TIDMCNA
26 March 2015
Centrica plc (the Company)
Annual Report and Accounts 2014 Annual Review 2014 Notice of
Annual General Meeting 2015
In accordance with Listing Rule 9.6.1, Centrica has uploaded a
copy of each of the above documents to the National Storage
Mechanism. These documents are also available at
centrica.com/ar14.
A condensed set of the Company's financial statements and
information on important events that have occurred during the
financial year ended 31 December 2014 and their impact on the
financial statements, were included in the preliminary results
announcement released on 19 February 2015. That information,
together with the information set out below, which is extracted
from the Annual Report and Accounts 2014, is provided in accordance
with the Disclosure and Transparency Rule 6.3.5 which is required
to be communicated to the media in full unedited text through a
Regulatory Information Service. This information should be read in
conjunction with the Company's preliminary results announcement.
This announcement is not a substitute for reading the full Annual
Report and Accounts 2014. Page and note references in the text
below refer to page numbers and note numbers in the Annual Report
2014.
Principal Risks and Uncertainties
The following risks, both short and long term, could impact our
future performance. The list is not exhaustive and items are not
prioritised. The list, and the nature of the risks, may change
during the year.
Health, safety, environment and security (HSES)
Risk climate: no change
What are the risks?
There are inherent hazards in our operations, in particular
those relating to the integrity of our physical operating assets
and to oil and gas exploration, production, transportation and
storage and power generation. This includes non-controlled
interests in organisations with whom we contract. The management of
these assets is also subject to various laws, regulations and
permits.
In addition, our engineers visit customer premises to undertake
essential repair and maintenance work on gas and electrical
installations, appliances and plumbing and drain services.
Security events such as malicious attacks, criminal or activist
activity can also cause disruption to our operations.
Failure to manage risks arising from these assets and operations
could result in major injuries or loss of life, significant
disruption to production or services, damage to our reputation and
environmental damage. The costs related to the recovery, clean up
or any resultant litigation could have a material financial
impact.
Insurance proceeds may not be adequate to fully cover all
liabilities, lost revenue or increased expenses resulting from a
major incident, particularly involving oil and gas exploration and
production activities or the nuclear fleet.
Compliance with laws, regulations and permits, or changes to
existing commitments, could significantly impact the cost of
operation and make it uneconomic to continue managing certain
assets.
How do we manage these risks?
The management of HSES risk is overseen by the Board and
Executive Committee and remains one of our core priorities with a
continued focus across all our assets and operations.
We undertake regular reviews and independent assessments of the
processes in place to manage these risks to ensure they remain
effective and continue to develop. This includes any third parties
involved in our operations and building strong relationships and
supporting any local communities we work within. We also continue
to invest in training to ensure we maintain safe operating
practices in both our upstream and downstream businesses.
Security intelligence and operating procedures, together with
crisis management and business continuity plans, are regularly
evaluated and tested to provide assurance that we are capable of
responding promptly and adequately to such events.
Further information on our safety activities and performance can
be found in 'How We Do Business' on page 21.
Looking forward
-- Delivery of process safety improvement plans in our upstream business.
-- Increased volume of smart meter installations in customer premises.
Political, regulatory and compliance
Risk climate: increased
What are the risks?
The markets in which we operate are subject to detailed
legislation and regulation across different jurisdictions. This
complex structure is continually evolving and any changes or
uncertainty, or ineffective or incomplete implementation of any new
obligations could adversely affect our business.
A worsening of the international political climate increases the
possibility of sanctions or other trade limiting actions that could
impact our ability to source commodities. Political and regulatory
direction will play a major part in our continued progress. Future
LNG exports from our gas facility project in North America could
face US government limitations or refusal.
Following the 2014 Scottish referendum, there is uncertainty
over the new powers including areas such as fuel poverty and energy
efficiency, that will be devolved to Scotland and also any changes
that could be made to the tax system in Scotland compared to the
rest of the UK.
The lead-up to the UK general election has and could continue to
result in consumer group lobbying, political statements and
manifesto pledges that do not translate well into considered
policy. This could increase the pressure on regulators to act,
resulting in sharp fluctuations in investor confidence, an increase
in the cost of capital and a reduction in the credit worthiness of
energy buyers.
The CMA market investigation is due to conclude at the end of
2015 and could result in recommendations that are unfavourable to
our business model. Ofgem is also focused on increasing
transparency over energy company finances, as well as increasing
pressure to lower retail energy bills as wholesale energy prices
have decreased.
How do we manage these risks?
Our Group business principles, policy framework and corporate
responsibility framework govern how we conduct our affairs.
We are committed to an open, transparent and competitive UK
energy market that provides choice for consumers. We lead the
industry in putting our customers in charge of their energy
consumption through innovative products such as our Tariff Checker
and Hive Active HeatingTM.
We proactively engage with our stakeholders, including
government, legislators and regulators in order to shape proposals
and manage risks. We work with regulators to find a better approach
to intervention that agrees clear targets, for example switching
times or complaint handling, against which we could demonstrate
progress. We work with political parties to develop a consensus on
energy policy that supports the transition to a secure, low cost,
low carbon UK.
Looking forward
-- Decision and any resulting remedial actions from the CMA energy market
investigation.
Trust, perception and customer service
Risk climate: no change
What are the risks?
The challenges of day-to-day costs of living, including energy,
have had a very negative impact on the public's perception of
energy suppliers. The fall in wholesale energy prices and the
timing of the reduction in consumers' bills, has further heightened
political and media attention in this area. This is not only a
concern for our customers but also damages investor confidence,
increasing the prospect of potential further government or
regulatory intervention at a time when substantial investment is
required to secure supplies of energy.
Media attention and the position taken by political parties in
the run-up to the UK general election could also lead to further
uncertainty, as the political consensus that existed over key
questions of energy policy has broken down.
Customers may switch supplier if they experience unacceptable
customer service levels or if it is perceived that we are failing
to maintain service quality.
The increased use of social media allows customers and consumer
groups to engage, share views and take part in direct action and
other campaigns more readily than before. Poor perception of the
Centrica brands, our service levels or our level of transparency
could undermine trust in us and lead to campaigns for change, as
well as challenges in attracting and retaining new customers.
Hydraulic fracturing in the UK together with the Group's
exploration licence in Norwegian waters close to the Arctic could
cause adverse publicity and damage to our brands as we explore
opportunities for unconventional energy supply and generation or
related technologies as part of our business strategy.
How do we manage these risks?
We remain focused on providing affordable energy and excellent
service, working to deliver a fair, simplified and transparent
offering to consumers and protecting the most vulnerable, fuel-poor
households through initiatives to improve energy efficiency or with
financial advice and aid. Through improved customer billing and CRM
systems, taking the lead on smart metering and developing new
innovative products, we help put customers in control of their
energy consumption and reduce carbon emissions. In 2014, we led the
industry in deciding to end the auto-rollover of contracts at
renewal for our business customers.
To help people today and secure energy for tomorrow, we engage
with NGOs, consumer and customer groups, political parties,
regulators, charities and other stakeholders to understand their
views and concerns, working together to identify solutions to help
reduce bills and improve transparency to help rebuild trust in the
industry. We have entered into initiatives, including our
partnership with Shelter, and the launch last year of the Centrica
backed pioneering social impact investment fund Ignite.
We actively manage our reputation with a number of different
stakeholders including customers, investors, opinion-formers,
employees, the media, governments and government agencies,
political parties, and regulatory and trade union bodies.
Looking forward
-- Media and political effect of the UK general election.
-- Progressing with development of our UK hydraulic fracturing interest.
Strategic growth
Risk climate: increased
What are the risks?
Despite positive signs of recovery in the UK, uncertainty
remains in the global economy and the economic sentiment could
impact many parts of our business.
The UK market faces potential pressure in both the run-up to the
UK general election and in the policy decisions taken by the next
government.
The UK is also becoming increasingly dependent on gas imports
and, as a result, international energy prices.
Growth in our North American downstream business will also be
dependent in part on the successful integration of a number of
newly acquired businesses.
The current political debate has exacerbated significant
uncertainty in the UK energy landscape. This could impact future
power, storage and upstream investment and the attractiveness of
the UK energy supply business.
A number of emerging technologies and innovations have the
potential to be disruptive to our business. In our upstream
business, we face competition in developing and applying new
technology to maximise recovery, in making unconventional sources
of oil and gas economic and in generating power through low carbon
solutions.
Improved energy efficiency and changing customer behaviour as a
result of greater environmental awareness, reaction to past price
increases and long-term weather patterns have led to a reduction in
energy demand in our downstream business.
In the UK, gas demand is forecast to continue to decline over
the next decade with the emergence of smart connected home
solutions and electricity demand is forecast to decline by a
smaller amount or remain flat. The retail energy environment is
highly competitive across residential and business segments as well
as energy services, including new business areas, such as smart
enabled applications.
In the UK, the number of small suppliers has grown significantly
and we have seen increasing levels of switching for the supply of
energy and services. We could see heightened competitive pressures
as new players, such as insurance companies, telecom companies,
supermarkets and other large retail companies enter the services
market and seek to strengthen their positions. The value of
customer data has increased and the widening range of virtual
interaction with customers through digital media, smart technology,
the internet and mobile devices plays a greater role in the retail
energy sector.
Climate change, new technologies and global economic conditions
may be subject to circumstances beyond our control resulting in an
adverse impact on our strategic growth.
How do we manage these risks?
We continue to pursue a range of options across the energy chain
and in different geographies to both deepen our customer
relationships and secure our future energy requirements. We remain
committed to developing diverse alternative sources of supply and
continue to explore for shale gas in the UK.
We continue to seek cost efficiency through innovation and
investment in systems, positioning ourselves to deliver targets
whilst maintaining a stable platform for investment.
The way we heat, power and light our homes is changing through a
combination of environmental and financial concerns and the ease of
use and prevalence of mobile and connected devices. The investment
we are making in smart connected homes through smart meters,
personalised customer energy usage reports, smart and time of use
tariffs, applications for remote heating control and US appliance
rental programmes has allowed us to create greater consumer
visibility and control over energy consumption. Our innovative
products will radically alter the way we operate and we continue to
lead the industry as we look to develop connected boiler
technology.
In 2014 we bought the former state-owned Irish energy company
Bord Gáis Energy as we continue our focus on entering new
deregulated markets. We will look to expand a services capability
in this new market and introduce some of our established smart
technology and products for the benefit of our new customer
base.
Looking forward
-- Impact of new market entrants (community, small, unconventional and
existing).
-- Impact of technology and innovation.
Commodity costs
Risk climate: increased
What are the risks?
A significant proportion of our profitability and price
competitiveness is dependent upon our ability to manage exposure to
increasingly volatile world energy markets. Commodity prices can
fluctuate based on a large number of factors including supply and
demand, as well as political and economic factors. Current
international political factors may trigger an expectation of or
actual disruption in supplies.
The price of gas in the UK market is particularly important for
us given we supply a significant proportion of Britain's gas needs.
As the country secures an increasing proportion of gas from abroad,
its price and availability will be increasingly shaped by
international forces, combined with the additional challenge of
transitioning to lower carbon generation.
Shale gas has already transformed the US energy market where gas
prices have fallen to historic lows. The low cost of natural gas
may result in new market entrants and cause margins to tighten.
Shale gas could further influence global energy markets over time,
in particular liquefied natural gas (LNG), which is becoming an
increasingly important source of natural gas in the UK.
Seasonal variations and economic conditions make it difficult to
forecast future energy demand, leading to significant uncertainties
around commodity prices and the potential to result in a surplus of
gas which cannot be sold profitably in the wholesale market or with
short commodity positions that cannot be covered at a cost that can
be passed on to customers. The Group also has a number of
contractual capacity contracts, the economic value of which depends
on market prices.
In 2014, we saw a significant fall in commodity prices,
particularly in the second half of the year, impacting the
profitability of our UK businesses. In the US, the extreme weather
of the polar vortex caused significant market volatility in
electricity and natural gas prices. Commodity price increases or
decreases may require us to change the price at which we sell
energy to our customers on variable tariffs. We may not be able to
pass through all increases in commodity prices to customers in a
given year. Where we do pass increased commodity prices on, or if
we fail to pass on decreased commodity prices, customers may seek
to switch to competitors.
Commodity price decreases may reduce profits and over the longer
term may make certain exploration and development projects and
existing operating assets uneconomic. Assets, including goodwill,
may be impaired if future cash flows from such assets are
insufficient to cover their cost on the balance sheet.
How do we manage these risks?
We have an active forward buying and selling programme to
mitigate the risks of sudden commodity price movements and track
supply chain risks to ensure security of supply.
Strategic investment decisions are made within a capital
allocation framework that tests projected returns against various
commodity price scenarios and are rigorously evaluated against
Board-approved criteria prior to commitment.
We continue to selectively invest in assets around our existing
hubs, while managing costs, looking to divest non-core and
uneconomic assets, delivering new projects and purchasing stakes in
other assets.
We continue to secure energy contracts, invest in low carbon and
gas-fired power generation and purchase gas and oil producing
assets to develop our portfolio, support downstream operations
through contractual arrangements, asset ownership and make progress
accessing new markets and securing new sources of gas. This enables
us to secure energy supplies for the future whilst sheltering
customers from volatility in the wholesale gas market.
Looking forward
-- Impact of sustained downward pressure on oil and gas prices.
Change management
Risk climate: no change
What are the risks?
The successful delivery of business change is fundamental to our
future success and includes organisational, cultural and technical
transformation.
The delivery of certain large change programmes is technically
complex. Planning to deliver too much change could result in a
stretch on resources, undermine system integrity, cost more than
originally planned or take longer than estimated to implement.
Change programmes could also suffer from quality issues and planned
benefits may not be realised or individual products as widely
accepted as anticipated.
The scale of change in our downstream business is significant.
Delays or challenges with changes to billing and other systems, the
implementation of smart connected home products in the UK and US
and integration of a number of acquisitions could adversely affect
our operations, reputation and financial position if not
successfully delivered.
We regularly review our assets, investments and organisational
structures, seeking to divest or change those that no longer meet
expected returns, to keep our cost base as low as possible. These
changes can involve difficult decisions for our people and there is
a risk that industrial relations could deteriorate.
How do we manage these risks?
Change activity is managed through a combination of programme
and project boards and is regularly reviewed at both the business
unit and executive level.
We have a defined capital allocation framework against which to
review business asset and investment performance and will be
increasingly selective in our investments, directing capital
towards projects based on their ability to deliver business
benefits against the framework.
We have a dedicated project management directorate to improve
governance of large capital change programmes undertaken in our
upstream business. Dedicated programme and project managers are
assigned to all major change initiatives and apply defined
methodologies and tools, together with defined governance
processes, supported by both functional and business unit
teams.
As part of our ambition to lead the energy industry and have the
strong future we are capable of, we embrace innovative technology
in our product offerings to customers, our IT systems and the way
in which we operate our business. We have implemented new billing
and CRM systems in our energy and services businesses in the UK and
North America. We have developed new products that put UK and US
customers in greater control of their energy consumption and we
have led the smart meter roll-out in the UK.
Looking forward
-- The delivery of a number of UK and Norwegian upstream projects.
-- Embedding new billing and customer relationship management systems.
Information systems and security
Risk climate: increased
What are the risks?
Our business operations rely on information systems maintaining
a high degree of availability, integrity and security, including
those from third-party providers.
With the increasing digitisation of information, the use of
social media and the continually evolving external cyberthreat
landscape, corporate organisations are targets for malicious and
unauthorised attempts to access information. Our businesses could
be compromised by an incident arising from the accidental or
deliberate exposure of sensitive data or intellectual property,
inadvertent or deliberate changes to data or changes in asset
control systems.
Attempts to appropriately collect, secure and dispose of
information now face far greater scrutiny from regulators,
customers and employees. Information security breaches could
seriously affect our reputation, lead to legal action and
regulatory sanctions and system outages that could cause financial
and operational loss.
EU, US and Canadian data privacy requirements and proposed
amendments, as well as regulatory changes, increase the
requirements around public notification of any data breach and also
the ability of the regulator to impose associated fines or
penalties for non-compliance.
How do we manage these risks?
Our information security strategy seeks to integrate information
system, personnel and physical aspects, overseen by the Information
Risk Steering Group, which reports to the Group Risk Management
Committee.
We seek to detect and investigate threats and incidents,
including engaging with key technology partners and suppliers, to
ensure potentially vulnerable systems are identified.
We regularly evaluate the adequacy of our infrastructure and IT
security controls, undertake employee awareness and training and
test our contingency and recovery processes.
We work collaboratively with working groups across the energy
industry and public and private sectors.
These measures allow for controls and responses to be put in
place that are both effective and proportionate, including
cybersecurity crisis management and business continuity plans that
have been evaluated and tested to provide assurance that they are
capable of responding promptly and adequately to any such events,
whilst recognising the evolving nature of the threat landscape.
Looking forward
-- Compliance with the 2014 EU Data Protection Regulation and
introduction of the 2014 EU Cyber Mandate.
-- Increase in the Smart Metering and Connected Homes programme with the
inherent risks associated with sensitive data.
People
Risk climate: increased
What are the risks?
The attraction, retention, development and succession of senior
management and individuals with key skills are critical factors in
the successful execution of strategy.
Cultural transformation, ambitious technical-change programmes,
changes to our current structure and business operations could all
result in challenges with attraction and retention for key roles
across the business and have an adverse impact on the engagement of
our people.
Ineffective trade union relationships could result in the threat
of industrial action in our upstream business operations and
engineering workforce.
Insufficient capability and capacity, at a time when we are
subject to high levels of public scrutiny, could limit our ability
to exploit opportunities and/or realise the full value of
investments.
How do we manage these risks?
We have a clearly defined people strategy based on developing
the right culture and engagement, talent development, training and
reward and recognition.
We regularly review our organisational capability, critical
business areas, reward strategies for key skills, talent management
and learning and development programmes. We also perform external
benchmarking to ensure we are attracting and retaining the talent
we need to be competitive.
We engage with trade unions on restructuring and issues that
could impact terms and conditions with clear and open processes to
promote an environment of trust and honesty.
We provide channels for employees to discuss concerns, including
whistleblowing, and regularly review the procedures in place to
support them in the delivery and development of their role.
We continually promote wellbeing and equality through processes
and campaigns to improve the vitality and fair treatment of all our
people.
Looking forward
-- Engagement and development of senior management team.
-- Identification and succession of British Gas Managing Director and
Chief Financial Officer positions.
Related Party Transactions
The Group's principal related parties include its investments in
wind farms and the existing EDF UK nuclear fleet.
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:
2014 2013
Sale Purchase Amounts Amounts Sale Purchase Amounts Amounts
of of owed from owed to of of owed from owed to
goods goods GBPm GBPm goods goods GBPm GBPm
and and and and
services services services services
GBPm GBPm GBPm GBPm
Joint
ventures:
Wind 16 (126) 414 (104) 23 (110) 475 (69)
farms
(as
defined
in note
6)
Associates:
Nuclear - (616) - (58) 27 (639) - (62)
(as
defined
in note
6)
Other 5 (42) 24 (2) 2 (7) 21 --
21 (784) 438 (164) 52 (756) 496 (131)
Investment and funding transactions for joint ventures and
associates are disclosed in note 14. Shareholder loan interest
income for wind farm joint ventures in the period was GBP34 million
(2013: GBP32 million). The terms of the outstanding balances
related to trade receivables from related parties are typically 30
to 120 days. The balances are unsecured and will be settled in
cash. No provision against amounts receivable from related parties
was recognised during the year through the Group Income Statement
(2013: GBP21 million). The balance of the provision at 31 December
2014 was GBP21 million (2013: GBP21 million).
Key management personnel comprise members of the Board and
Executive Committee, a total of 15 individuals at 31 December 2014
(2013: 16).
Remuneration of key management personnel
2014 2013
Year ended 31 December GBPm GBPm
Short-term benefits 7.9 8
Post-employment benefits 2.0 2
Share-based payments 0.4 6
10.3 16
Remuneration of the Directors of Centrica plc
2014 2013
Year ended 31 December GBPm GBPm
Total emoluments (i) 4.7 7
Gains made by Directors on the exercise of share options 3.6 0.3
Amounts receivable under long-term incentive schemes 2.6 -
Contributions into money purchase pension schemes 1.0 1
(i) These emoluments were paid for services performed on behalf
of the Group. No emoluments related specifically to services
performed for the Company.
Directors' responsibilities statement
The Directors, who are named on pages 46 and 47, are responsible
for preparing the Annual Report, the Directors' Remuneration
Report, the Strategic 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. Accordingly, the Directors have
prepared the Group Financial Statements in accordance with
International Financial Reporting Standards (IFRS) as adopted by
the European Union (EU) and the parent company Financial Statements
in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards and applicable law).
Under company law the Directors must not approve the Financial
Statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and the Company and of
the profit or loss of the Group for that period. In preparing these
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 IFRS as adopted by the EU and applicable UK
Accounting Standards have been followed, subject to any material
departures disclosed and explained in the Group and parent company
Financial Statements respectively; and
* prepare the Financial Statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
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 the Group and enable them to
ensure that the Financial Statements and the Directors'
Remuneration Report comply with the Act and, as regards the Group
Financial Statements, Article 4 of the IAS Regulation. They are
also responsible for safeguarding the assets of the Company and the
Group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Furthermore, the Directors are responsible for the maintenance
and integrity of the Company's website. Legislation in the UK
governing the preparation and dissemination of Financial Statements
may differ from legislation in other jurisdictions.
The Directors consider that the Annual Report and Accounts 2014,
when taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess the
Group's performance, business model and strategy.
Each of the Directors, whose names and functions are listed on
pages 46 to 47 confirm that to the best of their knowledge:
* the Group Financial Statements, which have been prepared in
accordance with IFRS as adopted by the EU, give a true and fair
view of the assets, liabilities, financial position and loss of the
Group;
* the Strategic Report contained on pages 2 to 45 together with
the Directors' Report on pages 82 to 84, includes a fair review of
the development and performance of the business and the position of
the Group, together with a description of the principal risks and
uncertainties that it faces;
* as outlined on page 54, there is no relevant audit information
of which PwC are unaware; and
* 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.
Enquiries:
Centrica Investor Relations: +44 (0)1753 494900
Centrica Media Relations: 0800 107 7014
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