues to operate within its limits. In respect of trading activities for both the US and Europe there is an effort to maintain a balance between exchange-based trading and bilateral transactions. This allows for a reasonable balance between counterparty credit risk and potential liquidity requirements. In addition, the Group actively manages the trade-off between credit and liquidity risks by optimising the use of contracts with collateral obligations and physically settled contracts without collateral obligations. Centrica plc Annual Report and Accounts 2020 173 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information continued S3. Financial risk management The Group is exposed to credit risk in its treasury, trading, energy procurement and downstream activities. The maximum exposure to credit risk for financial instruments at fair value is equal to their carrying value. Gross amounts are shown by counterparty credit rating in the table below. Further details of other collateral and credit security not offset against these amounts is shown in note S6. 2020 (i) 2019 Financial assets at amortised cost Financial assets at fair value Financial assets at amortised cost Financial assets at fair value Receivables including treasury, trading and energy procurement counterparties (ii) £m 71 320 499 63 17 3,698 4,668 Derivative financial instruments with positive fair values £m 13 827 543 273 38 55 Cash and cash equivalents £m 1,049 – – – – – 1,049 1,749 Receivables including treasury, trading and energy procurement counterparties £m 148 268 580 123 10 3,981 5,110 Cash and cash equivalents £m – 844 8 – – 26 878 Derivative financial instruments with positive fair values £m 31 487 763 331 32 169 Cash and cash equivalents £m 621 – – – – – 621 1,813 Cash and cash equivalents £m – 699 8 – – 14 721 31 December AAA to AA AA– to A– BBB+ to BBB– BB+ to BB– B+ or lower Unrated (ii) Included above is £1,546 million of receivables, £107 million of cash and cash equivalents and £159 million of derivative financial instruments included in assets held for sale. (i) (ii) The Group holds a provision of £673 million (2019: £589 million) against receivables, including amounts presented as part of disposal groups classified as held for sale. The significant majority of this provision is held against amounts due from unrated counterparties. (iii) The unrated counterparty receivables primarily comprise amounts due from downstream customers, subsidiaries of rated entities, exchanges or clearing houses. Details of how credit risk is managed across the asset categories are provided below: (a) Treasury, trading and energy procurement activities Wholesale counterparty credit exposures are monitored by individual counterparty and by category of credit rating, and are subject to approved limits. The Group uses master netting agreements to reduce credit risk and net settles payments with counterparties where net settlement provisions exist (see note S6 for details of amounts offset). In addition, the Group employs a variety of other methods to mitigate credit risk: margining, various forms of bank and parent company guarantees and letters of credit. See note 24 for details of cash posted or received under margin or collateral agreements. 100% of the Group’s credit risk associated with its treasury, trading and energy procurement activities is with counterparties in related energy industries or with financial institutions. The impairment considerations of IFRS 9 are applicable to financial assets arising from treasury, trading and energy procurement activities that are carried at amortised cost and equity instruments that are carried at fair value through other comprehensive income (FVOCI). Equity instruments measured at FVOCI are not material for further disclosure. Included in the table above within receivables including treasury, trading and energy procurement counterparties is £918 million (2019: £1,246 million) of treasury, trading and energy procurement assets. The Group’s risk assessment procedures and counterparty selection process ensure that the credit risk on this type of financial asset is always low at initial recognition. Included within the table above is information about the exposure to credit risk arising from only certain of the Group’s energy procurement contracts – those in the scope of IFRS 9. Whilst the Group manages the credit risk associated with both financial and non-financial energy procurement contracts, it is the carrying value of financial assets within the scope of IFRS 9 (note S6) that represents the maximum exposure to credit risk in accordance with IFRS 7. (b) Trade receivables and contract assets The simplified approach of measuring lifetime expected credit losses has been applied to trade receivables and contract asset balances, which are the focus of this disclosure. Therefore, consideration of the significance of any change in credit risk since initial recognition for the purpose of applying this model is not required for any material component of the receivables balance. In the case of business customers, credit risk is managed by checking a company’s creditworthiness and financial strength both before commencing trade and during the business relationship. For residential customers, creditworthiness is ascertained normally before commencing trade to determine the payment mechanism required to reduce credit risk to an acceptable level. Certain customers will only be accepted on a prepayment basis or with a security deposit. In some cases, an ageing of receivables is monitored and used to manage the exposure to credit risk associated with both business and residential customers. In other cases, credit risk is monitored and managed by grouping customers according to method of payment or profile. Liquidity risk management and going concern Liquidity risk is the risk that the Group is unable to meet its financial obligations as they fall due. The Group experiences significant movements in its liquidity position due primarily to the seasonal nature of its business and margin cash arrangements associated with certain wholesale commodity contracts. To mitigate this risk the Group maintains significant committed facilities and holds cash on deposit to ensure that there is sufficient liquidity headroom at all points in the seasonal trading cycle of the business. See note 24 for further information. 174 Centrica plc Annual Report and Accounts 2020 S3. Financial risk management Maturity profiles Maturities of derivative financial instruments, provisions, borrowings and leases are provided in the following tables (all amounts are remaining contractual undiscounted cash flows): Due for payment 2020 Energy and interest derivatives in a loss position that will be settled on a net basis (i) Gross energy procurement contracts and other derivative buy trades carried at fair value (i) (ii) Foreign exchange derivatives that will be settled on a gross basis: Outflow Inflow Financial liabilities within provisions (i) Borrowings (bank loans, bonds, overdrafts and interest) Leases: (iii) Minimum lease payments Capital elements of leases Due for payment 2019 Energy and interest derivatives in a loss position that will be settled on a net basis Gross energy procurement contracts and other derivative buy trades carried at fair value (ii) Foreign exchange derivatives that will be settled on a gross basis: Outflow Inflow Financial liabilities within provisions Borrowings (bank loans, bonds, overdrafts and interest) Leases: (iii) Minimum lease payments Capital elements of leases <1 year £m 1 to 2 years £m 2 to 3 years £m 3 to 4 years £m 4 to 5 years £m >5 years £m (237) (35) (11) (6) (6) (14) (3,045) (2,056) (1,769) (1,643) (1,055) (352) (5,701) 5,857 (120) (733) (186) (179) <1 year £m (773) 771 (32) (467) (108) (104) 1 to 2 years £m (158) 156 (16) (383) (76) (74) 2 to 3 years £m (27) 24 (13) (153) (56) (53) 3 to 4 years £m (2) – (13) (592) (50) (48) 4 to 5 years £m (56) 102 (27) (4,539) (86) (82) >5 years £m (353) (59) (30) (8) (5) (14) (4,506) (2,651) (1,763) (1,812) (2,033) (1,602) (4,378) 4,367 (152) (808) (171) (163) (1,721) 1,818 (28) (834) (132) (127) (345) 341 (29) (469) (65) (61) (34) 32 (10) (391) (37) (35) (2) – (7) (59) 96 (23) (154) (4,473) (30) (28) (95) (89) (i) Included within contractual cash flows for derivatives to be settled net, gross energy procurement contracts and other derivative buy trades, and financial liabilities within provisions are £142 million, £1,854 million and £28 million respectively that relate to the Direct Energy disposal group. Of these amounts, £109 million, £956 million and £18 million were contractually due within 12 months of the reporting date. The disposal of Direct Energy completed on 5 January 2021. (ii) Proprietary energy trades are excluded from this maturity analysis as the Group does not take physical delivery of volumes traded under these contracts. The associated cash flows are expected to be equal to the contract fair value at the balance sheet date. See note 19 for further details. (iii) The difference between the total minimum lease payments and the total capital elements of leases is due to future finance charges. Lease liabilities of £35 million relating to the Direct Energy business are included in liabilities held for sale. Centrica plc Annual Report and Accounts 2020 175 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information continued S4. Other equity This section summarises the Group’s other equity reserve movements. 1 January 2019 Actuarial loss Employee share schemes: Exercise of awards Value of services provided Impact of cash flow hedging Taxation on above items Share of other comprehensive income of joint ventures and associates, net of taxation Exchange differences on translation of foreign operations Exchange differences reclassified to Group Income Statement on disposal Other movements 31 December 2019 Actuarial loss Employee share schemes: Exercise of awards Value of services provided Purchase of own shares Impact of cash flow and net investment hedging Taxation on above items Share of other comprehensive income of joint ventures and associates, net of taxation Exchange differences on translation of foreign operations Exchange differences reclassified to Group Income Statement on disposal Other movements 31 December 2020 Cash flow hedging reserve £m 11 – – – (6) 2 – – – – 7 – – – – 11 (2) – – – – Foreign currency translation reserve £m (68) – – – – – – (110) (18) – (196) – – – – 50 (10) – (50) 8 – Actuarial gains and losses reserve £m (629) (465) – – – 78 29 – – – (987) (501) – – – – 122 58 – – – 16 (198) (1,308) Financial asset at FVOCI reserve £m Treasury and own shares reserve £m Share- based payments reserve £m Merger, capital redemption and other reserves £m (107) – 70 – – – – – – – (37) – 36 – (30) – – – – – – 92 – (60) 41 – – – – – – 73 – (46) 52 – – – – – – – 525 – – – – – – – – 2 527 – – – – – – – – – – 2 – – – – – – – – 2 4 – – – – – – – – – (4) – Total £m (174) (465) 10 41 (6) 80 29 (110) (18) 4 (609) (501) (10) 52 (30) 61 110 58 (50) 8 (4) (31) 79 527 (915) Merger, capital redemption and other reserves During February 1997, BG plc (formerly British Gas plc) demerged certain businesses (grouped together under GB Gas Holdings Limited (GBGH)) to form Centrica plc. Upon demerger, the share capital of GBGH was transferred to Centrica plc and was recorded at the nominal value of shares issued to BG plc shareholders. In accordance with the Companies Act 1985, no premium was recorded on the shares issued. On consolidation, the difference between the nominal value of the Company’s shares issued and the amount of share capital and share premium of GBGH at the date of demerger was credited to a merger reserve. On 8 December 2017, the Group’s existing exploration and production business was combined with that of Bayerngas Norge AS to form the Spirit Energy business. The Group acquired 69% of the Spirit Energy business and Bayerngas Norge’s former shareholders acquired 31%. The non-controlling interest established on acquisition has been based on its share of the carrying value of the combined business, with the other reserve representing the difference between the fair value and this carrying value. In accordance with the Companies Act, the Company has transferred to the capital redemption reserve an amount equal to the nominal value of shares repurchased and subsequently cancelled. Up to 31 December 2020 the cumulative nominal value of shares repurchased and subsequently cancelled was £28 million (2019: £28 million). Own shares reserve The own shares reserve reflects the cost of shares in the Company held in the Centrica employee share ownership trusts to meet the future requirements of the Group’s share-based payment plans. Treasury shares reserve Treasury shares are acquired equity instruments of the Company. 176 Centrica plc Annual Report and Accounts 2020 S5. Hedge accounting The Group primarily applies hedge accounting to address interest rate and foreign currency risk on borrowings. For the purposes of hedge accounting, hedges are classified either as fair value hedges, cash flow hedges or hedges of net investments in foreign operations. The Group recommenced net investment hedging during 2020 in respect of its investment in the US dollar subsidiaries in the Direct Energy business. The fair values of derivatives and primary financial instruments in hedge accounting relationships at 31 December were as follows: 31 December Interest rate risk Hedge Fair value Foreign exchange risk Cash flow hedge Foreign exchange risk Net investment hedge 2020 Assets £m Liabilities £m 182 180 24 (1) (9) – Change in fair value £m 93 44 50 2019 Liabilities £m (2) (2) – Assets £m 105 131 – Change in fair value £m 55 (44) – 2020 Interest rate risk Hedge Fair value Timing of nominal amount Average rate Nominal value Hedged item Change in fair value of hedged item in year £m Cumulative amount of fair value hedge adjustments on hedged item £m Accumulated gains/(losses) in equity (i) £m 2032-2033 Fixed to floating at LIBOR/US IBOR + 1%-5% £50 million - £550 million, $250 million Bonds (ii) (93) (164) N/A Foreign exchange risk Cash flow hedge 2021-2032 GBP to Euro at 1.356 €50 million, €750 million Euro bonds Foreign exchange risk Cash flow hedge 2036-2038 Net investment hedge/Cash flow hedge (iii) 2021 GBP to Yen at 151.49 GBP to USD at 1.34 ¥20 billion $2.3 billion Yen bank loans Carrying value of net assets of subsidiary/ disposal proceeds (37) (2) (55) N/A N/A N/A 22 (9) 55 i F n a n c a i l 2019 Interest rate risk Hedge Fair value Timing of nominal amount 2022-2033 Average rate Nominal value Hedged item Change in fair value of hedged item in year £m Cumulative amount of fair value hedge adjustments on hedged item £m Accumulated gains/(losses) in CFHR (i) £m S t a t e m e n t s Fixed to floating at LIBOR/US IBOR + 1%-5% £50 million - £550 million, $250 million Bonds (ii) (57) (85) N/A Foreign exchange risk Cash flow hedge 2021-2032 Cash flow hedge 2036-2038 GBP to Euro at 1.356 €50 million, €750 million Euro bonds GBP to Yen at 151.49 ¥20 billion Yen bank loans 42 1 N/A N/A 25 (18) In the years presented all amounts related to continuing cash flow hedge relationships. (i) (ii) The carrying amount of bonds designated as hedged items in hedging relationships is disclosed in note 24. (iii) The Group recommenced net investment hedging in 2020 in respect of the US dollar subsidiaries of its Direct Energy business. During 2020 the Group also used cash flow hedging to protect against exchange risk on the sterling value of the US dollar proceeds received on completion of the disposal of that business in 2021. Of the total notional US dollar value hedging, $305 million relates to this cash flow hedging strategy. The Group’s accounting policies in relation to derivatives qualifying for hedge accounting under IAS 39 are described below. Centrica plc Annual Report and Accounts 2020 177 Financial Statements | Notes to the Financial Statements continued Supplementary information continued S5. Hedge accounting Fair value hedges A derivative is designated as a hedging instrument and its relationship to a recognised asset or liability is classified as a fair value hedge when it hedges the exposure to changes in the fair value of that recognised asset or liability. The Group’s fair value hedges consist of interest rate swaps used to protect against changes in the fair value of fixed-rate, long-term debt due to movements in market interest rates. Any gain or loss from re-measuring the hedging instrument to fair value is recognised immediately in the Group Income Statement in net finance cost. Any gain or loss on the hedged item attributable to the hedged risk is adjusted against the carrying amount of the hedged item and recognised in the Group Income Statement within net finance cost. The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer qualifies for hedge accounting or the Group revokes the designation. Any adjustment to the carrying amount of a hedged financial instrument for which the effective interest method is used is amortised to the Group Income Statement. Amortisation may begin as soon as an adjustment exists and begins no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. Impact of interest rate benchmark reform The Group has continued to apply Phase 1 of the amendments to IFRS 9, IAS 39 and IFRS 7: “Interest benchmark reform” during 2020. The amendments permit continuation of hedge accounting even if, in the future, the benchmark interest rate applicable to the hedge may not be separately identifiable. The Group continues to monitor developments and consider the impact of reform, concluding that the primary impact relates to fair value hedging relationships in which fixed interest rates on bonds are swapped for floating rates linked to IBOR rates, as detailed in the above table. In 2021, the Group expects to apply Phase 2 of the amendments as described in note 1. The Group has assumed that the uncertainty arising from interest rate reform will not end until the Group’s contracts that reference IBORs are amended and appropriate language is introduced into relevant contracts. Work to ensure systems and processes are appropriately updated, along with discussions with counterparties around contract amendments is ongoing. Cash flow hedges A derivative is classified as a cash flow hedge when it hedges exposure to variability in cash flows that is attributable to a particular risk either associated with a recognised asset, liability or a highly probable forecast transaction. The Group’s cash flow hedges consist primarily of: • forward foreign exchange contracts used to protect against the variability of functional currency denominated cash flows associated with non- functional currency denominated highly probable forecast transactions; and • cross-currency interest rate swaps and forward foreign exchange contracts used to protect against the variability in cash flows associated with borrowings denominated in non-functional currencies. The portion of the gain or loss on the hedging instrument which is effective is recognised directly in equity while any ineffectiveness is recognised in the Group Income Statement. The gains or losses that are initially recognised in the cash flow hedging reserve through other comprehensive income are transferred to the Group Income Statement in the period in which the hedged item affects profit or loss. Where the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability on its recognition. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, no longer qualifies for hedge accounting or the Group revokes the designation. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity remains in equity until the hedged transaction occurs. If the transaction is no longer expected to occur, the cumulative gain or loss recognised in equity is recognised in the Group Income Statement. Note S4 details movements in the cash flow hedging reserve. The ineffective portion of gains and losses on cash flow hedging is immaterial. Net investment hedges Hedges of net investments in foreign operations hedge the exposure of the sterling value of the assets of foreign currency subsidiaries in the consolidated Financial Statements to changes in exchange rates. Such hedges are accounted for similarly to cash flow hedges. Any gain or loss on the effective portion of the hedge is recognised in equity, any gain or loss on the ineffective portion of the hedge is recognised in the Group Income Statement. On disposal of the foreign operation, the cumulative gains or losses recognised directly in equity are transferred to the Group Income Statement. The Group initially ceased any net investment hedging activity in 2009. The Group recommenced this strategy in respect of the US dollar subsidiaries in its Direct Energy business in 2020. The financial instruments in this net investment hedging relationship are forward US dollar/ sterling foreign exchange contracts. No material ineffectiveness was recognised in the Group Income Statement in respect of this relationship. 178 Centrica plc Annual Report and Accounts 2020 S6. Fair value of financial instruments The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Group has documented internal policies for determining fair value, including methodologies used to establish valuation adjustments required for credit risk. (a) Fair value hierarchy Financial assets and financial liabilities measured and held at fair value are classified into one of three categories, known as hierarchy levels, which are defined according to the inputs used to measure fair value as follows: • Level 1: fair value is determined using observable inputs that reflect unadjusted quoted market prices for identical assets and liabilities; • Level 2: fair value is determined using significant inputs that may be directly observable inputs or unobservable inputs that are corroborated by market data; and • Level 3: fair value is determined using significant unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value. 31 December Financial assets Derivative financial instruments: Energy derivatives Interest rate derivatives Foreign exchange derivatives Treasury gilts designated FVTPL Debt instruments Equity instruments Cash and cash equivalents Total financial assets at fair value Financial liabilities Derivative financial instruments: Energy derivatives Interest rate derivatives Foreign exchange derivatives 2020 (i) 2019 Level 1 £m Level 2 £m Level 3 £m Total £m Level 1 £m Level 2 £m Level 3 £m Total £m 21 1,199 91 1,311 – – – 84 25 – 130 185 253 – – – 1,049 2,686 – – – – 29 – 120 185 253 – 84 54 1,049 2,936 1 – – 124 77 26 – 228 1,241 228 1,470 108 235 – – – 621 2,205 – – – – 28 – 256 108 235 124 77 54 621 2,689 – – – (983) (1) (55) (129) (1,112) (146) (1,778) (90) (2,014) – – (1) (55) – – (25) (106) – – (25) (106) Total financial liabilities at fair value (1,039) (2,145) (i) The table above includes £159 million derivative assets, £240 million derivative liabilities and £4 million equity instruments which are classified as held for sale on the Group Balance Sheet. (1,168) (1,909) (129) (146) (90) – The reconciliation of the Level 3 fair value measurements during the year is as follows: Level 3 financial instruments 1 January Total realised and unrealised (losses)/gains: Recognised in Group Income Statement Purchases, sales, issuances and settlements (net) Transfers between Level 2 and Level 3 (ii) Foreign exchange movements 31 December Total losses for the year for Level 3 financial instruments held at the end of the reporting year 2020 (i) Financial assets £m Financial liabilities £m 2019 Financial assets £m Financial liabilities £m 256 (90) 175 (40) (79) (15) (2) 120 (44) (57) 16 1 1 17 28 38 (2) (129) 256 (57) (14) (59) (10) (26) 5 – (90) (2) (i) At 31 December 2020 includes £52 million of Level 3 financial assets, and £20 million of Level 3 financial liabilities that are classified as are held for sale on the Group Balance Sheet. (ii) Transfers between levels are deemed to occur at the beginning of the reporting period. Centrica plc Annual Report and Accounts 2020 179 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information continued S6. Fair value of financial instruments (b) Valuation techniques used to derive Level 2 and Level 3 fair values and Group valuation process Level 2 interest rate derivatives and foreign exchange derivatives comprise interest rate swaps and forward foreign exchange contracts. Interest rate swaps are fair valued using forward interest rates extracted from observable yield curves. Forward foreign exchange contracts are fair valued using forward exchange rates that are quoted in an active market, with the resulting market value discounted back to present value using observable yield curves. Level 2 energy derivatives are fair valued by comparing and discounting the difference between the expected contractual cash flows for the relevant commodities and the quoted prices for those commodities in an active market. The average discount rate applied to value this type of contract during the year was 1% (Europe) and 3% (North America) per annum (31 December 2019 average discount rate of 1% (Europe) and 3% (North America) per annum). For Level 3 energy derivatives, the main input used by the Group pertains to deriving expected future commodity prices in markets that are not active as far into the future as some of our contractual terms. This applies to certain contracts within Europe and North America. Fair values are then calculated by comparing and discounting the difference between the expected contractual cash flows and these derived future prices using an average discount rate of 1% (Europe) and 3% (North America) per annum (31 December 2019 average discount rate of 2% (Europe) and 3% (North America) per annum). Active period of markets UK (years) North America (years) Gas Power Coal Emissions 4 5 4 Up to 5 3 N/A 3 Up to 5 Oil 4 4 Because the Level 3 energy derivative valuations involve the prediction of future commodity market prices, sometimes a long way into the future, reasonably possible alternative assumptions for gas, power, coal, emissions or oil prices may result in a higher or lower fair value for Level 3 financial instruments. Given the relative size of the volumetric exposures and these fair values, it is unlikely that the impact of these reasonably possible changes would be significant when judged in relation to the Group’s profit and loss or total asset value. It should be noted that the fair values disclosed in the tables above only concern those contracts entered into that are within the scope of IFRS 9. The Group has numerous other commodity contracts that are outside of the scope of IFRS 9 and are not fair valued. The Group’s actual exposure to market rates is constantly changing as the Group’s portfolio of energy contracts changes. The Group’s valuation process includes specific teams of individuals that perform valuations of the Group’s derivatives for financial reporting purposes, including Level 3 valuations. The Group has an independent team that derives future commodity price curves based on available external data and these prices feed into the energy derivative valuations, subject to adjustments to ensure they are compliant with IFRS 13: ‘Fair value measurement’. The price curves are subject to review and approval by the Group’s Executive Committee and valuations of all derivatives, together with other contracts that are not within the scope of IFRS 9, are also reviewed regularly as part of the overall risk management process. Where the fair value at initial recognition for contracts which extend beyond the active period differs from the transaction price, a day-one gain or loss will arise. Such gains and losses are deferred and amortised to the Group Income Statement based on volumes purchased or delivered over the contractual period until such time as observable market data becomes available (see note S2 for further detail). The amount that has yet to be recognised in the Group Income Statement relating to the differences between the transaction prices and the amounts that would have arisen had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows: Day-one gains deferred 1 January Net gains deferred on transactions in the year Net amounts recognised in Group Income Statement Exchange differences 31 December 2020 £m 47 16 – 1 64 2019 £m 27 11 2 7 47 180 Centrica plc Annual Report and Accounts 2020 S6. Fair value of financial instruments (c) Fair value of financial assets and liabilities held at amortised cost The carrying value of the Group’s financial assets and liabilities measured at amortised cost are approximately equal to their fair value except as listed below: 31 December Bank loans Bonds Level 1 Level 2 2020 2019 Carrying value £m Fair value £m Fair value hierarchy Carrying value £m Fair value £m (144) (4,004) (107) (195) (4,825) (148) Level 2 Level 1 Level 2 (144) (3,963) (102) (176) (4,595) (138) Notes 24(d) 24(d) 24(d) Fair value hierarchy Level 2 Level 1 Level 2 Bank loans and borrowings The fair values of bonds classified as Level 1 within the fair value hierarchy are calculated using quoted market prices. The fair values of Level 2 bonds and bank loans have been determined by discounting cash flows with reference to relevant market rates of interest. The fair values of overdrafts and short-term loans are assumed to equal their book values due to the short-term nature of these amounts. Other financial instruments Due to their nature and/or short-term maturity, the fair values of trade and other receivables, cash and cash equivalents, trade and other payables, lease liabilities and provisions are estimated to approximate their carrying values. (d) Financial assets and liabilities subject to offsetting, master netting arrangements and similar arrangements 31 December 2020 Derivative financial assets Derivative financial liabilities Balances arising from commodity contracts: Accrued and unbilled downstream and energy income Accruals for commodity costs Cash and financing arrangements: Cash and cash equivalents Bank loans and overdrafts Securities 31 December 2019 Derivative financial assets Derivative financial liabilities Balances arising from commodity contracts: Accrued and unbilled downstream and energy income Accruals for commodity costs Cash and financing arrangements: Cash and cash equivalents Bank loans and overdrafts Securities Related amounts not offset in the Group Balance Sheet (i) Gross amounts of recognised financial instruments £m Gross amounts of recognised financial instruments offset in the Group Balance Sheet £m Net amounts presented in the Group Balance Sheet £m Financial instruments £m Collateral £m Net amount £m 5,609 (5,028) 4,837 (4,353) 1,942 (693) 138 (3,860) 3,860 (2,830) 2,830 (15) 15 – 1,749 (1,168) 581 2,007 (1,523) 1,927 (678) 138 (266) 266 (168) 168 (534) 534 – (68) 56 – – – – – 1,415 (846) 569 1,839 (1,355) 1,393 (144) 138 Related amounts not offset in the Group Balance Sheet (i) Gross amounts of recognised financial instruments £m Gross amounts of recognised financial instruments offset in the Group Balance Sheet £m Net amounts presented in the Group Balance Sheet £m Financial instruments £m Collateral £m Net amount £m 9,072 (9,404) 5,625 (5,146) 1,353 (703) 255 (7,259) 7,259 (3,280) 3,280 (11) 11 – 1,813 (2,145) (332) 2,345 (1,866) 1,342 (692) 255 (505) 505 (186) 186 (548) 548 – (35) 181 – – – – (26) 1,273 (1,459) (186) 2,159 (1,680) 794 (144) 229 (i) The Group has arrangements in place with various counterparties in respect of commodity trades which provide for a single net settlement of all financial instruments covered by the arrangement in the event of default or termination, or other circumstances arising whereby either party is unable to meet its obligations. The above table shows the potential impact of these arrangements being enforced by offsetting the relevant amounts within each Group Balance Sheet class of asset or liability, but does not show the impact of offsetting across Group Balance Sheet classes where the offsetting Group Balance Sheet class is not included within the above table. Included in assets and liabilities held for sale are accrued energy income and accrued commodity costs of £684 million and £504 million respectively, cash and cash equivalents of £107 million, securities of £4 million, and derivative financial assets and liabilities of £159 million and £240 million respectively. (ii) Centrica plc Annual Report and Accounts 2020 181 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information continued S7. Fixed-fee service and insurance contracts This section includes fixed-fee service (FFS) and insurance contract disclosures for services related to British Gas and Direct Energy. Direct Energy has been classified as a discontinued operation in 2020, with its assets and liabilities classified as held for sale in 2020. The disclosures given below relate to the Centrica Group as a whole. FFS contracts in North America are entered into with home and business services customers. Insurance contracts in North America are entered into with home services customers. FFS contracts in the UK are entered into with home services customers by British Gas Services Limited (BGSL) and with business customers by British Gas Services (Commercial) Limited. Insurance contracts in the UK are entered into with home services customers by British Gas Insurance Limited (BGIL), authorised by the PRA and regulated by the FCA and the PRA. Product offerings include central heating, boiler and controls, plumbing and drains and electrical appliance insurance cover. FFS contracts continue until cancelled by either party; insurance contracts normally provide cover for 12 months with the option of renewal. The contracts which protect policyholders against the risk of breakdowns result in the transfer of risk to the contract provider. Benefits provided to customers vary in accordance with terms and conditions of the contracts entered into. However, they generally include maintenance, repair and/or replacement of the items affected. The levels of risk exposure and service provision to customers under the contract terms are dependent on the occurrence of uncertain future events, in particular the nature and frequency of faults, and the cost of repair or replacement of the items affected. Accordingly, the timing and amount of future cash outflows associated with the contracts is uncertain. As the Group’s insurance contract portfolio is comprised of a large number of contracts with small individual values, a high volume of claims with a relatively low unit cost results. The characteristics of the business mean that material concentrations or aggregations of risk are relatively remote. The key terms and conditions that affect future cash flows are as follows: • provision of labour and parts for repairs, dependent on the agreement and associated level of service; • a specified number of safety and maintenance inspections are carried out as set out in the agreement (usually once a year); • no limit to the number of call-outs to carry out repair work; and • limits on certain maintenance and repair costs. The most significant insurance risk is an extreme weather event for an extended period, which has the propensity to increase claim frequencies. The Group regularly assesses insurance risk sensitivities, the most significant relating to increases in breakdown frequency and increases in the average cost of repair. A reasonably possible increase in either would not have a material impact on the results of the Group. Revenue is recognised over the life of contracts (usually twelve months) having regard to the incidence of risk, in particular the seasonal propensity of claims which span the life of the contract as a result of emergency maintenance being available throughout the contract term. Costs incurred to settle claims represent principally the engineer workforce employed by the Group within home services and the cost of parts utilised in repair or maintenance. These costs are accounted for over a 12-month period with adjustments made to reflect the seasonality of workload over a given year. Weather conditions and the seasonality of repairs both affect the profile of the workload and associated costs incurred across the year. The risk exposure of these uncertain events is actively managed by undertaking the following risk mitigation activities: • an initial service visit is provided to customers taking up most central heating contracts and in some instances pre-existing faults may lead to the contract being cancelled and no further cover being provided; • an annual maintenance inspection is performed as part of most central heating contracts to help identify and prevent issues developing into significant maintenance or breakdown claims; and • contract limits are applied to certain types of maintenance and repair work considered to be higher risk in terms of frequency and cost. The costs of FFS claims and insurance claims incurred during the year were £8 million (2019: £20 million) and £338 million (2019: £341 million) respectively and are included in the table below in ‘Expenses relating to FFS and insurance contracts’. All claims are settled immediately and in full. Due to the short average lead time between claims occurrence and settlement, no material provisions were outstanding at the balance sheet date in 2020 or 2019. Total revenue Expenses relating to FFS and insurance contracts Deferred income Accrued income 2020 £m 1,063 (872) (72) 32 2019 £m 1,118 (949) (86) 33 The table above includes amounts related to disposal groups held for sale and discontinued operations. The Group also considers whether estimated future cash flows under the contracts will be sufficient to meet expected future costs. Any deficiency is charged immediately to the Group Income Statement. Claims frequency is sensitive to the reliability of appliances as well as the impact of weather conditions. The contracts are not exposed to any interest rate risk or significant credit risk and do not contain any embedded derivatives. 182 Centrica plc Annual Report and Accounts 2020 S8. Related party transactions The Group’s principal related party is its investment in Lake Acquisitions Limited, which owns the existing EDF UK nuclear fleet. The disclosures below, including comparatives, only refer to related parties that were related in the current reporting period. During the year, the Group entered into the following arm’s length transactions with related parties who are not members of the Group, and had the following associated balances: Associates: Nuclear Joint Ventures 2020 Purchase of goods and services £m Amounts owed to £m 2019 Purchase of goods and services £m (501) (7) (508) (49) – (49) (454) (16) (470) Amounts owed to £m (51) (1) (52) During the year, there were no material changes to commitments in relation to joint ventures and associates. At the balance sheet date, the Group committed facilities to the Lake Acquisition Group totalling £120 million, although nothing has been drawn at 31 December 2020. Key management personnel comprise members of the Board and Executive Committee, a total of 11 individuals at 31 December 2020 (2019: 17). Remuneration of key management personnel Year ended 31 December Short-term benefits (i) Post-employment benefits Share-based payments (i) The value of the short-term benefits in 2020 includes a credit of £0.5 million in respect of bonuses which were included in 2019, but not subsequently paid. Remuneration of the Directors of Centrica plc Year ended 31 December Total emoluments (i) Contributions into pension schemes (i) These emoluments were paid for services performed on behalf of the Group. No emoluments related specifically to services performed for the Company. Directors’ interests in shares are given in the Remuneration Report on pages 66 to 75. 2020 £m 4.3 0.4 2.6 7.3 2020 £m 2.7 0.2 2019 £m 7.9 1.0 4.1 13.0 2019 £m 4.0 0.5 Centrica plc Annual Report and Accounts 2020 183 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information continued S9. Auditors’ remuneration Year ended 31 December Fees payable to the Company’s auditors for the audit of the Company’s individual and consolidated: Financial Statements Audit of the Company’s subsidiaries Total fees related to the audit of the parent and subsidiary entities Fees payable to the Company’s auditors and its associates for other services: Audit-related assurance services (ii) All other services (iii) Fees in respect of pension scheme audits (iv) 2020 £m 2019 (restated) (i) £m 5.5 1.7 7.2 3.0 1.3 11.5 0.1 5.7 1.7 7.4 1.1 – 8.5 0.1 (i) Restated to re-present the £0.3 million (2019: £0.3 million) for the audit of the Ofgem Consolidated Segmental Statement as an audit-related assurance service fee instead of for the audit of the Company’s consolidated Financial Statements. (ii) Predominantly relates to the review of the condensed interim Financial Statements included in the interim results and assurance work associated with the Direct Energy disposal. Also, included is £0.3 million (2019: £0.3 million) for the audit of the Ofgem Consolidated Segmental Statement, required by regulation. (iii) Relates to the Class 1 Circular reporting accountant work for the Direct Energy disposal. (iv) The pension scheme audit continues to be performed by PricewaterhouseCoopers LLP. During 2020, work on the divestment of Direct Energy required significant additional services from Deloitte to facilitate the sale. Approval for this expenditure was sought and received from the Audit and Risk Committee in advance of the work commencing. The work related to both the Reporting Accountant services in respect of the disposal Class 1 Circular and the audit of US GAAP carve-out accounts for Direct Energy, undertaken for purchaser NRG’s purposes, but under the direction of the Group. 184 Centrica plc Annual Report and Accounts 2020 S10. Related undertakings The Group has a large number of related undertakings principally in the UK, US, Norway, Canada, Denmark, the Netherlands and the Republic of Ireland. These are listed below. (a) Subsidiary undertakings Investments held directly by Centrica plc with 100% voting rights 31 December 2020 Centrica Beta Holdings Limited Centrica Holdings Limited Centrica Trading Limited Rhodes Holdings HK Limited Investments held indirectly by Centrica plc with 100% voting rights Principal activity Holding company Holding company Country of incorporation/ registered address key (i) Class of shares held United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares Dormant United Kingdom / A Ordinary shares Holding Company Hong Kong / B Ordinary shares 31 December 2020 Accord Energy (Trading) Limited Accord Energy Limited Airtron Inc. (ii) Alertme.com GmbH Astrum Solar Inc. Atform Limited Principal activity Dormant Dormant Country of incorporation/ registered address key (i) Class of shares held United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares Home and/or commercial services United States / C Ordinary shares Non-trading Germany / D Ordinary shares Home and/or commercial services United States / E Ordinary shares Dormant United Kingdom / A Ordinary shares AWHR America’s Water Heater Rentals LLC (ii) Home and/or commercial services United States / C Membership interest Bord Gáis Energy Limited Bord Gáis Energy Trustees DAC Bounce Energy Inc. (ii) British Gas Energy Procurement Limited British Gas Finance Limited British Gas Insurance Limited British Gas Limited British Gas New Heating Limited Energy supply and power generation Republic of Ireland / F Ordinary shares Pension trustee company Republic of Ireland / F Ordinary shares Energy supply Energy supply Vehicle leasing United States / C Ordinary shares United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares Insurance provision United Kingdom / A Ordinary shares Dormant United Kingdom / A Ordinary shares Electrical and gas installations United Kingdom / A Ordinary shares British Gas Services (Commercial) Limited Servicing and installation of heating systems United Kingdom / A Ordinary shares British Gas Services Limited Home services United Kingdom / A Ordinary shares British Gas Social Housing Limited Servicing and installation of heating systems United Kingdom / A Ordinary shares British Gas Solar Limited British Gas Trading Limited British Gas X Limited Business Gas Limited Caythorpe Gas Storage Limited CBS US Solar Fund 1 LLC Centrica (IOM) Limited Centrica (Lincs) Wind Farm Limited Centrica Alpha Finance Limited Centrica America Limited Centrica Barry Limited Centrica Brigg Limited Centrica Business Holdings Inc. (iii) Dormant United Kingdom / A Ordinary shares Energy supply Energy supply United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares Dormant United Kingdom / A Ordinary shares Gas storage United Kingdom / G Ordinary shares Distributed energy and power United States / C Membership interest Dormant Isle of Man / H Ordinary shares Holding company United Kingdom / A Ordinary shares Dormant Dormant United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares Power generation United Kingdom / A Ordinary shares Power generation United Kingdom / A Ordinary shares Holding company United States / I Ordinary shares Centrica Business Solutions (Generation) Limited Power generation United Kingdom / A Ordinary shares Centrica Business Solutions Asset Management LLC Energy management products and services United States / C Membership interest Centrica Business Solutions Belgium NV Demand response aggregation Belgium / J Ordinary shares Centrica Business Solutions BV Energy management products and services Netherlands / K Ordinary shares Centrica Business Solutions Canada Inc. Energy management products and services Canada / L Ordinary shares Centrica Business Solutions Deutschland GmbH Demand response aggregation Germany / M Ordinary shares Centrica Business Solutions France SASU Demand response aggregation France / N Ordinary shares Centrica Business Solutions International Limited Holding company United Kingdom / A Ordinary shares Centrica plc Annual Report and Accounts 2020 185 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information continued S10. Related undertakings 31 December 2020 Principal activity Country of incorporation/ registered address key (i) Class of shares held Centrica Business Solutions Ireland Limited Energy management products and services Republic of Ireland / F Ordinary shares Centrica Business Solutions Italia Srl Energy management products and services Italy / O Ordinary shares Centrica Business Solutions Management Limited Holding company United Kingdom / A Ordinary shares Centrica Business Solutions México S.A. de C.V. Energy management products and services Mexico / P Ordinary shares Centrica Business Solutions Optimize LLC (iv) Energy management products and services United States / C Membership interest Centrica Business Solutions Romania Srl Energy management products and services Romania / Q Ordinary shares Centrica Business Solutions Services Inc. (iv) Energy management products and services United States / C Ordinary shares Centrica Business Solutions UK Limited Energy management products and services United Kingdom / A Ordinary shares Centrica Business Solutions UK Optimisation Limited Demand response aggregation United Kingdom / A Ordinary shares Centrica Business Solutions US Inc. Energy management products and services United States / C Ordinary shares Centrica Business Solutions Zrt Energy management products and services Hungary / R Ordinary shares Centrica Combined Common Investment Fund Limited Centrica Delta Limited Centrica Directors Limited Dormant Dormant Dormant United Kingdom / A Ordinary shares Isle of Man / S Ordinary shares United Kingdom / A Ordinary shares Centrica Distributed Generation Limited Power generation United Kingdom / A Ordinary shares Centrica Energy (Trading) Limited Centrica Energy Limited Centrica Energy Marketing Limited Centrica Energy Operations Limited Centrica Energy Renewable Investments Limited Centrica Energy Trading A/S Centrica Energy Trading GmbH Centrica Energy Trading Pte. Ltd. Wholesale energy trading United Kingdom / A Ordinary shares Wholesale energy trading United Kingdom / A Ordinary shares Wholesale energy trading United Kingdom / A Ordinary shares Dormant Dormant United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares Energy services and wholesale energy trading Denmark / T Ordinary shares Energy services and wholesale energy trading Germany / U Ordinary shares Energy services and wholesale energy trading Singapore / V Ordinary shares Centrica Engineers Pension Trustees Limited Dormant United Kingdom / A Ordinary shares Centrica Finance (Canada) Limited Centrica Finance (Scotland) Limited Centrica Finance (US) Limited Centrica Finance Investments Limited Centrica Finance Norway Limited Centrica Gamma Holdings Limited Centrica Hive Canada Inc. (ii) Centrica Hive Limited Centrica Hive Srl Centrica Hive US Inc. (ii) Centrica HoldCo GP LLC (ii) Centrica Ignite GP Limited Centrica Ignite LP Limited Centrica India Offshore Private Limited Centrica Infrastructure Limited Centrica Innovations UK Limited Centrica Innovations US Inc. Centrica Insurance Company Limited Centrica Jersey Limited Centrica KPS Limited Centrica Lake Limited Centrica Leasing (KL) Limited Centrica LNG Company Limited Centrica LNG UK Limited Centrica Nederland BV Centrica NewCo 123 Limited Holding company United Kingdom / A Ordinary shares Holding company United Kingdom / W Ordinary shares Holding company United Kingdom / A Ordinary shares Dormant Dormant United Kingdom / A Ordinary shares Jersey / X Ordinary shares Holding company United Kingdom / A Ordinary shares Energy management products and services Canada / L Ordinary shares Energy management products and services United Kingdom / A Ordinary shares Energy management products and services Italy / Y Ordinary shares Energy management products and services United States / C Ordinary shares Holding company United States / C Membership interest Investment company United Kingdom / A Ordinary shares Investment company United Kingdom / A Ordinary shares Business services India / Z Ordinary shares Dormant United Kingdom / W Ordinary shares Investment company United Kingdom / A Ordinary shares Investment company United States / C Ordinary shares Insurance provision Isle of Man / H Ordinary and preference shares Dormant Jersey / AA Ordinary shares Power generation United Kingdom / A Ordinary shares Holding company United Kingdom / A Ordinary shares Dormant United Kingdom / A Ordinary shares LNG trading LNG trading United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares Holding company Netherlands / K Ordinary shares Dormant United Kingdom / A Ordinary shares 186 Centrica plc Annual Report and Accounts 2020 S10. Related undertakings 31 December 2020 Centrica Nigeria Limited Centrica No.12 Limited Centrica Nominees No.1 Limited Centrica Offshore UK Limited Centrica Onshore Processing UK Limited Centrica Overseas Holdings Limited Centrica PB Limited Centrica Pension Plan Trustees Limited Centrica Pension Trustees Limited Centrica Production Limited Centrica Resources (Nigeria) Limited Centrica Resources (UK) Limited Centrica Resources Petroleum UK Limited Centrica Secretaries Limited Centrica Services Limited Centrica Storage Holdings Limited Centrica Storage Limited Centrica Trinidad and Tobago Limited Centrica Trust (No.1) Limited Centrica Upstream Investment Limited Centrica US Holdings Inc. (ii) CH4 Energy Limited CID1 Limited CIU1 Limited DEML Investments Limited DER Development No.10 Ltd. Direct Energy (B.C.) Limited (ii) Direct Energy Business LLC (ii) Principal activity Country of incorporation/ registered address key (i) Class of shares held Holding company United Kingdom / A Ordinary shares Dormant Dormant United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares Gas and/or oil exploration and production United Kingdom / G Ordinary shares Dormant United Kingdom / G Ordinary shares Holding company Power generation Dormant Dormant Dormant Non-trading Dormant Dormant Dormant Business services Holding company United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares United Kingdom / A Limited by guarantee United Kingdom / A Ordinary shares United Kingdom / W Ordinary shares Nigeria / AB Ordinary shares United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares United Kingdom / G Ordinary shares Gas production and processing United Kingdom / G Ordinary shares Business services Trinidad and Tobago / AC Ordinary shares Dormant Dormant United Kingdom / A Ordinary shares United Kingdom / W Ordinary shares Holding company United States / C Ordinary shares Dormant Dormant Dormant Holding company Holding company United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares Canada / AD Ordinary shares Canada / L Ordinary shares Energy supply and/or services Canada / AE Ordinary shares Energy supply and/or services United States / C Membership interest Direct Energy Business Marketing LLC (ii) Energy supply and/or services United States / C Membership interest Direct Energy GP LLC (ii) Direct Energy Holdings (Alberta) Inc. (ii) Direct Energy HVAC Services Ltd. (ii) Direct Energy Leasing LLC (ii) Direct Energy Marketing Inc. (ii) Direct Energy Marketing Limited (ii) Direct Energy Operations LLC (ii) Direct Energy Services LLC (ii) Holding company United States / C Membership interest Home and/or commercial services Canada / L Ordinary shares Home and/or commercial services Canada / L Ordinary shares Home and/or commercial services United States / C Membership interest Wholesale energy trading United States / C Ordinary and preference shares Energy supply and/or services Canada / AD Ordinary shares Energy supply and/or services United States / C Membership interest Energy supply and/or services United States / C Membership interest Distributed Energy Asset Solutions Limited Dormant United Kingdom / A Ordinary shares Distributed Energy Customer Solutions Limited Energy management products and services United Kingdom / A Ordinary shares Drips Limited Dyno Developments Limited Dyno-Plumbing Limited Dyno-Rod Limited Dyno-Security Services Limited Dyno-Services Limited ECL Contracts Limited ECL Investments Limited Electricity Direct (UK) Limited ENER-G Cogen International Limited Dormant Dormant Dormant United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares Operation of a franchise network United Kingdom / A Ordinary shares Dormant Dormant Dormant Dormant Dormant United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares Holding company United Kingdom / A Ordinary shares ENER-G Nagykanizsa Kft Energy management products and services Hungary / R Ordinary shares Centrica plc Annual Report and Accounts 2020 187 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information continued S10. Related undertakings 31 December 2020 ENER-G Power2 Limited ENER-G Rudox LLC Energy For Tomorrow FES Energy Solutions Limited First Choice Power LLC (ii) Gateway Energy Services Corporation (ii) GB Gas Holdings Limited Generation Green Solar Limited GF One Limited (v) GF Two Limited (v) Goldbrand Development Limited Hillserve Limited Home Assistance UK Limited Home Warranty Holdings Corp. (ii) Home Warranty of America Inc. (ii) (vi) Home Warranty of America Inc. (ii) (vi) Io-Tahoe LLC Io-Tahoe UK Limited Io Tahoe Ukraine LLC Masters Inc. (ii) Neas Energy Limited Neas Invest A/S Newco One Limited North Sea Infrastructure Partners Limited NSIP (Holdings) Limited Principal activity Country of incorporation/ registered address key (i) Class of shares held Holding company United Kingdom / A Ordinary shares Energy management products and services United States / C Membership interest Not-for-profit energy services United Kingdom / A Limited by guarantee Energy management products and services Republic of Ireland / F Ordinary shares Energy supply and/or services United States / AF Membership interest Energy supply United States / AG Ordinary shares Holding company United Kingdom / A Ordinary shares Dormant community benefit society United Kingdom / A Ordinary shares In liquidation In liquidation Dormant Dormant United Kingdom / AH Ordinary shares United Kingdom / AH Ordinary shares United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares Non-trading United Kingdom / A Ordinary shares Insurance provision United States / C Ordinary shares Home and/or commercial services United States / AI Ordinary shares Home and/or commercial services United States / AJ Ordinary shares Data management United States / C Membership interest Data management United Kingdom / A Ordinary shares Data management Ukraine / AK Participatory interest Home and/or commercial services United States / E Ordinary shares Energy services and wholesale energy trading United Kingdom / A Ordinary shares Dormant Dormant Dormant Dormant Denmark / T Ordinary shares United Kingdom / A Ordinary shares United Kingdom / W Ordinary shares United Kingdom / W Ordinary shares P.H. Jones Facilities Management Ltd Servicing and maintenance of heating systems United Kingdom / A Ordinary shares P.H Jones Group Limited Panoramic Power Ltd. Pioneer Shipping Limited Repair and Care Limited RSG Holding Corp. (ii) Solar Technologies Group Limited Solar Technologies Limited Soren Limited South Energy Investments LLC Vista Solar Inc. Energy management products and services Israel / AL Ordinary shares Holding company United Kingdom / A Ordinary shares LNG vessel chartering United Kingdom / A Ordinary Shares Dormant United Kingdom / A Ordinary shares Holding company United States / C Ordinary shares Dormant Dormant Dormant United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares United Kingdom / A Ordinary shares Investment company United States / AM Membership interest Distributed energy and power United States / AN Ordinary shares 188 Centrica plc Annual Report and Accounts 2020 S10. Related undertakings Investments held indirectly by Centrica plc with 69% voting rights 31 December 2020 Bayerngas Norge AS Bowland Resources (No.2) Limited Bowland Resources Limited Elswick Energy Limited NSGP (Ensign) Limited Spirit Energy Hedging Holding Limited Spirit Energy Hedging Limited Spirit Energy Limited Spirit Energy Nederland BV Spirit Energy Norway AS Spirit Energy North Sea Limited Spirit Energy North Sea Oil Limited Spirit Energy Production UK Limited Spirit Energy Resources Limited Spirit Energy Southern North Sea Limited Spirit Energy Treasury Limited Spirit Europe Limited Spirit Infrastructure BV Spirit North Sea Gas Limited Spirit Norway Limited Spirit Production (Services) Limited Spirit Resources (Armada) Limited Principal activity Country of incorporation/ registered address key (i) Class of shares held Holding company Gas and/or oil exploration and production Gas and/or oil exploration and production Gas and/or oil exploration and production Gas and/or oil exploration and production Dormant Dormant Holding company Gas and/or oil exploration and production Gas and/or oil exploration and production Gas and/or oil exploration and production Gas and/or oil exploration and production Gas and/or oil exploration and production Gas and/or oil exploration and production Gas and/or oil exploration and production Finance company Holding company Construction, ownership and exploitation of infrastructure Gas and/or oil exploration and production Gas and/or oil exploration and production Business services Gas and/or oil exploration and production Norway / AO United Kingdom / AP United Kingdom / AP United Kingdom / AP Jersey / AQ United Kingdom / AP United Kingdom / AP United Kingdom / AP Netherlands / AR Norway / AS United Kingdom / AP United Kingdom / AT United Kingdom / AP United Kingdom / AP United Kingdom / AP United Kingdom / AP United Kingdom / AP Netherlands / AR United Kingdom / AT United Kingdom / AP United Kingdom / AT United Kingdom / AP Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary and deferred shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares (i) For list of registered addresses, refer to note S10(d). (ii) Entity included in the sale of the North American energy supply, services and trading business, Direct Energy, to NRG Energy Inc. on 5 January 2021. (iii) Established in 2020. (iv) The following name changes were made during the year: Centrica Business Solutions Delivery LLC to Centrica Business Solutions Optimize LLC and SmartWatt Energy Inc. to Centrica Business Solutions Services Inc. (v) GF One Limited and GF Two Limited are 75% indirectly owned by Centrica plc. (vi) Home Warranty of America Inc. is registered as separate entities in the states of California and Illinois. i F n a n c a i l S t a t e m e n t s Centrica plc Annual Report and Accounts 2020 189 Financial Statements | Notes to the Financial Statements continued Supplementary information continued S10. Related undertakings (b) Subsidiary undertakings – partnerships held indirectly by Centrica plc with 100% voting rights 31 December 2020 CF 2016 LLP CFCEPS LLP CFCPP LLP CPL Retail Energy LP (ii) Direct Energy LP (ii) Direct Energy Partnership (ii) Direct Energy Resources Partnership Finance Scotland 2016 Limited Partnership Finance Scotland CEPS Limited Partnership Finance Scotland CPP Limited Partnership Ignite Social Enterprise LP WTU Retail Energy LP (ii) Principal activity Country of incorporation/ registered address key (i) Class of shares held Group financing United Kingdom / A Membership interest Group financing United Kingdom / A Membership interest Group financing United Kingdom / A Membership interest Energy supply Energy supply Energy supply Holding entity United States / C Membership interest United States / AF Membership interest Canada / L Membership interest Canada / L Membership interest Group financing United Kingdom / W Membership interest Group financing United Kingdom / W Membership interest Group financing United Kingdom / W Membership interest Social enterprise investment fund United Kingdom / A Membership interest Energy supply United States / C Membership interest (i) For list of registered addresses, refer to note S10(d). (ii) Entity included in the sale of the North American energy supply, services and trading business, Direct Energy, to NRG Energy Inc. on 5 January 2021. The following partnerships are fully consolidated into the Group Financial Statements and the Group has taken advantage of the exemption (as confirmed by regulation 7 of the Partnerships (Accounts) Regulations 2008) not to prepare or file separate accounts for these entities: • Finance Scotland 2016 Limited Partnership; • Finance Scotland CEPS Limited Partnership; • Finance Scotland CPP Limited Partnership; and • Ignite Social Enterprise LP. (c) Joint arrangements and associates 31 December 2020 Joint ventures (ii) Allegheny Solar 1 LLC Barrow Shipping Limited C2 Centrica MT LLC Celtic Array Limited Eurowind Polska VI Sp z.o.o. Greener Ideas Limited Rhiannon Wind Farm Limited Three Rivers Solar 1 LLC Three Rivers Solar 2 LLC Three Rivers Solar 3 LLC Vindpark Keblowo ApS Associates (ii) Lake Acquisitions Limited Principal activity Country of incorporation/ registered address key (i) Class of shares held Energy supply and/or services United States / AU Membership interest Energy supply and/or services United Kingdom / AV Ordinary shares Energy supply and/or services United States / AW Membership interest Development of an offshore windfarm United Kingdom / A Ordinary shares Operation of an onshore windfarm Poland / AX Ordinary shares Development of flexible power generation sites Republic of Ireland / F Ordinary shares Dormant United Kingdom / A Ordinary shares Energy supply and/or services United States / AU Membership interest Energy supply and/or services United States / AU Membership interest Energy supply and/or services United States / AU Membership interest Operation of an onshore windfarm Denmark / AY Ordinary shares Indirect interest and voting rights (%) 40.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 40.0% 40.0% 40.0% 50.0% Holding company United Kingdom / AZ Ordinary shares 20.0% (i) For list of registered addresses, refer to note S10(d). (ii) Further information on the principal joint ventures and associate investments held by the Group is disclosed in notes 6 and 14. All Group companies principally operate within their country of incorporation unless noted otherwise. 190 Centrica plc Annual Report and Accounts 2020 S10. Related undertakings (d) List of registered addresses Registered address key Address A B C D E F G H I J K L M N O P Q R S T U V W X Y Z AA AB AC AD AE AF AG AH AI AJ AK AL AM AN AO AP AQ AR AS AT AU AV AW AX AY AZ Millstream, Maidenhead Road, Windsor, SL4 5GD, United Kingdom Level 54, Hopewell Centre, 183 Queens Road East, Hong Kong 3411 Silverside Road, Suite 104, Tatnall Building, Wilmington, DE 19810, United States Thomas-Wimmer-Ring 1-3, 80539, Munich, Germany 2 Wisconsin Circle #700, Chevy Chase, MD 20815, United States 1 Warrington Place, Dublin 2, Republic of Ireland (i) Woodland House, Woodland Park, Hessle, HU13 0FA, United Kingdom 3rd floor, St George’s Court, Upper Church Street, Douglas, IM1 1EE, Isle of Man 3411 Silverside Road, Rodney Building #104, Wilmington, DE 19810, United States Posthofbrug 12, 2600 Antwerp, Belgium Wiegerbruinlaan 2A, 1422 CB Uithoorn, Netherlands 350 7th Avenue SW, Suite 3400, Calgary AB T2P 3N9, Canada Neuer Wall 10, 20354 Hamburg, Germany 60 Avenue Charles de Gaulle, Cs 60016, 92573, Neuilly sur Seine Cedex, France (ii) Milan (MI), Via Emilio Cornalia 26, Italy Presidente Masaryk no. 61, Piso 7, Mexico, D.f. CP 11570, Mexico Strada Martir Colonel Ioan U nr.28 camera 1, Municipiul Timisoara judet Timis, Romania H-1106 Budapest Jászberényi út 24-36, Hungary 33-37 Athol Street, Douglas, IM1 1LB, Isle of Man Skelagervej 1, 9000 Aalborg, Denmark Gustav-Mahler-Platz 1, 20354 Hamburg, Germany 220 Orchard Road, #05-01 Midpoint Orchard, Singapore 238852, Republic of Singapore 1 Waterfront Avenue, Edinburgh, Scotland EH5 1SG, United Kingdom 47 Esplanade, St Helier, JE1 0BD, Jersey Via Paleocapa Pietro 4, 20121, Milano, Italy G-74, LGF, Kalkaji, New Delhi, South Delhi, Delhi, 110019, India 26 New Street, St Helier, JE2 3RA, Jersey Sterling Towers, 20 Marina, Lagos, Nigeria 48-50 Sackville Street, Port of Spain, Trinidad and Tobago Bay Adelaide Centre, 333 Bay Street, Suite 2400, Toronto ON, M5H 2T6, Canada 500 Burrard Street, Suite 2900, Vancouver BC V6C 0A3, Canada 5444 Westheimer #1000, Houston, TX 77056, United States 15 North Mill Street, Nyack, NY 10960, United States 1 More London Place, London, SE1 2AF, United Kingdom 1430 Truxtun Avenue, 5th floor, Bakersfield, CA 93301, United States 350 S. Northwest Highway #300, Park Ridge, IL 60068, United States 20 A Heroiev Stalingrada Avenue, Kyiv 04210, Ukraine 15 Atir Yeda Street, Kfar Saba, 44643, Israel 6 Landmark Square, 4th Floor, Stamford CT 06901, United States 4640 Admiralty Way, 5th floor, Marina del Rey, California 90292, United States Lilleakerveien 8, 0283 Oslo, Norway 1st floor, 20 Kingston Road, Staines-upon-Thames, TW18 4LG, United Kingdom Sanne, IFC 5, St Helier, JE1 1ST, Jersey Transpolis Building, Polarisavenue 39, 2132 JH Hoofddorp, Netherlands Veritasvien 29, 4007 Stavanger, Norway 5th floor, IQ Building, 15 Justice Mill Lane, Aberdeen, AB11 6EQ, United Kingdom 1209 Orange Street, Wilmington, New Castle County, DE 19801, United States c/o Wilkin Chapman LLP, The Maltings, 11-15 Brayford Wharf East, Lincoln, LN5 7AY, United Kingdom 850 New Burton Road, Suite 201, Dover, DE 19904, United States Ul. Wysogotowska 23, 62-081 Przezmierowo, Wielkpolskie, Poland Mariagervej 58B, DK 9500 Hobro, Denmark 90 Whitfield Street, London, W1T 4EZ, United Kingdom (i) Centrica Business Solutions Ireland Limited changed their registered address during the year from 1 The Seapoint Building, Clontarf, Dublin 3, Republic of Ireland to the address listed above. (ii) Centrica Business Solutions France SASU changed their registered address during the year from Place de la Défense 12, Maison de la Défense, 92974, Paris, France to the address listed above. Centrica plc Annual Report and Accounts 2020 191 i F n a n c a i l S t a t e m e n t s Financial Statements | Notes to the Financial Statements continued Supplementary information continued S10. Related undertakings (e) Summarised financial information Material associates and joint arrangements Management has determined that the investment in Lake Acquisitions Limited is sufficiently material to warrant further disclosure on an individual basis. Accordingly, the Group presents summarised financial information, along with reconciliations to the amounts included in the consolidated Group Financial Statements, for this investee. Lake Acquisitions Limited Summarised statement of total comprehensive income Year ended 31 December Revenue Operating profit before interest and tax Profit for the year Other comprehensive income Total comprehensive income Summarised balance sheet 31 December Non-current assets Current assets Current liabilities Non-current liabilities Net assets Associate information reported to Group £m 2,748 433 300 291 591 Associate information reported to Group £m 19,328 3,756 (1,011) 2020 2019 Unadjusted 20% share £m Fair value and other adjustments £m 550 87 60 58 118 – (30) (36) – (36) 2020 Fair value and other adjustments (i) £m Unadjusted 20% share £m Associate information reported to Group £m 2,463 268 166 145 311 Group share £m 550 57 24 58 82 Unadjusted 20% share £m Fair value and other adjustments £m – (58) (46) – (46) 493 54 33 29 62 2019 Associate information reported to Group £m Fair value and other adjustments (i) £m Unadjusted 20% share £m Group share £m 3,866 751 (202) (13,528) (2,706) 8,545 1,709 574 4,440 18,558 3,712 702 – – (14) 560 751 (202) 3,426 (674) (2,720) (13,057) 2,269 8,253 685 (135) (2,611) 1,651 (1) – (105) 596 Group share £m 493 (4) (13) 29 16 Group share £m 4,414 684 (135) (2,716) 2,247 (i) Before cumulative impairments of £1,439 million (2019: £958 million) of the Group’s associate investment. During the year, dividends of £60 million (2019: £nil) were paid by the associate to the Group. Joint operations – fields/assets 31 December 2020 Cygnus Location Percentage holding UK North Sea 61% 192 Centrica plc Annual Report and Accounts 2020 S11. Non-controlling interests The Group has one subsidiary undertaking with a non-controlling interest: Spirit Energy Limited, through which the Group carries out the majority of its exploration and production activities. 31 December Non- controlling interests % Loss for the year £m Total comprehensive loss £m Spirit Energy Limited 31% (158) (158) Distributions to non- controlling interests £m Non- controlling interests % Loss for the year £m Total comprehensive loss £m – 31% (80) (96) Total equity £m 425 Distributions to non- controlling interests £m 124 Total equity £m 583 2020 2019 Summarised financial information The summarised financial information disclosed is shown on a 100% basis. It represents the consolidated position of Spirit Energy Limited and its subsidiaries that would be shown in its consolidated financial statements prepared in accordance with IFRS under Group accounting policies before intercompany eliminations. Summarised statement of total comprehensive income Year ended 31 December Revenue Loss for the year Other comprehensive loss Total comprehensive loss Summarised balance sheet 31 December Non-current assets Current assets Assets of disposal groups classified as held for sale Current liabilities Liabilities of disposal groups classified as held for sale Non-current liabilities Net assets Summarised cash flow Year ended 31 December Net decrease in cash and cash equivalents 2020 £m 1,278 (510) – (510) 2020 £m 3,128 791 – (395) – (2,154) 1,370 2020 £m (20) 2019 £m 1,579 (258) (52) (310) 2019 £m 4,200 932 11 (606) (6) (2,651) 1,880 2019 £m (57) Centrica plc Annual Report and Accounts 2020 193 i F n a n c a i l S t a t e m e n t s Company Financial Statements Company Statement of Changes in Equity 1 January 2019 Profit for the year Other comprehensive loss Employee share schemes and other share transactions Scrip dividend Dividends paid to equity holders 31 December 2019 Loss for the year Other comprehensive loss Employee share schemes and other share transactions 31 December 2020 Share capital £m 354 Share premium £m 2,240 – – – 6 – – – – 90 – 360 2,330 – – 1 – – 17 361 2,347 Capital redemption reserve £m 26 – – 2 – – 28 – – – 28 Retained earnings £m 2,695 567 – (10) – (561) 2,691 (1,072) – (8) 1,611 Other equity (note II) £m 24 – (59) 51 – – 16 – (61) 12 (33) Total equity £m 5,339 567 (59) 43 96 (561) 5,425 (1,072) (61) 22 4,314 As permitted by section 408(3) of the Companies Act 2006 no Income Statement or Statement of Comprehensive Income is presented. The Directors do not propose a final dividend for the year ended 31 December 2020. Details of the Company’s share capital are provided in the Group Statement of Changes in Equity and note 25 to the consolidated Group Financial Statements. The notes on pages 196 to 204 form part of these Financial Statements, along with note 25 to the consolidated Group Financial Statements. 194 Centrica plc Annual Report and Accounts 2020 Company Balance Sheet 31 December Non-current assets Property, plant and equipment Investments Trade and other receivables Derivative financial instruments Retirement benefit assets Securities Current assets Trade and other receivables Derivative financial instruments Current tax assets Cash and cash equivalents Securities Total assets Current liabilities Derivative financial instruments Trade and other payables Provisions for other liabilities and charges Bank overdrafts, loans and other borrowings Non-current liabilities Deferred tax liabilities Derivative financial instruments Trade and other payables Provisions for other liabilities and charges Retirement benefit liabilities Bank loans and other borrowings Total liabilities Net assets Share capital Share premium Capital redemption reserve Retained earnings (i) Other equity Total shareholders’ equity Notes IV V VI VII XII VI VII VII IX XI X VII IX XII XI II 2020 £m 13 1,117 36 206 38 108 2019 £m 15 2,262 71 241 108 103 1,518 2,800 13,596 13,770 231 11 899 – 109 11 434 124 14,737 16,255 14,448 17,248 (45) (6,843) (1) (579) (104) (6,651) (1) (631) (7,468) (7,387) (2) (12) (132) (1) (66) (4,260) (4,473) (11) (36) (168) (1) (62) (4,158) (4,436) (11,941) (11,823) 4,314 361 2,347 28 1,611 (33) 4,314 5,425 360 2,330 28 2,691 16 5,425 (i) Retained earnings includes a net loss after taxation of £1,072 million (2019: £567 million profit). The Financial Statements on pages 194 to 204, of which the notes on pages 196 to 204 form part, along with note 25 to the consolidated Group Financial Statements, were approved and authorised for issue by the Board of Directors on 24 February 2021 and were signed on its behalf by: Chris O’Shea Group Chief Executive Kate Ringrose Group Chief Financial Officer Centrica plc Registered No: 03033654 Centrica plc Annual Report and Accounts 2020 195 i F n a n c a i l S t a t e m e n t s Company Financial Statements Notes to the Company Financial Statements I. General information and principal accounting policies of the Company General information The Company is a public company limited by shares, incorporated and domiciled in the UK, and registered in England and Wales. The registered office is Millstream, Maidenhead Road, Windsor, Berkshire, SL4 5GD. The Company Financial Statements are presented in pounds sterling with all values rounded to the nearest million pounds. Pounds sterling is the functional currency of the Company. Basis of preparation The separate financial statements of the Company are presented as required by the Companies Act 2006. The Company meets the definition of a qualifying entity under FRS 100: ‘Application of Financial Reporting Requirements’ issued by the FRC. Accordingly, these financial statements are prepared in accordance with FRS 101: ‘Reduced Disclosure Framework’. From 1 January 2020, the following standards and amendments are effective in the Company's Financial Statements: • Amendments to IFRS 3: ‘Business combinations’; • Amendments to IAS 1: ‘Presentation of financial statements’ and IAS 8: ‘Accounting policies, changes in accounting estimates and errors’; and • Conceptual Framework for Financial Reporting 2018. These changes and other amendments effective during the year did not have any impact on the Company’s Financial Statements. As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation to: • the requirements of IAS 7: ‘Statement of cash flows’; • the statement of compliance with Adopted IFRSs; • the effects of new but not yet effective IFRSs; • prior year reconciliations for property, plant and equipment and intangible assets; • the prior year reconciliation in the number of shares outstanding at the beginning and at the end of the year for share capital; • disclosures in respect of related party transactions with wholly owned subsidiaries in a group; • disclosures in respect of the compensation of key management personnel; and • disclosures in respect of capital management. As the consolidated Financial Statements of Centrica plc, which are available from the registered office, include the equivalent disclosures, the Company has taken the exemptions available under FRS 101 in respect of certain disclosures required by IFRS 13: ‘Fair value measurement’ and the disclosures required by IFRS 7: ‘Financial instruments: disclosures’. These disclosures have not been provided apart from those that are relevant for financial instruments held at fair value. Measurement convention The Company Financial Statements have been prepared on the historical cost basis except for: investments in subsidiaries that have been recognised at deemed cost on transition to FRS 101; derivative financial instruments, financial instruments required to be measured at fair value through profit or loss or other comprehensive income, and those financial assets so designated at initial recognition, and the assets of the defined benefit pension schemes that have been measured at fair value; the liabilities of the defined benefit pension schemes that have been measured using the projected unit credit valuation method; and the carrying values of recognised assets and liabilities qualifying as hedged items in fair value hedges that have been adjusted from cost by the changes in the fair values attributable to the risks that are being hedged. Going concern The accounts have been prepared on a going concern basis, as described in the Directors’ Report and note 24(b) of the consolidated Group Financial Statements. Critical accounting judgements and key sources of estimation uncertainty The Company does not have any critical accounting judgements. It is subject to estimation uncertainty related to its share of the Group’s pension scheme surplus/deficit, as detailed further in note 22 of the consolidated Group Financial Statements. The valuation of the Company’s investments is also a key source of estimation uncertainty. The Company’s net assets were higher than its market capitalisation on 31 December 2020, and this was an indicator of impairment. As a result of the impairment review conducted in light of this indicator, the Company recognised an impairment charge of £1,173 million predominantly in respect of its investment in Centrica Holdings Limited, based on an assessment of the investment’s value in use. The key assumptions used in determining the recoverable amount of the Company’s investments in subsidiaries are consistent with those used to value the underlying businesses and assets in those subsidiaries. Further details on these assumptions and related sensitivities are given in note 7 to the consolidated Financial Statements. Principal accounting policies The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Company Financial Statements. 196 Centrica plc Annual Report and Accounts 2020 I. General information and principal accounting policies of the Company Employee share schemes The Group has a number of employee share schemes under which it makes equity-settled share-based payments as detailed in the Remuneration Report on pages 66 to 75 and in note S2 to the consolidated Group Financial Statements. Equity-settled share-based payments are measured at fair value at the date of grant (excluding the effect of non-market-based vesting conditions). The fair value determined at the grant date is expensed on a straight-line basis together with a corresponding increase in equity over the vesting period, based on the Group’s estimate of the number of awards that will vest and adjusted for the effect of non-market-based vesting conditions. The issue of share incentives by the Company to employees of its subsidiaries represents additional capital contributions. When these costs are recharged to the subsidiary undertaking, the investment balance is reduced accordingly. Fair value is measured using methods detailed in note S2 to the consolidated Group Financial Statements. Foreign currencies The Company’s functional and presentational currency is pounds sterling. Transactions in foreign currencies are translated at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into pounds sterling at closing rates of exchange. Exchange differences on monetary assets and liabilities are taken to the Income Statement. Property, plant and equipment PP&E is included in the Balance Sheet at cost, less accumulated depreciation and any provisions for impairment. The initial cost of an asset comprises purchase price and construction cost and any costs directly attributable to bringing the asset into operation. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Depreciation is charged so as to write off the cost of assets over their estimated useful lives, on a straight-line basis, over a period of 3 to 10 years. Investments Fixed asset investments in subsidiaries’ shares are held at deemed cost on transition to FRS 101 and at cost in accordance with IAS 27: ‘Separate financial statements’, less any provision for impairment as necessary. Impairment Impairment of investments in subsidiaries and non-financial assets The Company’s accounting policies in respect of impairment of property, plant and equipment, and intangible assets are consistent with those of the Group. The carrying values of investments in subsidiary undertakings are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. The recoverable amount of an investment in a subsidiary undertaking is the greater of its value in use and its fair value less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment of other financial assets and credit losses for financial guarantee contracts The Company’s impairment policies in relation to financial assets are consistent with those of the Group, with additional consideration given to amounts owed by Group undertakings. Except for certain loans due in greater than one year, all outstanding receivable balances are repayable on demand and arise from funding provided by the Company to its subsidiaries. Were net receivers of funding unable to repay loan balances in full at maturity, or if the debt was otherwise called upon, the Company expects that in such circumstances the counterparty would either negotiate extended credit terms with the Company or obtain external financing to repay the balance. As such, the expected credit loss is either considered immaterial based on discounting the loan over the extended payment term, or has been calculated by applying a default loss rate based on the actual or proxy credit rating of the counterparty. No change in credit risk is deemed to have occurred since initial recognition for amounts not repayable on demand, and therefore a 12-month expected credit loss has been calculated based on the assessed probability of default. The Company has applied the impairment requirements of IFRS 9 to financial guarantees issued to its subsidiary undertakings. Expected credit losses on such arrangements have been calculated according to the nature of the guarantee and the Company’s estimate of potential exposure at the balance sheet date. Centrica plc Annual Report and Accounts 2020 197 i F n a n c a i l S t a t e m e n t s Company Financial Statements | Notes to the Company Financial Statements continued I. General information and principal accounting policies of the Company Pensions and other post-employment benefits The Company’s employees participate in a number of the Group’s defined benefit pension schemes. The total Group cost of providing benefits under defined benefit schemes is determined separately for each of the Group’s schemes under the projected unit credit actuarial valuation method. Actuarial gains and losses are recognised in full in the period in which they occur. The key assumptions used for the actuarial valuation are based on the Group’s best estimate of the variables that will determine the ultimate cost of providing post-employment benefits, on which further detail is provided in notes 3(b) and 22 to the consolidated Group Financial Statements. The Company’s share of the total Group surplus or deficit at the end of the reporting period for each scheme is calculated in proportion to the Company’s share of ordinary employer contributions to that scheme during the year; ordinary employer contributions are determined by the pensionable pay of the Company’s employees within the scheme and the cash contribution rates set by the scheme trustees. Note that as a participant in these multi-employer schemes, the Company could be liable for other entities’ obligations (for example under section 75 of the Pensions Act). See note 22 of the consolidated Group Financial Statements for details of the overall scheme obligations. Current service cost is calculated with reference to the pensionable pay of the Company’s employees. The Company’s share of the total Group interest on scheme liabilities, expected return on scheme assets and actuarial gains or losses is calculated in proportion to ordinary employer contributions in the prior accounting period. Changes in the surplus or deficit arising as a result of the changes in the Company’s share of total ordinary employer contributions are also treated as actuarial gains or losses. Taxation Current tax, including UK corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is recognised in respect of all temporary differences identified at the balance sheet date, except for differences arising on: • the initial recognition of an asset or liability in a transaction which is not a business combination and which at the time of the transaction affects neither accounting profit nor taxable profit; and • investments in subsidiaries where the Company is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future. Temporary differences are differences between the carrying amount of the Company’s assets and liabilities and their tax base. Deferred tax assets and liabilities are offset when the Company has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority. Deferred tax assets that are not eligible for offset against deferred tax liabilities are recognised only when, on the basis of all available evidence, it can be regarded as probable that there will be suitable taxable profits in the foreseeable future, against which the deductible temporary difference can be utilised. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the asset is realised or the liability is settled, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Measurement of deferred tax liabilities and assets reflects the tax consequences expected from the manner in which the asset or liability is recovered or settled. The tax expense for the year comprises current and deferred tax. Tax is recognised in the Income Statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Financial instruments The Company’s accounting policies for financial instruments are consistent with those of the Group as disclosed in note S2 to the consolidated Group Financial Statements. The Company’s financial risk management policies are consistent with those of the Group and are described in the Strategic Report – Principal Risks and Uncertainties on pages 34 to 39 and in note S3 to the Group Financial Statements. Presentation of derivative financial instruments In line with the Group’s accounting policy for derivative financial instruments, the Company has classified those derivatives held for the purpose of treasury management as current or non-current, based on expected settlement dates. 198 Centrica plc Annual Report and Accounts 2020 II. Other equity 1 January 2019 Gains on revaluation of equity investments measured at fair value through other comprehensive income Actuarial loss Employee share schemes: Exercise of awards Value of services provided Impact of cash flow hedging Taxation on above items 31 December 2019 Losses on revaluation of equity investments measured at fair value through other comprehensive income Actuarial loss Employee share schemes: Increase in own shares Exercise of awards Value of services provided Impact of cash flow hedging Taxation on above items 31 December 2020 III. Directors and employees Employee costs Year ended 31 December Wages and salaries Other Average number of employees during the year Year ended 31 December Administration Power Cash flow hedging reserve £m Actuarial gains and losses reserve £m Financial asset at FVOCI reserve £m 9 – – – – (4) – 5 – – – – – 4 (1) 8 26 – (72) – – – 13 (33) – (79) – – – – 16 (96) 4 4 – – – – – 8 (1) – – – – – – 7 Treasury and own shares reserve £m (107) – – 70 – – – (37) – – (30) 36 – – – (31) Share- based payments reserve £m 92 – – (60) 41 – – 73 – – – (46) 52 – – 79 2020 £m (13) (14) (27) Total £m 24 4 (72) 10 41 (4) 13 16 (1) (79) (30) (10) 52 4 15 (33) 2019 £m (21) (18) (39) 2020 Number 2019 Number 134 41 175 82 74 156 Centrica plc Annual Report and Accounts 2020 199 i F n a n c a i l S t a t e m e n t s Company Financial Statements | Notes to the Company Financial Statements continued IV. Property, plant and equipment Cost 1 January Re-measurement of right-of-use asset 31 December Accumulated depreciation 1 January Charge for year 31 December NBV at 31 December Included within the above balance is £13 million of right-of-use assets (2019: £15 million). V. Investments in subsidiaries Cost 1 January Additions Employee share scheme net capital movement (i) 31 December Provision 1 January Impairment provided in the year (ii) 31 December NBV at 31 December 2020 £m 26 5 31 (11) (7) (18) 13 2020 (i) £m 2019 (i) £m 2,262 2,258 44 (16) – 4 2,290 2,262 – (1,173) (1,173) 1,117 – – – 2,262 (i) Employee share scheme movement is the net change in shares to be awarded under employee share schemes to employees of Group undertakings. Direct investments are held in Centrica Holdings Limited, Centrica Trading Limited and Centrica Beta Holdings Limited, all of which are incorporated in England, and Rhodes Holdings HK Limited, which is incorporated in Hong Kong. Related undertakings are listed in note S10 to the consolidated Group Financial Statements. (ii) An impairment charge was recognised during the year, predominantly in relation to the investment in Centrica Holdings Limited. The Directors believe that the carrying value of the investments is supported by their realisable value. 200 Centrica plc Annual Report and Accounts 2020 VI. Trade and other receivables 31 December Amounts owed by Group undertakings Prepayments 2020 2019 Current (i) £m 13,590 6 13,596 Non-current (ii) £m 29 7 36 Current (i) £m Non-current (ii) £m 13,763 7 13,770 65 6 71 (i) The amounts receivable by the Company include a gross balance of £13,871 million (2019: £12,383 million) that bears interest at a quarterly rate determined by Group treasury and linked to the Group cost of funds. The quarterly rates ranged between 3.5% and 5.9% per annum during 2020 (2019: 3.0% and 6.3%). The other amounts receivable from Group undertakings are interest free. All amounts receivable from Group undertakings are unsecured and repayable on demand. Amounts receivable by the Company are stated net of provisions of £563 million (2019: £418 million). (ii) The amounts receivable by the Company due after more than one year include £20 million (2019: £20 million) that bears interest at a quarterly rate determined by Group treasury and linked to the Group cost of funds. The quarterly rates ranged between 4.4% and 4.7% per annum during 2020 (2019: 4.4% and 4.9%). The other amounts receivable from Group undertakings are interest-free. All amounts receivable from Group undertakings are unsecured and repayable in two to three years. VII. Derivative financial instruments 31 December Derivative financial assets Derivative financial liabilities 2020 Current £m Non-current £m 231 (45) 206 (12) Total £m 437 (57) 2019 Current £m Non-current £m 109 (104) 241 (36) Total £m 350 (140) VIII. Financial instruments (a) Determination of fair values The Company’s policies for the classification and valuation of financial instruments carried at fair value are consistent with those of the Group, as detailed in note S6 to the Group Financial Statements. (b) Financial instruments carried at fair value 31 December Financial assets Derivative financial assets held for trading: Foreign exchange derivatives Interest rate derivatives Derivative financial assets in hedge accounting relationships: Interest rate derivatives Foreign exchange derivatives Treasury gilts designated FVTPL Debt instruments Equity instruments designated FVOCI Cash and cash equivalents Total financial assets at fair value Financial liabilities Derivative financial liabilities held for trading: Interest rate derivatives Foreign exchange derivatives Derivative financial liabilities in hedge accounting relationships: Interest rate derivatives Foreign exchange derivatives Total financial liabilities at fair value Level 1 £m Level 2 £m Level 1 £m Level 2 £m 2020 Total £m 80 3 182 172 – 84 24 80 3 182 172 – – – 796 1,233 796 1,341 – (48) (1) (8) (57) – (48) (1) (8) (57) – – – – – 84 24 – 108 – – – – – i F n a n c a i l S t a t e m e n t s 2019 Total £m 113 – 108 129 124 77 26 432 1,009 (23) (115) (2) – – – – – 124 77 26 – 227 – – – – 113 – 108 129 – – – 432 782 (23) (115) (2) – (140) (140) Centrica plc Annual Report and Accounts 2020 201 Company Financial Statements | Notes to the Company Financial Statements continued IX. Trade and other payables 31 December Amounts owed to Group undertakings Accruals and other creditors 2020 2019 Current (i) £m (6,818) (25) (6,843) Non-current (ii) £m (132) – (132) Current (i) £m Non-current (ii) £m (6,616) (35) (6,651) (158) (10) (168) (i) The amounts payable by the Company include £5,834 million (2019: £5,120 million) that bears interest at a quarterly rate determined by Group treasury and linked to the Group cost of funds. The quarterly rates ranged between 3.5% and 5.9% per annum during 2020 (2019: 3.0% and 6.3%). Other amounts payable by the Company are interest free. (ii) The amounts payable by the Company due after more than one year include £120 million (2019: £100 million) that bears interest at the prevailing SONIA rate less 0.05% (prior to May 2020 LIBOR rate less 0.05%). These amounts payable are due in over five years. Other amounts payable by the Company are interest free. X. Deferred tax 1 January 2019 (Charge)/credit to income Credit to equity 31 December 2019 Charge to income Credit/(charge) to equity 31 December 2020 Retirement benefit obligation £m (10) (6) 12 (4) (5) 16 7 Other £m (10) 3 – (7) (1) (1) (9) Total £m (20) (3) 12 (11) (6) 15 (2) Other deferred tax liabilities primarily relate to other temporary differences. All deferred tax crystallises in over one year. XI. Bank overdrafts, loans and other borrowings 31 December Bank loans and overdrafts Bonds Interest accruals Lease obligations 2020 Current £m (489) – (82) (8) Non-current £m (144) (4,111) – (5) 2019 Current £m (483) (60) (82) (6) Non-current £m (144) (4,005) – (9) (579) (4,260) (631) (4,158) Disclosures in respect of the Group’s financial liabilities are provided in notes 24 and S3 to the Group Financial Statements. With the exception of leases and overdrafts, materially all of the Group’s financing activity is carried out through the Company. 202 Centrica plc Annual Report and Accounts 2020 XII. Pensions (a) Summary of main schemes The Company’s employees participate in the following Group defined benefit pension schemes: Centrica Pension Plan (CPP), Centrica Pension Scheme (CPS) and Centrica Unfunded Pension Scheme. Its employees also participate in the defined contribution section of the Centrica Pension Scheme. Information on these schemes is provided in note 22 to the Group Financial Statements. Together with the Centrica Engineers Pensions Scheme (CEPS), CPP and CPS form the significant majority of the Group’s and Company’s defined benefit obligation and are referred to below and in the Group Financial Statements as the ‘Registered Pension Schemes’. (b) Accounting assumptions, risks and sensitivity analysis The accounting assumptions, risks and sensitivity analysis for the Registered Pension Schemes are provided in note 22 to the consolidated Group Financial Statements. (c) Movements in the year 1 January Items included in the Company Income Statement: Current service cost Past service credit Interest on scheme liabilities Expected return on scheme assets Termination benefits Items included in the Company Statement of Comprehensive Income: Actuarial (loss)/gain Other movements: Employer contributions Benefits paid from schemes Transfers 31 December Presented in the Company Balance Sheet as: 31 December Retirement benefit pension assets Retirement benefit pension liabilities The pension scheme liabilities relate to the Centrica Unfunded Pension Scheme. (d) Analysis of the actuarial losses recognised in reserves (note II) Year ended 31 December Actuarial gain (actual return less expected return on pension scheme assets) Experience (loss)/gain arising on the scheme liabilities Changes in assumptions underlying the present value of the schemes’ liabilities Actuarial loss recognised in reserves before adjustment for taxation Cumulative actuarial (losses)/gains recognised in reserves at 1 January, before adjustment for taxation Cumulative actuarial losses recognised in reserves at 31 December, before adjustment for taxation 2020 2019 Pension liabilities £m (1,446) Pension assets £m 1,492 Pension liabilities £m Pension assets £m (1,370) 1,461 (8) – (31) – (10) (165) – 49 – – – – 33 – 86 21 (49) – (11) 29 (39) – – (75) – 47 (27) – – – 43 – 3 32 (47) – (1,611) 1,583 (1,446) 1,492 i F n a n c a i l 2020 £m 38 (66) (28) 2020 £m 86 (7) (158) (79) (40) (119) S t a t e m e n t s 2019 £m 108 (62) 46 2019 £m 3 42 (117) (72) 32 (40) Centrica plc Annual Report and Accounts 2020 203 Company Financial Statements | Notes to the Company Financial Statements continued XII. Pensions (e) Defined benefit pension scheme contributions Note 22 to the Group Financial Statements provides details of the triennial review carried out at 31 March 2018 in respect of the UK Registered Pension Schemes and the future pension scheme contributions, including asset-backed arrangements, agreed as part of this review. Under IAS 19, the Company’s contribution and trustee interest in the Scottish Limited Partnerships are recognised as scheme assets. The Company estimates that it will pay £4 million of employer contributions during 2021 at an average rate of 19% of pensionable pay together with contributions via the salary sacrifice arrangement of £2 million. For details of the weighted average duration of the liabilities of the Registered Pension Schemes see note 22. (f) Pension scheme assets 31 December Equities Corporate bonds High-yield debt Liability matching assets Property Cash pending investment Asset-backed contribution assets Group pension scheme assets (i) Company share of the above Quoted £m 19 2,649 2,069 2,192 – 38 – 2020 Unquoted £m 396 – 1,286 1,069 352 – 670 Total £m 415 2,649 3,355 3,261 352 38 670 Quoted £m 188 2,646 1,015 1,430 – 695 – 2019 Unquoted £m 346 – 1,288 1,075 316 – 738 Total £m 534 2,646 2,303 2,505 316 695 738 6,967 3,773 10,740 5,974 3,763 9,737 2020 £m 1,583 2019 £m 1,492 (i) Total pension scheme assets, including asset-backed contribution assets not recognised in the consolidated accounts. XIII. Commitments At 31 December 2020, the Company had commitments of £58 million (2019: £101 million) relating to contracts for outsourced services and £3 million (2019: £nil) relating to contracts for property services. The Company has provided guarantees and letters of credit relating to its subsidiaries' trading activities and decommissioning obligations. At 31 December 2020, the Group has derivative liabilities of £1,168 million (2019: £2,145 million), and decommissioning liabilities of £2,408 million (2019: £2,223 million). See notes 19 and 21 to the consolidated Financial Statements for further information on these balances. The Company has also provided guarantees in its role as sponsoring employer for the UK Registered Pension Schemes. These guarantees are for all present and future obligations of the Group to make payments to those schemes, and are capped at an amount equal to the potential section 75 (of Pensions Act 1995) debt that would be triggered in relation to the Centrica Engineers Pension Scheme, Centrica Pension Plan and Centrica Pension Scheme, were a Group employer entity to become insolvent, leave the schemes or cease to have active members, or on the winding up of the schemes. See note 22 of the consolidated Financial Statements for further details on these schemes. The Company considers that the likelihood of these guarantees and letters of credit being called upon is remote. XIV. Related parties During the year the Company accepted cash deposits on behalf of the Spirit Energy group of companies giving rise to a Trade and other payables balance of £419 million (2019: £312 million). Spirit Energy Limited is a subsidiary of the Company, held indirectly, that is not wholly owned. See note 3 to the consolidated Financial Statements for more information. 204 Centrica plc Annual Report and Accounts 2020 Gas and Liquids Reserves (Unaudited) The Group’s estimates of reserves of gas and liquids are reviewed as part of the full year reporting process and updated accordingly. A number of factors affect the volumes of gas and liquids reserves, including the available reservoir data, commodity prices and future costs. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of reserves are subject to change as additional information becomes available. The Group discloses 2P gas and liquids reserves, representing the central estimate of future hydrocarbon recovery. Reserves for Centrica operated fields are estimated by in-house technical teams composed of geoscientists and reservoir engineers. Reserves for non-operated fields are estimated by the operator, but are subject to internal review and challenge. As part of the internal control process related to reserves estimation, an assessment of the reserves, including the application of the reserves definitions, is undertaken by an independent technical auditor. An annual reserves assessment has been carried out by Gaffney, Cline & Associates for the Group’s global reserves. Reserves are estimated in accordance with a formal policy and procedure standard. The Group has estimated 2P gas and liquids reserves in Europe. The principal fields in Spirit Energy are Kvitebjørn, Statfjord, Ivar Aasen, Cygnus, Maria, South and North Morecambe, Rhyl and Chiswick. The principal non-Spirit Energy field is Rough. The European reserves estimates are consistent with the guidelines and definitions of the Society of Petroleum Engineers, the Society of Petroleum Evaluation Engineers and the World Petroleum Council’s Petroleum Resources Management System using accepted principles. Estimated net 2P reserves of gas (billion cubic feet) 1 January 2020 Revisions of previous estimates (ii) Disposals of reserves in place (iii) Production (iv) 31 December 2020 Estimated net 2P reserves of liquids (million barrels) 1 January 2020 Revisions of previous estimates (ii) Production (iv) 31 December 2020 Estimated net 2P reserves (million barrels of oil equivalent) 31 December 2020 (v) (i) The movements represent Centrica’s 69% interest in Spirit Energy. (ii) Revision of previous estimates include those associated with North and South Morecambe, North Sea fields and Norwegian fields. (iii) Reflects the disposal of interests in the Babbage assets. (iv) Represents total sales volumes of gas and oil produced from the Group’s reserves. (v) Includes the total of estimated gas and liquids reserves at 31 December 2020 in million barrels of oil equivalent. Liquids reserves include oil, condensate and natural gas liquids. Spirit Energy (i) Rough 683 7 (6) (111) 573 63 5 – (23) 45 Total 746 12 (6) (134) 618 Spirit Energy (i) Rough Total 82 4 (12) 74 – – – – 82 4 (12) 74 i F n a n c a i l Spirit Energy (i) Rough 170 7 Total 177 S t a t e m e n t s Centrica plc Annual Report and Accounts 2020 205 Five Year Summary (Unaudited) Year ended 31 December 2016 (restated) (i) (ii) (iii) £m 2017 (restated) (i) (iii) £m 2018 (restated) (i) (iii) £m 2019 (restated) (iii) £m 2020 £m Group revenue from continuing operations included in business performance (i) 16,558 17,126 16,465 15,958 14,949 Operating profit from continuing operations before exceptional items and certain re-measurements: British Gas (iii) (iv) Bord Gáis Energy (iii) (iv) Centrica Business Solutions (iii) (iv) Energy Marketing & Trading (iii) (iv) Upstream (iii) (iv) Operating profit from discontinued operations before exceptional items and certain re-measurements (iii) (iv) Exceptional items and certain remeasurements after taxation Profit/(loss) attributable to equity holders of the parent Earnings per ordinary share Adjusted earnings per ordinary share Dividend per share in respect of the year Assets and liabilities 31 December Goodwill and other intangible assets Other non-current assets (ii) (v) Net current assets/(liabilities) (ii) Non-current liabilities (v) Net assets of disposal groups held for sale Net assets Net debt (note 24) Cash flows Year ended 31 December Cash flow from operating activities before exceptional payments Payments relating to exceptional charges in operating costs Net cash flow from investing activities 764 46 26 124 199 1,159 308 777 1,672 Pence 31.4 16.8 12.0 2016 £m 4,383 8,218 1,220 744 47 (45) 77 256 1,079 161 (407) 328 Pence 5.9 12.5 12.0 2017 £m 4,326 7,190 1,705 591 44 (40) 35 567 1,197 195 (416) 183 Pence 3.3 11.2 12.0 2018 £m 4,456 7,435 284 (11,173) (9,789) (8,227) 196 2,844 (3,473) 2016 £m 2,669 (273) (803) – 3,432 (2,596) 2017 £m 2,016 (176) 32 – 3,948 (2,656) 2018 £m 2,182 (248) (1,007) 927 304 50 (20) 138 178 650 251 (1,531) (1,023) Pence (17.8) 7.3 1.5 2019 £m 4,033 5,826 (696) (7,474) 106 1,795 (3,181) 2019 £m 1,548 (298) (503) 747 281 42 (140) 174 90 447 252 (520) 41 Pence 0.7 6.5 – 2020 £m 1,940 4,767 622 (8,072) 2,125 1,382 (2,769) 2020 £m 1,532 (132) (285) 1,115 Cash flow before cash flow from financing activities 1,593 1,872 (i) 2018 Group revenue included in business performance has been restated to include the net result of certain commodity purchases and sales trades that are deemed to be speculative in nature. Earlier periods have not been restated and therefore are not presented on a comparable basis. (ii) Results for the year ended 2016 have not been restated in accordance with IFRS 15: ‘Revenue from contracts with customers’ and therefore are not presented on a comparable basis. (iii) Results have been restated to reflect the new operating structure of the Group. See note 1 for further details. (iv) Adjusted operating profit has been restated to include the impact of business performance interest and taxation of joint ventures and associates. (v) Results from the years ended 2016, 2017 and 2018 figures have not been presented in line with IFRS 16: ‘Leases’. 206 Centrica plc Annual Report and Accounts 2020 Ofgem Consolidated Segmental Statement Independent Auditor’s Report to the Directors of Centrica plc and its Licensees In our opinion the accompanying statement (the ‘Consolidated Segmental Statement’ or ’CSS’) of Centrica plc and its Licensees for the year ended 31 December 2020 is prepared, in all material respects, in accordance with: • the requirements of Ofgem’s Standard Condition 19A of the Gas and Electricity Supply Licences and Standard Condition 16B of the Electricity Generation Licences established by the regulator Ofgem; and • the basis of preparation on pages 214 to 216. We have audited the Consolidated Segmental Statement of Centrica plc and its Licensees (as listed in footnote (i)) (the Group) for the year ended 31 December 2020 in accordance with the terms of our engagement letter dated 6 July 2020. The Consolidated Segmental Statement has been prepared by the Directors of Centrica plc and its Licensees based on the requirements of Ofgem’s Standard Condition 19A and the Gas and Electricity Supply Licenses and Standard Condition 16B of the Electricity Generation Licences (together, the ‘Licences’) and the basis of preparation on pages 214 to 216. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the CSS section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the CSS in the United Kingdom, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis of matter – basis of accounting We draw attention to pages 214 to 216 of the CSS which describes the basis of accounting. The CSS is prepared to assist the Company in complying with the requirements of Ofgem’s Standard Condition 19A of the Gas and Electricity Supply Licences and Standard Condition 16B of the Electricity Generation Licences established by the Regulator Ofgem. The basis of preparation is not the same as segmental reporting under IFRS and/or statutory reporting. As a result, the CSS may not be suitable for another purpose. Our opinion is not modified in respect of this matter. Conclusions relating to going concern In auditing the CSS, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the CSS is appropriate. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group’s ability to continue as a going concern for a period of at least twelve months from when the CSS is authorised for issue. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. Other information The other information comprises the information included in the annual report, other than the CSS and our auditor’s report thereon. The directors are responsible for the other information contained within the annual report. Our opinion on the CSS does not cover the other information and we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the CSS or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the CSS. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors The Directors are responsible for the preparation of the CSS in accordance with the Licences and the basis of preparation on pages 214 to 216 and for such internal control as the Directors determine is necessary to enable the preparation of the CSS that are free from material misstatement, whether due to fraud or error. In preparing the CSS, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the CSS Our objectives are to obtain reasonable assurance about whether the CSS as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this CSS. A further description of our responsibilities for the audit of the CSS is located on the Financial Reporting Council’s website at: frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Centrica plc Annual Report and Accounts 2020 207 i F n a n c a i l S t a t e m e n t s Ofgem Consolidated Segmental Statement continued Independent Auditor’s Report to the Directors of Centrica plc and its Licensees Extent to which the audit was considered capable of detecting irregularities, including fraud Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below. We considered the nature of the Group’s industry and its control environment, and reviewed the Group’s documentation of their policies and procedures relating to fraud and compliance with laws and regulations. We also enquired of management and internal audit about their own identification and assessment of the risks of irregularities. We obtained an understanding of the legal and regulatory frameworks that the Group operates in, and identified the key laws and regulations that: • had a direct effect on the determination of material amounts and disclosures in the CSS. These included UK Companies Act and Ofgem's Standard Condition 19A of the Electricity and Gas Supply Licences and Standard Condition 16B of the Electricity Generation Licences; and • do not have a direct effect on the CSS but compliance with which may be fundamental to the Group’s ability to operate or to avoid a material penalty. We discussed among the audit engagement team including significant component audit teams regarding the opportunities and incentives that may exist within the organisation for fraud and how and where fraud might occur in the CSS. As a result of performing the above, we identified the greatest potential for fraud in the following area, and our specific procedures performed to address it are described below: • Credit losses on financial assets within the Group’s energy supply businesses (“Bad debt provisions”). Our audit approach for bad debt provisions was a combination of data analytics, substantive audit procedures and tests of internal control. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override. In addressing the risk of fraud through management override of controls, we tested the appropriateness of journal entries and other adjustments; assessed whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluated the business rationale of any significant transactions that are unusual or outside the normal course of business. In addition to the above, our procedures to respond to the risks identified included the following: • reviewing financial statement disclosures by testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the CSS; • performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud; • enquiring of management, internal audit and in-house legal counsel concerning actual and potential litigation and claims, and instances of non-compliance with laws and regulations; and • reading minutes of meetings of those charged with governance, and reviewing internal audit reports. Use of this report This report is made solely to the Group’s Directors, as a body, in accordance with our engagement letter dated 6 July 2020 and solely for the purpose of assisting the Directors in reporting on the CSS to the Regulator Ofgem. We permit this report to be displayed on the Centrica plc website www.centrica.com and within the December 2020 Annual Report & Accounts (see footnote (ii)) to enable the Directors to show they have addressed their governance responsibilities by obtaining an independent assurance report in connection with the CSS. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Directors as a body and Centrica plc, for our work or this report, or for the opinions we have formed. The materiality level we used in planning and performing our audit was £17 million. The engagement partner on the audit resulting in this independent auditor’s report is Dean Cook. Deloitte LLP 24 February 2021 London (i) British Gas Trading Limited, Neas Energy Limited, Centrica Barry Limited, Centrica KPS Limited, Centrica PB Limited and Centrica KL Limited. (ii) The maintenance and integrity of Centrica plc’s website is the responsibility of the Directors of Centrica plc; the work carried out by the auditors does not involve consideration of these matters and accordingly, the auditors accept no responsibility for any changes that may have occurred to the CSS since it was initially presented on the website. 208 Centrica plc Annual Report and Accounts 2020 Introduction The Ofgem Consolidated Segmental Statement (CSS) and required regulatory information on pages 209 to 218 are provided in order to comply with Standard Condition 16B of the Electricity Generation Licences and Standard Condition 19A of the Electricity and Gas Supply Licences. The CSS and supporting information is prepared by the Directors in accordance with the Segmental Statements Guidelines issued by Ofgem. The CSS has been derived from and reconciled to the Centrica plc Annual Report and Accounts for the year ended 31 December 2020, which have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. Centrica plc operational reporting structure Below is a summary of the Centrica plc Group’s (Group) operational reporting structure. The CSS financial data has been extracted from the Centrica plc Annual Report and Accounts 2020 operating segments rather than with reference to specific legal entities. Certain activities included in the Group’s operating segments have been excluded from the Generation and Supply segments of the CSS on the basis they are non-licensed activities (for example Services and Solutions and other trading activity unrelated to Generation or Supply) as illustrated below. The Centrica plc Annual Report and Accounts 2020 provides operating segment results in note 4. A full reconciliation between the relevant operating segment results and those disclosed for ‘Domestic Supply’, ‘Non-Domestic Supply’ and ‘Generation’ in this CSS is provided at the end of the report. Reporting segments Activities Included in CSS Activities Excluded from CSS Centrica plc British Gas UK Domestic Supply (and an element of UK Non- Domestic Supply) • UK Home and Business Services and Solutions Centrica Business Solutions UK Non-Domestic Supply • Centrica Business Turbines, engines and batteries (generation) Solutions non-generation • North America Distributed Energy Upstream Nuclear (generation) • Exploration & Production Energy Marketing & Trading Thermal (generation) • Energy Marketing & Trading non-generation Bord Gáis • Irish Energy Supply and related activities Centrica plc Annual Report and Accounts 2020 209 i F n a n c a i l S t a t e m e n t s Ofgem Consolidated Segmental Statement continued Centrica plc operational reporting structure Centrica plc is the ultimate parent company of all 100% owned licensees. The individual supply and generation licences are held in legal entities whose licensed activities are reported as part of the Centrica plc Annual Report and Accounts 2020 within the operating segments shown above. The individual supply and generation licences held in subsidiaries, joint ventures or associates of Centrica plc during 2020 are detailed below: Licensee British Gas Trading Limited Neas Energy Limited (i) Centrica Brigg Limited Centrica Barry Limited Centrica KPS Limited Centrica Distributed Generation Limited Centrica PB Limited Centrica KL Limited (ii) EDF Energy Nuclear Generation Limited (iii) Licence Supply Supply Exempt Generation Generation Exempt Generation Generation Generation Ownership 100% 100% 100% 100% 100% 100% 100% 100% 20% Associate (i) Neas Energy holds a supply licence but currently does not supply any UK customers. (ii) Centrica KL Limited was disposed of by the Group on 12 February 2020. (iii) The Group holds a 20% investment in Lake Acquisitions Limited which indirectly owns 100% of EDF Energy Nuclear Generation Limited. 210 Centrica plc Annual Report and Accounts 2020 Ofgem consolidated segmental statement Year ended 31 December 2020 Electricity Generation Unit Nuclear Thermal Total revenue Sales of electricity & gas Other revenue Total operating costs Direct fuel costs Direct costs Transportation costs Environmental and social obligation costs Other direct costs Indirect costs WACOF/E/G EBITDA DA EBIT Volume Average customer numbers/sites 2019 Summarised CSS Year ended 31 December 2019 Total revenue EBIT Aggregate Generation Business 710.6 639.2 71.4 Electricity Supply Gas Supply Domestic Non-Domestic Domestic 3,181.9 3,130.8 51.1 1,528.7 1,528.7 – 3,193.3 3,151.6 41.7 Non- Domestic 428.0 428.0 – Aggregate Supply Business 8,331.9 8,239.1 92.8 511.4 462.8 48.6 199.2 176.4 22.8 (354.1) (170.7) (524.8) (3,122.6) (1,585.8) (3,043.8) (418.0) (8,170.2) (82.5) (230.3) (52.1) – (178.2) (41.3) (9.1) 157.3 (141.3) 16.0 9.1 (90.6) (72.8) (0.6) (47.5) (24.7) (7.3) (44.5) 28.5 (17.8) 10.7 3.1 (173.1) (303.1) (52.7) (47.5) (202.9) (48.6) N/A 185.8 (159.1) 26.7 N/A (984.0) (581.6) (1,382.1) (1,664.8) (852.5) (1,087.2) (240.4) (118.1) (3,188.1) (3,722.6) (769.9) (360.3) (924.4) (94.5) (2,149.1) (809.3) (85.6) (473.8) (58.2) 59.3 (43.7) 15.6 16.9 (455.3) (36.9) (151.7) (56.5) (57.1) (12.7) (69.8) 10.3 (76.8) (86.0) (574.5) (51.4) 149.5 (53.3) 96.2 – (1,341.4) (23.6) (59.5) (48.0) 10.0 (5.2) 4.8 (232.1) (1,259.5) N/A 161.7 (114.9) 46.8 N/A 2,686.5 501.0 £m £m £m £m £m £m £m £m £m £m £/MWh, P/th £m £m £m TWh, MThms ‘000s N/A N/A N/A 5,250.4 464.9 6,402.5 179.7 N/A Supply EBIT Supply PAT Supply PAT margin £m margin 0.5% 12.6 0.4% (4.6)% (56.5) (3.7)% 3.0% 77.9 2.4% 1.1% 3.8 0.9% 0.6% 38.0 0.5% Electricity Generation Unit £m £m Nuclear Thermal 534.8 27.1 262.5 (31.8) Aggregate Generation Business Electricity Supply Gas Supply Domestic Non-Domestic Domestic 797.3 3,166.3 1,574.1 3,642.0 (4.7) (35.6) 15.8 172.1 Supply EBIT Supply PAT Supply PAT margin £m margin (1.1)% (28.7) (0.9)% 1.0% 12.7 0.8% 4.7% 139.1 3.8% i F n a n c a i l S t a t e m e n t s Non- Domestic 467.2 38.5 8.2% 31.2 6.7% Aggregate Supply Business 8,849.6 190.8 2.2% 154.3 1.7% Centrica plc Annual Report and Accounts 2020 211 Ofgem Consolidated Segmental Statement continued Glossary of terms • ‘WACOF/E/G’ is weighted average cost of fuel (nuclear), electricity (supply) and gas (thermal and supply) calculated by dividing direct fuel costs by volumes. For the Thermal sub-segment, the cost of carbon emissions is added to direct fuel costs before dividing by the generated volume. • ‘EBITDA’ is earnings before interest, tax, depreciation and amortisation, and is calculated by subtracting total operating costs from revenue. • ‘DA’ is depreciation and amortisation. • ‘EBIT’ is earnings before interest and tax, and is calculated by subtracting total operating costs, depreciation and amortisation from total revenue. • ‘Supply EBIT margin’ is a profit margin expressed as a percentage and calculated by dividing EBIT by total revenue and multiplying by 100 for the Supply segment. • ‘Supply PAT’ is profit after tax but before interest and is calculated by subtracting Group adjusted tax from EBIT for the Supply segment. • ‘Supply PAT margin’ is a profit margin expressed as a percentage and calculated by dividing Supply PAT by total revenue and multiplying by 100 for the Supply segment. • ‘Volume’ for Supply is supplier volumes at the meter point (i.e. net of losses); Generation volume is the volume of power that can actually be sold in the wholesale market (i.e. generation volumes after losses up to the point where power is received under the Balancing and Settlement Code but before subsequent losses). • ‘Average customer numbers/sites’ are calculated by adding average monthly customer numbers/sites (as defined in the basis of preparation) and dividing by 12. • ‘Scheduling decisions’ means the decision to run individual generation units. • ‘Responsible for interactions with the Balancing Market’ means interactions with the Balancing Mechanism in electricity. • ‘Interacts with wider market participants to buy/sell energy’ means the business unit is responsible for interacting with wider market participants to buy/sell energy, not the entity responsible for the buy/sell decision itself, which falls under ‘Responsible for implementing hedging policy/makes decisions to buy/sell energy’. • ‘Matches own generation with own supply’ means where there is some internal matching of generation and supply before either generation or supply interact with the wider market. • ‘Forecasts total system demand’ means forecasting total system electricity demand or total system gas demand. • ‘Forecasts customer demand’ means forecasting the total demand of own supply customers. • ‘Bears shape risk after initial hedge until market allows full hedge’ means the business unit which bears financial risk associated with hedges made before the market allows fully shaped hedging. • ‘Bears short-term risk for variance between demand and forecast’ means the business unit which bears financial risk associated with too little or too much supply for own customer demand. 212 Centrica plc Annual Report and Accounts 2020 Business functions table Year ended 31 December 2020 – analysis of business functions (i) The table below illustrates where the business functions reside. Operates and maintains generation assets Responsible for scheduling decisions Responsible for interactions with the Balancing Market Responsible for determining hedging policy Responsible for implementing hedging policy/makes decision to buy and sell energy Interacts with wider market participants to buy/sell energy Holds unhedged positions (either short or long) Procures fuel for generation Procures allowances for generation Holds volume risk on positions sold (either internal or external) Matches own generation with own supply Forecasts total system demand Forecasts wholesale price Forecasts customer demand Determines retail pricing and marketing strategies Bears shape risk after initial hedge until market allows full hedge Bears short-term risk for variance between demand and forecast Generation Supply Another part of business – – (output) (demand) (output) (demand) – – – – – (bilateral) (market and bilateral) (market and bilateral) (ii) – – (iv) – – – – – – (iv) (ii) – – – (ii) (iii) – (iv) – – – – (i) The table reflects the business functions that impact our UK segments. (ii) The Group’s Supply and Generation businesses are separately managed. Both businesses independently enter into commodity purchases and sales with the market via Centrica Energy Limited (CEL), our market-facing legal entity. CEL forms part of our non-licensed element of Energy Marketing & Trading function and also conducts trading for the purpose of making profits in its own right. The Supply segment is also able to enter into market trades directly as part of its within day balancing activities (as well as external bilateral contracts). (iii) ‘Matches own generation with own supply’ is undertaken in ‘Another part of the business’ (by CEL at market referenced prices), outside of the Generation and Supply segments. (iv) A separate team forecasts the wholesale price for the benefit and use of the entire Group. This team does not formally reside in any particular segment but their costs are recharged across the Group. Key: Function resides and profit/loss recorded in segment. – Neither function nor profit/loss reside in segment. Centrica plc Annual Report and Accounts 2020 213 i F n a n c a i l S t a t e m e n t s Ofgem Consolidated Segmental Statement continued Basis of preparation The following notes provide a summary of the basis of preparation of the 2020 submission. The Ofgem CSS segments our Supply and Generation activities and provides a measure of profitability, weighted average cost of fuel, and volumes, in order to increase energy market transparency for consumers and other stakeholders. These statements have been prepared by the Directors of Centrica plc and its Licensees in accordance with Standard Condition 16B of the Electricity Generation Licences and Standard Condition 19A of the Electricity and Gas Supply Licences and the basis of preparation. Throughout the basis of preparation the first paragraph number relates to the generation licence and the second to the supply licence conditions respectively. The financial data provided has been taken from the relevant licensee’s and affiliate’s financial information for the year ended 31 December 2020, included in the Centrica plc Annual Report and Accounts 2020 which have been prepared under IFRS as adopted by the EU (in accordance with paragraph 3/19A.3). The CSS has been prepared on a going concern basis, as described in the Directors’ Report and note 24 in the Centrica plc Annual Report and Accounts 2020. For the Generation segment, we have included the financial results from all activities that relate to our generation licences. For clarity the following judgements have been made: • the Group has a long-term tolling contract in respect of the Spalding power station, but does not specifically hold the generation licence. This arrangement provides the Group with the right to nominate 100% of the plant capacity in return for a mix of capacity payments and operating payments. We do not own the power station and the Group does not control the physical dispatch of the asset. This contractual arrangement has been accounted for as a lease (under IFRS) and therefore the financial result and volume has been included in the Thermal sub-segment, within the Generation segment; • Brigg and Roosecote power stations had their licences revoked on 2 July 2015 (at their request) because they no longer required an electricity generation licence and are now exempt. Whilst we do not specifically hold a generation licence for these power stations, the financial results from these businesses have been included in the Thermal sub-segment and hence within the Generation segment; • the Group has a 20% equity interest in Lake Acquisitions Limited, which owns eight nuclear power stations (through its indirect investment in EDF Energy Nuclear Generation Limited). Although we do not specifically hold a generation licence for any of the nuclear stations, our gross share of the financial result from this business (including any contractual arrangements) has been included in the Nuclear sub-segment and hence within the Generation segment; and • where power is purchased from third parties (for example from wind farms, power stations or other bilateral arrangements) and we do not have an equity interest in, or a leasing arrangement (from an IFRS perspective) over the assets that generate this power, the result related to these activities is excluded from the Generation segment. In all cases, the Generation segment reports direct fuel costs and generation volumes on a consistent basis (if the purchase cost is a direct fuel cost, then the electricity generated is reported in volume). Domestic Supply represents the revenue and associated costs in supplying gas and electricity to residential customers in the UK. Non- Domestic Supply represents the revenue and associated costs in supplying gas and electricity to business customers in the UK. As a voluntary disclosure, to aid comparability, a summarised 2019 CSS with margins has been included within the report. Revenues Revenues, costs and profits of the Licensees have been defined below and prepared in compliance with the Group’s accounting policies as detailed in notes 2, 3 and S2 of the Centrica plc Annual Report and Accounts 2020, except for joint ventures and associates which are presented gross (in accordance with paragraph 4(a)/19A.4(a)). • Revenue from sales of electricity and gas for the Supply segment is recognised on the basis of gas and electricity supplied during the year to both domestic and non-domestic customers. • Revenue from sales of electricity and gas includes an assessment of energy supplied to customers between the date of the last meter reading and the year end (unread). For the respective Supply segments this means electricity and gas sales. Revenue for domestic supply is after deducting dual fuel discounts where applicable, with the discount split evenly between electricity and gas. Government mandated social tariffs and discounts, such as the Warm Home Discount, and other social discounts, have also been deducted from Domestic Supply revenues directly, charged specifically to each fuel. • Revenue from sales of electricity for the Generation segment is recognised on the basis of power supplied during the year. Power purchases and sales entered into to optimise the performance of each of the power Generation segments are presented net within revenue. 214 Centrica plc Annual Report and Accounts 2020 Basis of preparation • The financial risks and rewards of owning and using the Group’s power stations reside entirely in the reported Generation segment. • Other respective segmental revenues not related to the sale of gas or power have been separately disclosed. Other revenues include: − £51.1 million (2019: £78.1 million) in Domestic Electricity Supply and £41.7 million (2019: £73.0 million) in Domestic Gas Supply primarily relating to New Housing Connections and smart meter installations; − £22.8 million (2019: £30.4 million) in Thermal principally relating to Supplementary Balancing Reserve (SBR), Short Term Operating Reserve (STOR), Triad revenue and Capacity Market income; and − £48.6 million (2019: £38.3 million) revenue in Nuclear not directly related to energy sales, such as capacity market income and provision of miscellaneous services. Direct fuel costs Direct fuel costs for both Generation and Supply include electricity, gas, nuclear fuel and imbalance costs. • Energy supply to Domestic and Non-Domestic energy customers is procured at a market referenced price, through a combination of bilateral, over-the-counter (OTC) and exchange-based trades/contracts (see table below). Where energy is procured from within the Group it is also at a market referenced price on an OTC basis. The market referenced prices used are those prevailing at the time of procurement, which may differ from the price prevailing at the time of supply. • Domestic and Non-Domestic fixed price products are hedged based upon anticipated demand at the start of the contract period. The majority of the gas and power for Non-Domestic energy and Domestic energy tariff products is purchased in advance (see table below). • The exact Domestic and Non-Domestic purchasing patterns vary in response to the outlook for commodity markets and commercial factors. • The Generation segment purchases gas and sells all of its energy at market referenced prices. Gas for turbines/engines is procured at market referenced prices through a combination of OTC and exchange-based trades/contracts. The cost to the power stations will reflect market referenced prices at the time of procurement, and so may differ from the price prevailing at the time of physical supply. How we procure electricity, gas and carbon: Long form bilateral contracts (‘bilateral’) Individually negotiated contracts with non-standardised terms and conditions which may relate to size, duration or flexibility. Pricing is predominantly indexed to published market referenced prices, adjusted for transfer of risks, cost of carry and administration. OTC Exchange Broker supported market of standardised products, predominantly performed via screen-based trading. These transactions are between two parties, leaving both parties exposed to the other’s default with no necessary intermediation of any exchange. An internal OTC price may be provided where market liquidity prevents external trading, with prices that are reflective of market conditions at the time of execution. Regulated electronic platform (notably ICE, APX, and N2EX) where standardised products are traded on exchange through the intermediary of the clearing house which becomes the counterparty to the trade. Membership of a clearing house is required which entails posting of cash or collateral as margin. WACOF/WACOE/WACOG • For Generation this represents a proxy for the weighted average input cost of gas, carbon and nuclear fuel, shown as £/MWh, used by the Generation business. Gas for turbines/engines is procured at market referenced prices through a combination of OTC and exchange-based trades/contracts. The cost to the power stations will reflect market referenced prices at the time of procurement, and so may differ from the price prevailing at the time of physical supply. • For Supply this covers the wholesale energy cost, the energy element of reconciliation by difference (RBD) costs and balancing and shaping costs incurred by the Supply licensees. Again, gas and electricity is procured at market referenced prices through a combination of bilateral, OTC and exchange-based trades/contracts. The cost for the Supply business will reflect market referenced prices at the time of procurement, and so may differ from the price prevailing at the time of physical supply. Where gas is procured using (predominantly indexed) bilateral contracts, the fuel cost is then allocated between Domestic and Non-Domestic Supply using annually updated fixed percentages based on the historical split of tariff book volumes. Gas and Electricity balancing costs are allocated between Domestic and Non-Domestic Supply based on their respective volumes multiplied by an appropriate industry referenced price (for example APX or SAP). • For electricity Supply the weighted average cost of electricity is shown as £/MWh. For gas Supply, the weighted average cost of gas is shown as p/th. Centrica plc Annual Report and Accounts 2020 215 i F n a n c a i l S t a t e m e n t s Ofgem Consolidated Segmental Statement continued Basis of preparation Direct costs Direct costs for Supply and Generation are broken down into network costs, environmental and social obligation costs and other direct costs. • Network costs for Supply and Generation include transportation costs, BSUOS and the transport element of RBD costs. Supply transportation costs include transportation and LNG costs, including £38.5 million incurred by Gas Domestic Supply in 2020, which enables the segment to secure supply by giving the ability to bring gas into the UK from overseas (2019: £35.7 million). • Environmental and social obligation costs for Domestic Supply include ROCs, FIT, ECO and UK Capacity Market costs. Non-Domestic Supply includes the cost of LECs, ROCs, FIT and UK Capacity Market costs. Within the Domestic and Non-Domestic segments, the costs of LECs, FIT, ROCs and UK Capacity Market costs are included within Electricity, and ECO is allocated between Electricity and Gas based on the relevant legislation. Environmental and social obligation costs for the Generation segment relate to EU ETS carbon emission costs and carbon tax. • Other direct costs for Generation include employee and maintenance costs. • Other direct costs for Supply include brokers’ costs and sales commissions when the costs have given rise directly to revenue, that is, producing a sale. They also include Elexon and Xoserve market participation and wider Smart metering programme costs. Indirect costs Indirect costs for Supply and Generation include operating costs such as sales and marketing, bad debt costs, costs to serve, IT, HR, finance, property, staffing and billing and metering costs (including smart meter costs). • Indirect costs for the Generation, Domestic and Non-Domestic Supply segments (including corporate and business unit recharges) are allocated based on relevant drivers, which include turnover, headcount, operating profit, net book value of fixed assets and proportionate use/benefit. For Supply, indirect costs (including corporate recharges but excluding bad debt costs) are primarily allocated between Electricity and Gas on the basis of customer numbers (Domestic) and sites (Non-Domestic). Bad debt costs are allocated between Electricity and Gas on the basis of actual bad debt cost by individual contract in the billing system (Domestic) and on the basis of revenues (Non-Domestic). Other • For Supply, depreciation and amortisation is allocated between Electricity and Gas on the basis of customer numbers (Domestic) and sites (Non-Domestic). • For the purposes of Supply PAT, tax is allocated between Gas and Electricity within both Domestic and Non-Domestic Supply based on their relative proportions of EBIT. • For the Domestic Supply segment, customer numbers are stated based on the number of district meter point reference numbers (MPRNs) and meter point administration numbers (MPANs) in our billing system (for gas and electricity respectively), where it shows an active point of delivery and a meter installation. As a result, our customer numbers do not include those meter points where a meter may recently have been installed but the associated industry registration process has yet to complete, as the meter information will not be present in our billing system. • For the Non-Domestic Supply segment, sites are based on the number of distinct MPRNs and MPANs in our billing system for gas and electricity respectively. Transfer pricing for electricity, gas and generation licensees in accordance with paragraph 4(d)/19A.4(d) There are no specific energy supply agreements between the Generation and Supply segments. The Group continues to ensure transfer pricing methodologies are appropriate and up to date. In order to meet this requirement, the Group ensured all transfer pricing and cost allocation methodologies were internally reviewed, updated and collated in a central repository. Treatment of joint ventures and associates The share of results of joint ventures and associates for the year ended 31 December 2020 principally arises from the Group’s interests in the entities listed on page 210. Under paragraph 5 of the Conditions, the information provided in the CSS includes our gross share of revenues, costs, profits and volumes of joint ventures and associates. In preparing the CSS, joint ventures and associates (which hold a UK generation licence or exemption) are accounted for as follows: • our proportionate share of revenues of joint ventures and associates has been included within revenue; • our proportionate share of the profit before tax of joint ventures and associates has been included within EBIT and EBITDA; and • our proportionate share of the generation volumes of joint ventures and associates has been included within the generation volumes. For each of the above items, our share of the income and expenses of the joint ventures or associates has been combined line-by-line within the relevant item of the CSS. Exceptional items and certain re-measurements Restructuring costs, impairment charges and pension charges that have been identified as exceptional items, and mark-to-market adjustments in the Centrica plc Annual Report and Accounts 2020, are excluded from the CSS. For further details of excluded exceptional items and certain re-measurements see note 7 in the Centrica plc Annual Report and Accounts 2020. A reconciliation of the Segmental Statement revenue, EBIT and depreciation to the 2020 audited Centrica plc Annual Report and Accounts has been included in accordance with paragraphs 4(b) & (c)/19A.4 (b) & (c) and 6/19A.6. 216 Centrica plc Annual Report and Accounts 2020 Reconciliation to Centrica plc Annual Report and Accounts The reconciliation refers to the segmental analysis of the 2020 Centrica plc Annual Report and Accounts in note 4. Centrica plc Annual Report and Accounts Segmental Analysis (i) Segment revenue Less non-UK and non-Generation/Supply Segment revenue after non-UK and non-Generation/Supply Reallocate British Gas Non-Domestic Supply element Reallocate Centrica Business Solutions Generation element Add Generation reported in Energy, Marketing & Trading Segment revenue after non-UK and non-Generation/Supply and reallocation of Generation element from Centrica Business Solutions and Energy Marketing & Trading to Upstream ) m £ ( e u n e v e R Gas and Electricity allocation Include share of JVs and associates Exclude intra-segment revenues Ofgem Consolidated Segmental Statement Centrica plc Annual Report and Accounts Segmental Analysis (i) Segment EBIT Less non-UK and non-Generation/Supply Segment EBIT after non-UK and non-Generation/Supply Reallocate British Gas Non-Domestic Supply element Reallocate Centrica Business Solutions Generation element ) m £ ( I T B E Add Generation reported in Energy, Marketing & Trading Segment EBIT after non-UK and non-Generation/Supply and reallocation of Generation element from Centrica Business Solutions and Energy, Marketing & Trading to Upstream Gas and Electricity allocation Exclude share of JVs’ and associates’ interest and tax Ofgem Consolidated Segmental Statement 1 2 2 3 4 5 6 1 2 2 3 4 5 Supply segment Domestic Non-Domestic Generation segment Electricity Notes 2020 2020 Upstream British Gas 1,918.3 7,887.0 (1,455.5) (1,408.1) 462.8 – 22.3 176.9 6,478.9 (103.7) – – Gas 2020 Electricity 2020 Gas 2020 Centrica Business Solutions 2,130.5 (255.2) 1,875.3 103.7 (22.3) – 662.0 6,375.2 1,956.7 – 3,181.9 3,193.3 1,528.7 428.0 549.6 (501.0) – – – – – – – – 710.6 3,181.9 3,193.3 1,528.7 428.0 90.2 (106.9) (16.7) – (0.1) 10.8 281.5 (181.1) 100.4 11.4 – – (140.0) 86.3 (53.7) (11.4) 0.1 – (6.0) 111.8 (65.0) – 32.7 26.7 15.6 – 15.6 96.2 – 96.2 (69.8) – (69.8) 4.8 – 4.8 i F n a n c a i l S t a t e m e n t s Centrica plc Annual Report and Accounts 2020 217 Ofgem Consolidated Segmental Statement continued Reconciliation to Centrica plc Annual Report and Accounts Generation segment Centrica plc Annual Report and Accounts Segmental Analysis (i) Segment depreciation and amortisation Less non-UK and non-Generation/Supply ) m £ ( n o i t a s i t r o m a d n a i n o i t a c e r p e D Segment depreciation and amortisation after non-UK and non- Generation/Supply Reallocate British Gas Non-Domestic Supply element Reallocate Centrica Business Solutions Generation element Add Generation reported in Energy, Marketing & Trading Segment depreciation and amortisation after non-UK and non- Generation/Supply and reallocation of Generation element from Centrica Business Solutions and Energy, Marketing & Trading to Upstream Gas and Electricity allocation Include share of JVs and associates Ofgem Consolidated Segmental Statement Supply segment Domestic Non-Domestic Electricity Notes 2020 2020 Upstream British Gas Gas 2020 Electricity 2020 Gas 2020 Centrica Business Solutions 1 2 2 3 4 5 (545.3) 545.3 – – (6.5) (11.3) (170.8) 73.3 (97.5) 0.5 – – (17.8) (97.0) (53.2) 29.3 (23.9) (0.5) 6.5 – (17.9) – (43.7) (53.3) (12.7) (5.2) (141.3) (159.1) – – – – (43.7) (53.3) (12.7) (5.2) (i) The tables reconcile the Generation segment to Upstream, the Domestic Supply segment to British Gas and the Non-Domestic Supply segment to Centrica Business Solutions from note 4 to the 2020 Centrica plc Annual Report and Accounts. Also included in note 4 is a reconciliation to the IFRS compliant statutory result reported by the Centrica plc Group. Notes: 1. British Gas includes Home Services and Solutions, Centrica Business Solutions includes Business Services and Solutions and Upstream includes Exploration and Production, which are non-licensed activities and have been deducted to reconcile these CSS numbers. 2. British Gas includes supply activity to certain companies fulfilling the Non-Domestic definition. Centrica Business Solutions includes generation activity from the Group’s turbines, engines and battery assets. 3. Energy, Marketing and Trading includes Generation activity associated with the Spalding power station. 4. The share of Domestic and Non-Domestic Revenues, Operating Profit (EBIT) and Depreciation (including amortisation) as provided in note 4 of the Centrica plc Annual Report and Accounts 2020, has been split between Gas and Electricity. 5. £549.6 million of revenues relating to the Group’s share of joint ventures and associates in Generation are included in the CSS for Nuclear revenues. £56.6 million of EBIT in the Generation segment relates to profits from associates for Nuclear. Additionally, costs relating to the Group’s share of joint ventures and associates: £82.5 million direct fuel costs, £230.3 million direct costs, £38.9 million indirect costs and £141.3 million depreciation and amortisation are included. Note also that financing costs and tax of £32.7 million are initially included in the Upstream segmental EBIT associated with nuclear. The results of joint ventures and associates are shown separately in the Centrica plc Annual Report and Accounts 2020 in notes 6 and 14. 6. £501.0 million of intra-segment revenues between the joint ventures and associates and the Generation segment (included in the £549.6 million of joint venture and associate revenues) are excluded from the CSS. 218 Centrica plc Annual Report and Accounts 2020 Shareholder Information General enquiries Centrica’s share register is administered and maintained by Equiniti, our Registrar, whom you can contact directly if you have any questions about your shareholding which are not answered here or on our website. 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You will also receive alerts to let you know that you can cast your AGM vote online. You can manage your shareholding online by registering at shareview.co.uk, a free online platform provided by Equiniti, which allows you to: • view information about your shareholding; • have your dividend paid into your bank account; • update your personal details; and • appoint a proxy for the AGM. Centrica FlexiShare FlexiShare is an easy way to hold Centrica shares without a share certificate. Your shares are held by a nominee company, Equiniti Financial Services Limited. However, you are able to attend and vote at general meetings as if the shares were held in your own name. Holding your shares in this way is free and gives you: • low cost share dealing rates (full details of which are available on centrica.com, together with dealing charges); • quicker settlement periods for buying and selling shares; and • no paper share certificates to lose. centrica.com The Shareholder Centre on our website contains a wide range of information including a dedicated investors section where you can find further details about shareholder services including: • share price information; • dividend history; • telephone and internet share dealing; • downloadable shareholder forms; and • taxation. This Annual Report and Accounts can also be viewed online by visiting centrica.com/ar20. ShareGift If you have a small number of shares and the dealing costs or the minimum fee make it uneconomical to sell them, it is possible to donate them to ShareGift, a registered charity, which provide a free service to enable you to dispose charitably of such shares. More information on this service can be found at sharegift.org or by calling +44 (0)20 7930 3737. 219 Other InformationCentrica plc Annual Report and Accounts 2020 Other Information Additional Information – Explanatory Notes (Unaudited) Definitions and reconciliation of adjusted performance measures Centrica’s 2020 consolidated Financial Statements include a number of non-GAAP measures. These measures are chosen as they provide additional useful information on business performance and underlying trends. They are also used to measure the Group’s performance against its strategic financial framework. They are not, however, defined terms under IFRS and may not be comparable with similarly titled measures reported by other companies. Where possible they have been reconciled to the statutory equivalents from the primary statements (Group Income Statement (‘I/S’), Group Balance Sheet (‘B/S’), Group Cash Flow Statement (‘C/F’)) or the notes to the Financial Statements. Adjusted revenue, adjusted gross margin, adjusted operating profit, adjusted earnings and free cash flow have been defined and reconciled separately in notes 2, 4 and 10 to the Financial Statements where further explanation of the measures is given. Additional performance measures are used within this announcement to help explain the performance of the Group and these are defined and reconciled below. EBITDA EBITDA is a business performance measure of operating profit, after adjusting for depreciation and amortisation. It provides a performance measure in its own right, and provides a bridge between the Income Statement and the Group’s key cash metrics. Year ended 31 December Continuing group operating loss Exceptional items included within Group operating profit and certain re-measurements before taxation Share of (profits)/losses of joint ventures and associates, net of interest and taxation(i) Depreciation and impairments of PP&E(i) Amortisation, write-downs and impairments of intangibles(i) Continuing EBITDA Discontinued operations EBITDA Group total EBITDA (i) These line items relate to business performance only. Note I/S 7 I/S 4 4 2020 £m (362) 809 (23) 659 253 1,336 299 1,635 2019 £m (783) 1,433 12 851 265 1,778 341 2,119 The following tables provide additional information to help readers when reconciling between different parts of the consolidated Financial Statements, and the Group Cash Flow Statement. Payments relating to exceptional charges in operating costs Year ended 31 December Restructuring costs incurred during the year and utilisation of prior year liabilities Sales/purchase contract loss provision and other exceptional costs Payments relating to exceptional charges in continuing operating costs Depreciation, amortisation, write-downs, impairments and write-backs PP&E depreciation PP&E impairments Joint venture impairments Intangible write-down Intangible amortisation Intangible impairments Group total cash flow from depreciation, amortisation, write-downs, impairments and write-backs Less cash flow from discontinued operations depreciation, amortisation, write-downs, impairments and write-backs in: Business Performance Exceptional items Cash flow depreciation, amortisation, write-downs, impairments and write-backs (continuing) Continuing: Exceptional item impairments Business Performance PP&E depreciation Business Performance PP&E impairments Business Performance intangibles amortisation Business Performance intangibles impairments and write-downs 220 Notes C/F Notes 13 13 14 15 15 15 4 7 C/F 7 4 4 4 4 2020 £m 117 3 120 2020 £m 672 482 483 24 258 353 2,272 (47) (8) 2,217 (1,305) (657) (2) (226) (27) Change (25%) (23%) 2019 £m 249 15 264 2019 (restated)(i) £m 807 569 372 178 266 107 2,299 (90) (66) 2,143 (1,027) (778) (73) (205) (60) Centrica plc Annual Report and Accounts 2020 Definitions and reconciliation of adjusted performance measures Reconciliation in receivables and payables to Group Cash Flow Statement Year ended 31 December Receivables opening balance Less receivables closing balance Payables opening balance Less payables closing balance Net reduction in receivables and payables Non-cash changes, and other reconciling items: Transferred to held for sale and business disposals Movement related to discontinued operations prior to transfer to held for sale Movement in capital creditors Movement in ROCS and emission certificate intangible assets Other movements (including foreign exchange movements) Non-cash charges, and other reconciling items Movement in trade and other receivables, trade and other payables and contract related assets relating to business performance Pensions Year ended 31 December Cash contributions to defined benefit schemes in excess of service cost income statement charge Employer contributions Contributions by employer in respect of employee salary sacrifice arrangements Total current service cost Past service credit Termination benefit Discontinued operations free cash flow Year ended 31 December Discontinued operations free cash flow Movement in variation margin and collateral Net cash flow from discontinued operating activities Net cash flow from discontinued investing activities Notes B/S B/S B/S B/S C/F Notes C/F 22 22 22 22 22 Notes 4 C/F C/F 2020 £m 4,993 (2,946) (5,685) 3,836 198 (281) (48) 61 (92) (46) (406) (208) 2020 £m (42) 241 28 (107) – (120) 2020 £m 376 45 421 443 (22) 421 2019 £m 5,662 (4,993) (6,398) 5,685 (44) 2 (75) 18 106 51 102 58 2019 £m (493) 320 29 (116) 260 – 2019 £m 494 (66) 428 280 148 428 221 Other InformationCentrica plc Annual Report and Accounts 2020 People and Planet – Performance Measures We engaged DNV GL Business Assurance Services UK Limited (DNV) to undertake a limited assurance engagement using the International Standard on Assurance Engagements (ISAE) 3000 (Revised): ‘Assurance Engagements Other Than Audits or Reviews of Historical Financial Information’. DNV has provided an unqualified opinion in relation to four KPIs that are identified with the symbol ‘†’ and feature on pages 30 and 224. It is important to read the responsible business information in the Annual Report and Accounts 2020 in the context of DNV’s full limited assurance statement and Centrica’s Basis of Reporting, which are available at centrica.com/assurance. Read more about our People & Planet Plan on Pages 28 to 33 Read more about our wider non-financial performance at centrica.com/datacentre Read more about our SASB disclosure at centrica.com/sustainability Progress against our People & Planet Plan Key: Progress against Ambitions On track Behind Goal Milestone All company and senior leaders to be by 2022: • 30% female • 13% ethnic minority • 4% disability • 3% LGBTQ+ • 3% ex-service 2020 Progress(i) All company(ii): • 28% female • 13% ethnic minority • 1% disability • 1% LGBTQ+ • 1% ex-service Senior leadership(ii): • 28% female • 13% ethnic minority • 1% disability • 1% LGBTQ+ • 1% ex-service Create an engaged team that reflects the full diversity of the communities we serve by 2030 – this means all company and senior leaders to be: • 47% female • 14% ethnic minority • 15% disability • 3% LGBTQ+ • 3% ex-service Recruit 3,500 apprentices and provide career development opportunities for under-represented groups by 2030 (baseline: 2021) Inspire colleagues to give 100,000 days to build inclusive communities by 2030 (baseline: 2019) Help our customers be net zero by 2050(iv) (baseline: 2019) Be a net zero business by 2045(v) (baseline: 2019) 1,000 apprentices by 2022 – (iii) 20,000 days by 2022 28% carbon intensity reduction by 2030 40% carbon reduction by 2034 10,548 days 18% reduction 18% reduction (i) Our People & Planet Plan was introduced in 2021 to accelerate action in areas where we can make the greatest difference. The Plan builds on our 2030 Responsible Business Ambitions and where our outgoing goals directly support our new goals, we have provided 2019 performance to transparently demonstrate progress: 29% female representation in senior leadership, 10% ethnic minority representation in senior leadership, 29% female representation across all company, 12% ethnic minority representation across all company, 362 young people from under-represented groups supported with skills, 2,452 volunteering days, 3.9% customer carbon emission reduction and 39% internal carbon footprint reduction since 2015. More detail on our outgoing climate goals are on page 224. (ii) Ethnicity is based on 65% of colleagues in 2020 and 63% of colleagues in 2019 who voluntarily disclosed whether they are from a Black, Asian, Mixed/Multiple or other ethnic group across the UK and North America. Senior leaders includes colleagues above general management and spans senior managers, the Centrica Leadership Team and the Board. (iii) Performance against the goal will be reported in full from 2021. This is because our apprenticeship goal is a new focus for 2021 onwards, while many wider training opportunities were paused in 2020 due to COVID-19. (iv) Carbon intensity of our customers’ overall energy use including electricity and gas with a baseline normalised for divestments. Target aligned to the Paris Accord and based on science, corresponding to a well below 2°C pathway initially and 1.5°C by mid-century. (v) Scope 1 (direct) and 2 (indirect) greenhouse gas emissions based on operator boundary and normalised for acquisitions and divestments, with target aligned to the Paris Accord and based on science. This differs from total carbon emissions reported on page 224 which includes all emissions at time of ownership. 222 Other InformationCentrica plc Annual Report and Accounts 2020 Progress against our Foundations People Metric 2020 2019 What’s next Customers Brand net promoter score (NPS)(i) Complaints per 100,000 customers(i) Vulnerable customers helped through the UK Warm Home Discount Scheme Customer safety incident frequency rate per 1,000,000 jobs completed +13.8(ii) 2,569(iv) +15.1(iii) 3,429(v) 570,304 618,881 Continue to deliver new services and solutions that help our customers live sustainably, simply and affordably Maintain focus on driving down complaints by improving customer service Ensure customers in vulnerable circumstances receive the help they need to stay warm, safe and debt-free 3.85 2.85 Consistently follow existing controls as well as encourage customers to maintain distance from work areas (i) Measure linked to Executive Director remuneration arrangements. See pages 70 and 73 for more information. (ii) Aggregated scores across British Gas Home +8, Direct Energy Home +32, Bord Gáis Energy -5, Hive +40, British Gas Business -1 and Direct Energy Business +39, weighted by customer numbers. (iii) Business divisions have been updated to better align with how we now operate. Aggregated scores across British Gas Home and Dyno +8 (previously combined under the outgoing UK Home division reported prior to 2020), Direct Energy Home +29, Bord Gáis Energy +23, Hive +39, British Gas Business +1 and Direct Energy Business +32, weighted by customer numbers. (iv) Aggregated scores across British Gas Energy Supply 3,616 as reported to Ofgem, British Gas Home Services 2,234 as reported to the FCA, Bord Gáis Energy 5 as reported to the Commission for Regulation of Utilities, Water and Energy (CRU), Direct Energy Home Energy 42 as reported by various regulatory bodies, British Gas Business 3,369 as reported to Ofgem and Direct Energy Business 17 as reported by various regulatory bodies and weighted by customer accounts. (v) Aggregated scores across British Gas Home Energy Supply 5,182 as reported to Ofgem, British Gas Home Services 2,388 as reported to the FCA, Bord Gáis Energy 4 as reported to the Commission for Regulation of Utilities, Water and Energy (CRU), Direct Energy Home Energy 65 as reported by various regulatory bodies, British Gas Business 3,825 as reported to Ofgem and Direct Energy Business 27 as reported by various regulatory bodies and weighted by customer accounts. Metric 2020 2019 What’s next Colleagues Employee engagement(i) (ii) 42% favourable 43% favourable Gender pay gap(iii) Gender bonus gap(iv) Ethnicity pay gap(iii) (v) Ethnicity bonus gap(iv) (v) Retention Absence per full-time employee(vii) 21% mean 35% median 26% mean 5% median 8% mean 14% median 14% mean 16% median 85% 14% mean 30% median 29% mean 23% median -(vi) -(vi) 80% 15 days 14 days Total recordable injury frequency rate (TRIFR) per 200,000 hours worked(i) Lost time incident frequency rate (LTIFR) per 200,000 hours worked Process safety incident frequency rate (Tier 1 and 2) per 200,000 hours worked(i) Significant process safety events (Tier 1) Fatalities 1.03 0.72 0.00 0 0 1.06 0.58 0.08 0 0 Endeavour to improve employee experience which includes connecting colleagues with our purpose and enabling them to perform at their best Drive action through our People & Planet Plan to create an engaged team that reflects the full diversity of the communities we serve Support employees through restructuring and improve retention by enhancing employee experience and talent development Strive to reduce absence through good management practices alongside proactive support and education on the importance of overall health, and how physical and mental health are connected Drive down TRIFR and LTIFR by keeping safety front-of-mind and reinforcing a strong safety culture while adhering to existing controls and monitoring Continue to ensure robust operational controls and operator competencies, timely safety-critical maintenance programmes and effective performance management Maintain zero fatalities (i) Measure linked to Executive Director remuneration arrangements. See pages 70 and 73 for more information. (ii) Measured through responses to annual survey asking employees to rate their level of advocacy, pride, loyalty and satisfaction. (iii) Based on hourly rates of pay for all employees at full pay (including bonus and allowances) at the snapshot dates of 5 April 2018 and 2019. Read our Gender and Ethnicity Pay Statement to find out more at centrica.com/paygap. (iv) Includes anyone receiving a bonus during the 12-month period leading up to the pay gap snapshot date and who are still employed on the snapshot date. (v) Based on 65% of colleagues who confirmed whether they are from a Black, Asian, Mixed/Multiple or other ethnic group. (vi) We voluntarily published our ethnicity pay gap for the first time in 2020 and so there is no 2019 performance available. (vii) Relates to absence from sickness rather than wider forms of absence such as bereavement. 223 Other InformationCentrica plc Annual Report and Accounts 2020 Other Information | People and Planet – Performance Measures continued Metric Communities Total community contributions Average sustainability risk score (score out of 100)(iii) Ethnical site inspections undertaken for higher risk suppliers Colleagues committed to Our Code 2020 2019 What’s next £219.7 million(i) £167.0 million(ii) 54 (low risk) 59 (low risk) 5 96% 9 82% Help create more inclusive communities and grow colleague engagement via our flagship charity partnerships with the Trussell Trust, Carers UK, British Gas Energy Trust and Focus Ireland Continue to monitor and raise standards to reduce risk across our supply chain, particularly among higher risk strategic suppliers Ensure all colleagues uphold Our Code as part of our commitment to doing the right thing and acting with integrity (i) Comprises £216.4 million in mandatory and £0.5 million in voluntary contributions which largely support vulnerable customers, alongside £2.8 million in charitable donations which includes £0.3 million in contributions from third parties such as employee fundraising. (ii) Restated due to availability of improved data. Comprises £164.0 million in mandatory and £0.3 million in voluntary contributions alongside £2.8 million in charitable donations which includes £0.5 million in contributions from third parties such as employee fundraising. Aggregated component values differ from total due to rounding. (iii) A score near 100 is low risk. High-risk companies have limited or no tangible actions on sustainability, medium-risk companies take partial tangible action on selected sustainability issues, low-risk companies have a structured sustainability approach with policies and action to manage major sustainability issues while lowest-risk companies have strong sustainability credentials and reporting embedded across their business. Planet Metric Carbon Total carbon emissions (Scope 1 and 2)(i) Scope 1 emissions Scope 2 emissions Scope 3 emissions(iv) Total carbon intensity by revenue Annual customer carbon savings from measures installed Total energy use Help our customers reduce emissions by 25% by direct (3%) and indirect action (baseline: 2015) Deliver 7GW of flexible, distributed and low carbon technologies as well as provide system access and optimisation services Reduce our internal carbon footprint by 35% by 2025 and be net zero by 2050 (baseline: 2015) Water, waste and non-compliance Total water use Total waste generated Environmental non-compliance(x) 2020 2019 What’s next 1,925,747tCO2e† 2,512,141tCO2e(ii) 1,885,449tCO2e† 40,299tCO2e† 115,828,220tCO2e 92tCO2e/£m(v) 2,474,794tCO2e (ii) 37,347tCO2e(iii) 127,209,632tCO2e 111tCO2e/£m(vi) (vii) 4,419,549tCO2e 3,045,458tCO2e(vi) Measure and reduce our emissions and those of our customers through our People & Planet Plan, whereby we aim to be a net zero business by 2045 and help our customers be net zero by 2050 Continue to analyse the impact of our strategy on decoupling carbon from value creation Deliver services and solutions that help our customers achieve net zero by 2050 4.9% 8,331,421,261kWh† (viii) 10,095,173,370kWh(ix) Remain focused on energy efficiency as we strive to be a net zero business by 2045 Our outgoing Responsible Business Ambitions were all on track by the end of 2020 – these goals have since been superseded by our People & Planet Plan which amplifies our commitment to help our customers be net zero by 2050 and be a net zero business by 2045 3.9% 2.6GW 2.6GW(ii) 58% reduction 39% reduction (38,368tCO2e) (55,145tCO2e)(iii) 306,361m3 27,299 tonnes 9 516,836m3 36,814 tonnes(vi) 42 Effectively monitor, manage and reduce our water use and waste production, as well as our incidence of environmental non-compliance Included in DNV’s limited assurance scope referenced on page 222. † (i) Comprises Scope 1 and Scope 2 emissions as defined by the Greenhouse Gas Protocol. (ii) Restated due to availability of improved data. Previous figures included in PwC’s limited assurance scope for the 2019 Annual Report were: Total carbon emissions (iii) (iv) 2,283,514tCO2e, Scope 1 emissions 2,246,167tCO2e, Scope 2 emissions 37,347tCO2e and Flexible capacity 2.7GW. See centrica.com/responsibilitydownloads to view PwC’s assurance statement and Centrica’s Basis of Reporting. Included in PwC’s limited assurance scope for the 2019 Annual Report. Includes emissions associated with gas and power sold to customers, purchased goods and services alongside business travel and commuting which was expanded to include emissions from colleagues working from home during COVID-19. All emissions are calculated in line with the methodologies set out by the Greenhouse Gas Protocol’s technical guidance, apart from working from home emissions which are based on methodology set out in EcoAct’s homeworking emissions whitepaper. (v) Comprises UK 85tCO2e/£m and non-UK carbon intensity by revenue 99tCO2e/£m. Total is a weighted average of component parts. (vi) Restated due to availability of improved data. (vii) Comprises UK 116tCO2e/£m and non-UK carbon intensity by revenue 107tCO2e/£m. Total is a weighted average of component parts. (viii) Comprises UK & Offshore 2,678,890,009kWh and non-UK energy use 5,652,531,252kWh. (ix) Comprises UK & Offshore 3,130,631,079kWh and Non-UK energy use 6,964,542,291kWh. (x) Includes breaches of environmental authorisation including permit, licence and consent coupled with wider environmental legislation where we are either required to notify the regulator or where an authority or regulator is involved. The majority of incidents relate to offshore activities. 224 Centrica plc Annual Report and Accounts 2020 Glossary $ Refers to US dollars unless specified otherwise 2P reserves Proven and probable reserves Acas AGM AIP bcf CHP CO2e CPI CSS The Advisory, Conciliation and Arbitration Service is an independent public body that receives funding from the UK Government to provide employees and employers with free impartial advice on workplace rights and to help resolve disputes Annual General Meeting Annual Incentive Plan Billion cubic feet Combined heat and power Universal unit of measurement of the global warming potential (GWP) of greenhouse gases (GHG) expressed in terms of the GWP of one unit of CO2e (carbon dioxide equivalent) Consumer Price Index LTIFR mmboe MThms MSA Net zero NGO NPS Ofgem Lost time injury frequency rate Million barrels of oil equivalent Million therms Modern Slavery Act 2015 The point at which there is either no carbon dioxide (CO2) being emitted or where any CO2 emitted is removed from the atmosphere Non-governmental organisation Net promoter score The government regulator for gas and electricity markets in Great Britain Paris Accord A global agreement to keep temperature rise well below 2°C above pre-industrial levels, and pursue efforts to limit the increase to 1.5°C PPE PP&E ppt Personal Protective Equipment Property, Plant and Equipment Percentage point Consolidated Segmental Statement Process safety Process safety is concerned with the prevention of harm to people CUPS DB CUPS DC Centrica Unfunded Pension Scheme defined benefit Centrica Unfunded Pension Scheme defined contribution Data analytics The process of examining data sets to draw conclusions DEEPAC EBITDA EBT EP EPS ESG EU and insights about the information they contain Direct Energy Employee Political Action Committee Earnings before interest, tax, depreciation and amortisation Employee Benefit Trust Economic profit Earnings per share Environmental, Social & Governance European Union EU ETS European Union Emissions Trading Scheme FCA FCF FRS GDPR GMB GPS GW GWh HSES IAS IFRS KPI kWh Financial Conduct Authority Free cash flow Financial Reporting Standards General Data Protection Regulation Trade union Global Positioning System Gigawatt Gigawatt hours Health, Safety, and Environmental Services International Accounting Standards International Financial Reporting Standards Key performance indicators Kilowatt hour LGBTQ+ Lesbian, Gay, Bisexual, and Trans plus. The ‘plus’ is inclusive of other groups such as asexual, intersex and questioning LNG Liquefied natural gas Designed by SALTERBAXTER MSL This report is printed on recycled silk papers made from 100% pre and post-consumer waste. The paper mills are based in the European Union and manufacture papers independently audited and certified by the Forest Stewardship Council® (FSC®) and accredited to the Environmental Management System 14001. Printed by CPI Colour Limited ISO14001, FSC® certified and CarbonNeutral®. PRA PRT PWR RBD ROC RPI SASB SAYE SESC and the environment, or asset damage from major incidents such as fires, explosions and accidental releases of hazardous substances Prudential Regulatory Authority Petroleum Revenue Tax Pressurised water reactor Reconciliation by difference Renewable Obligation Certificate Retail Price Index Sustainability Accounting Standards Board Save As You Earn Safety, Environment and Sustainability Committee (formerly SHESEC) SHESEC Safety, Health, Environment, Security and Ethics Committee SIP tCO2e T&Cs TCFD Share Incentive Plan Tonnes of carbon dioxide equivalent Terms and Conditions Task Force on Climate-related Financial Disclosures The Company Centrica plc The Group Centrica plc and all of its subsidiary entities TRIFR TSR TWh UAOCF VIU Total recordable injury frequency rate Total shareholder return Terawatt hour Underlying adjusted operating cash flow Value in use WBCSD World Business Council for Sustainable Development WRI World Resources Institute Disclaimer This Annual Report and Accounts contains certain forward-looking statements. The forward-looking statements appear in a number of places throughout this Annual Report and Accounts and include statements regarding the current intentions, beliefs or expectations of the Directors, the Company and/or the Group concerning, among other things, the financial condition, prospects, growth, strategies, results, operations and businesses of the Company. By their nature, these forward-looking statements are subject to risk and uncertainties because they relate to, and may be impacted by, events and circumstances that will occur in the future which are beyond the Company’s ability to control or estimate precisely. There are a number of factors that could cause the Company’s actual future results, financial condition, performance, results, operations and businesses to differ materially from those expressed or implied by these forward-looking statements. Such forward-looking statements should be considered in the light of all relevant factors, including those set out in the ‘Our Principal Risks and Uncertainties’ section of the Strategic Report. These forward-looking statements are not guarantees of the Company’s future performance and undue reliance should not be placed on them. Neither the Company nor any other person undertakes any obligation to update or revise any of these forward-looking statements to reflect any changes in events, conditions or circumstances on which any such forward-looking statement is based, save in respect of any requirement under applicable law or regulation. Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser. Centrica plc Registered office: Millstream Maidenhead Road Windsor Berkshire SL4 5GD Company registered in England and Wales No. 3033654 centrica.com A n n u a l R e p o r t a n d A c c o u n t s 2 0 2 0 C e n t r i c a p l c