REG-Centrica PLC Annual Financial Report

Wed Mar 27, 2013 5:17am EDT

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LONDON--(Business Wire)--

27 March 2013

Centrica plc (the Company) 
Annual Report and Accounts 2012

Further to the release of the Company's preliminary results announcement on 27
February 2013, the Company announces that it has today published its Annual
Report and Accounts 2012 (Annual Report 2012). 

The Company also announces that it has today posted to shareholders the Notice
of an Annual General Meeting to be held at 2.00 p.m. on Monday, 13 May 2013 at
the Queen Elizabeth II Conference Centre, London SW1. 

In accordance with Listing Rule 9.6.1, copies of the following documents have
been submitted to the UK Listing Authority and will shortly be available for
inspection from the National Storage Mechanism, which can be accessed at

* Annual Report and Accounts 2012 
* Annual Review and Summary Financial Statements 2012 
* Notice of Annual General Meeting 2013

The above documents may be viewed online at and are
also available to download at 

A condensed set of the Company`s financial statements and information on
important events that have occurred during the financial year and their impact
on the financial statements, were included in the preliminary results
announcement released on 27 February 2013. That information, together with the
information set out below, which is extracted from the Annual Report 2012, 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 2012. Page and note references in
the text below refer to page numbers and note numbers in the Annual Report 2012.

Principle Risks and Uncertainties

Risks and Uncertainties 

Assessing and managing risk is a fundamental part of day to day business
management across Centrica. The risks we face in a rapidly changing energy
landscape continue to evolve over time. A number of measures helped to mitigate
those factors in 2012. 

2012 key risks 

Our principal risks and uncertainties during 2012 are summarised below, together
with a brief summary on how these have moved or been managed throughout the

Health, safety and environment - Safety is one of our core priorities and we
continue to target risk and impact reduction. In 2012 we reduced the lost time
injury frequency rate (LTIFR) and achieved significant safety milestones at a
number of operations. For example, Centrica Storage had no lost time incidents
recorded for more than five million man hours of work. 

Brand and reputation - The Group continued to change and improve the offering to
customers and provide more transparent billing, and continued to roll out an
Energy Regulation Compliance Programme. 

Legislation and regulation - Our contact programme with key stakeholders helps
us respond to new initiatives and external market changes. As part of the Retail
Market Review (RMR), we are engaging with Ofgem over their proposals, and we are
also engaging with the Department of Energy & Climate Change (DECC) with
reference to Electricity Market Reform (EMR). 

Strategic growth - The Group continued to pursue a range of options across the
gas value chain and undertook significant investment through upstream and North
American acquisitions, including assets in the North Sea of £1.2 billion to
secure an affordable energy supply. 

Commodity prices - We continued to seek long-term supply arrangements and
develop our asset portfolio. Increased wholesale and other costs forced us to
raise gas and electricity prices in November; however, we worked to make tariffs
easier to understand. 

Competition - Affordability is a key issue for customers. We invested
significantly in systems to ensure our customer service levels continue to
improve and remain competitive. British Gas extended eligibility under the Warm
Home Discount and developed offers with affinity partners, such as Sainsbury`s

Organisational change - We successfully moved our North American headquarters
from Toronto to Houston. We made plans to recruit 1,000 British Gas energy
apprentices in connection with the significant investment in smart energy. In
respect of the upstream business we will create significant numbers of jobs in
construction and across the supply chain for the Cygnus project, to develop the
largest gas discovery in the southern North Sea for 25 years. 

Supply chain - We reviewed and refined governance processes and many suppliers
signed our responsible procurement clauses. Furthermore, we linked supplier
audit activity to low cost country sourcing. 

Information security, intellectual property and assets - We operate in a complex
computing environment and the threat of cyber attack against our industry
remains high. We invested in the transition of our data centres and improved our
system of internal controls. 

2013 presents our organisation with more challenges. Strong governance and a
clear risk strategy equip us for uncertainties ahead. 

2013 principal risks and uncertainties 

The following risks 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, security and environment (HSSE)

What are the risks? 

We face four principal categories of HSSE risks associated with our operations:

* an incident resulting in one or more fatalities or multiple injuries at an
owned, operated, or other facility where the organisation has an interest; 
* an incident which results in significant environmental damage or compliance
* an incident which results in a fatality or major injury to members of the
public; and 
* a security event, requiring activation of our crisis management plan and/or
business continuity plan.

Such risks may result in widespread distress and harm, significant disruption to
operations, and damage to our reputation. The cost related to the recovery,
clean up and/or resultant litigation could have a material financial impact. 

Actual incidents, precautionary plant closures or suspension of activities on
HSSE grounds could lead to loss of production or service and impact profits. Our
operations have many inherent hazards, particularly related to exploration and
production, power generation and offshore activities. 

We also have non-controlled interests in organisations with inherently high
hazards, relating to the exploration and production of oil and gas and nuclear
power generation. 

How do we manage these risks? 

The Board and Executive Committee oversee HSSE risk and consider it one of our
core priorities. We provide regular training to all our employees and
colleagues, including those in our customer-facing businesses and those working
to ensure the safe operation of our assets. 

We remain committed to understanding, managing and reducing the environmental
and ecological impacts of our activities through innovation, technology and
cultural change. 

In 2012, business unit Health, Safety & Environment (HS&E) plans were put into
place alongside the Group audit programme. These risks are tracked by control
effectiveness assessments and performance metrics. We reviewed our HS&E audit
operating model to ensure the 2013 risk-based audit programme accurately
assesses compliance and provides assurance to the Board and Audit Committee.
Security intelligence and operating procedures, as well as crisis management and
business continuity plans, are regularly reviewed. 

Brand and reputation

What are the risks? 

As highlighted in the Corporate Responsibility Review, our ambition is to be the
most trusted energy company. Failure to follow our global business principles of
operating professionally, fairly and with integrity could harm our reputation,
as could real or perceived customer service failings. Rising prices, increased
political pressures and deep recessionary impacts have all increased the level
of media coverage. 

We need to ensure that we clearly communicate our future strategy to key
stakeholders, in order to avoid an adverse reaction and loss of confidence in
the Group. 

Social media now allows consumers and pressure groups to mount damaging direct
action and other campaigns more readily than before. 

Failure to restore public confidence could impact Group revenues. Public
exposure to criticism could damage our brand, increase governmental or
regulatory intervention and reduce access to financial capital. 

How do we manage these risks? 

The Group supports transparency, fairness and competition, and has taken action
to make bills clearer and to work with our customers to improve awareness about
energy efficiency. We meet regularly with the media, government, NGOs,
investment community, regulators and consumer groups as part of our relationship
management strategy. Although some sections of our key stakeholders hold an
`anti energy` position, our Honest Conversation and Customer Board initiatives
are recognised by industry critics as helping stakeholders understand the energy

The Group, through gas and power assets, offices and call centres and the 10
million visits engineers make to homes in the UK and North America every year,
is very much part of local communities. We act as a responsible company within
these communities and continue to help vulnerable customers. 

In Ontario, Direct Energy launched a new customer promise with a commitment to
see all customers without heat the very same day. This was based on the success
of a similar service developed in the UK. Direct Energy is also a key supporter
of a programme to provide people going through financially difficult times with
assistance in paying their household bills. 

Legislation and regulation

What are the risks? 

Energy markets in the UK, North America and mainland Europe are closely
regulated. Legal or regulatory changes could impact our ability to achieve
financial goals. 

New financial regulation was introduced in the US and Europe as a result of the
global financial crisis. As part of this we are still awaiting finalisation of
the rules and regulations in Europe and in the US, under the Dodd-Frank Act.
These could adversely affect the manner in which we currently deal in the
commodity markets. Governments and regulators, often under public pressure, have
also stepped up levels of enforcement and intervention. 

Retail sector competitiveness continues to face regulatory scrutiny, as the
costs of higher wholesale commodity prices are passed on to customers, just as
disposable incomes are falling and deepening recessionary impacts continue to be
felt. In the UK, Ofgem`s updated RMR proposals could introduce significant risk
to our downstream business, and reduce innovation and affordable choice for

In North America, the legal and regulatory framework is primarily set at a
provincial or state level, making generalisations difficult and our entry into
new markets needs to be assessed on a case by case basis. 

Public statements made by governing political bodies can cause concern. One of
the challenges would be the abolition of existing or future `green` subsidies,
as occurred in the UK solar industry and in other energy sources around the
world, such as the end of free carbon allowances in 2012 which will impact our
upstream business. 

Such developments may have a material adverse effect on our business,
operations, financial condition and ability to meet long-term growth
aspirations, especially if any case of compliance failure receives extensive
media coverage. 

How do we manage these risks? 

We proactively engage stakeholders, including governments and regulators in the
UK and North America to help shape these proposals and manage the risks they
present. The Centrica Policy Group met regularly during 2012, setting Group-wide
positions on each issue. 

In 2012, we formed a Corporate Reputation Group to discuss threats from
legislative and regulatory proposals. We also continued to roll out our Energy
Regulation Compliance Programme. 

Strategic growth

What are the risks? 

Strategic issues, including capital investment in mergers, acquisitions,
disposals, market position, climate change, sustainable development and new
technologies, are affected by the global economy. As we implement our refreshed
strategic priorities to deliver our vision to be the leading integrated energy
company with customers at our core, we face an increasingly uncertain
environment. Challenges include the intensifying uncertainty in the world
economy reflected by concerns over further economic deterioration, pressure from
higher wholesale prices, increased competition, reduced demand and recessionary
impacts, all of which contribute to making market conditions challenging. 

The economic condition of the countries and markets in which the Group operates,
namely the UK and North America, are of concern, with the extent and timing of
recovery uncertain. The UK entered a double-dip recession during 2012, with the
threat of an unprecedented triple-dip in 2013. The US experienced the potential
for a `fiscal cliff` and the proximity of further `fiscal cliffs` in 2013 exists
with the possibility, from the interconnected global financial systems, of this
not only impacting our overseas operations but also the Group as a whole. 

Decisions on the future of energy markets also pose risks to our existing and
future operations. The UK Government`s preference for converting coal power
stations to co-firing biomass rather than building dedicated biomass facilities
led us to end our investment in dedicated biomass power station projects. The US
President`s re-election indicated continued support for all domestic energy
sources; shale, power generation including nuclear, renewable, carbon capture
and storage, although specific details remain uncertain. 

The rise of the digital economy is adding to competitive pressures and with the
internet entering a second phase dominated by mobile devices, the barriers to
market entry are falling and customer loyalties can change swiftly. In the UK
market, a significant number of our customers have changed in line with this, as
they now choose to deal with us through accessing digital channels, such as the
British Gas website and smartphone applications. Smart meters represent one of
the biggest changes in the retail energy market since the 1970s and British Gas
will operate, not only in an energy market but in an energy services and
advisory market open to non-traditional players. 

How do we manage these risks? 

The Group pursues a range of strategic investment options across the gas value
chain and in different geographies, to both deepen our customer relationships
and secure the Group`s future energy requirements. 

In 2012, we invested £2.7 billion to secure energy supplies and increase energy
reserves. In addition, our investment in the Cygnus project, when complete and
at peak production, will meet the energy needs of nearly 1.5 million UK homes.
We continue to seek industry partnerships to supply the UK with gas, and three
such supply deals have been signed since 2011. 

In North America, the Group continues to deliver on its priorities. The
residential, business and services footprint has grown, helping the upstream
business perform well despite low gas and power prices. 

We aspire to lead in the roll-out of smart meters to give consumers insight into
how smart products will transform the way they understand their energy use. We
are market leader in the supply for electric vehicle charge points and the Group
continues to offer expertise in energy efficiency through domestic energy
efficiency surveys and home insulation. Furthermore, the Group is mindful of the
need to keep abreast of emerging technologies and the potential impact on the
smart connected home of the future and as such we maintain links with technology
experts to give us further advantage. 

Commodity costs

What are the risks? 

Volatile commodity costs affect our ability to price competitively and meet
profit targets. The Group buys a significant proportion of the gas to supply
Britain`s needs. This position sets the Group apart from the other counterparts
in the UK market. To maintain supply and protect against possible price
increases much of this is procured in advance in order to ensure a balanced
supply and demand portfolio. Mild weather could reduce demand, leaving the Group
with a surplus of gas which would have to be sold back to the wholesale market
at a loss. This could contribute to customer bills not dropping when wholesale
prices later fall. 

There has been a significant impact from shale gas in North America where an
immediate effect has been to lower wholesale gas prices in the US and weaken the
traditional links between gas and oil prices. Such an emerging energy source
could influence global energy markets over time, with the surplus of gas
affecting the current liquefied natural gas (LNG) sector in particular. 

Investment decisions key to Group strategic growth plans, particularly in
respect of upstream assets such as gas fields or power stations, are based on
evaluations underpinned by forecasts of longer-term commodity price development.
These reflect prevailing market prices and are supplemented by assessments of
underlying industry fundamentals. 

Assets, including goodwill, may be impaired if discounted future cash flows from
an asset are insufficient to cover its cost on the balance sheet. The excess
asset cost on the Group balance sheet will be provided against and charged to
the Group income statement. The cash flows of assets are sensitive to changes

* commodity prices; 
* discount rates; 
* reserve estimates/useful economic life; 
* capital expenditure/operating expenditure assumptions (including changes in
decommissioning estimates); and 
* operational performance.

There are also a number of contractual capacity contracts, the economic value of
which depends on volatile spread relationships. 

How do we manage these risks? 

The Group has an active hedging programme and tracks supplier risks through
robust governance frameworks. Strategic investment decisions are made within a
capital allocation framework designed to ensure that proposals are rigorously
evaluated prior to acquisition and that they meet Board-approved financial
criteria over the life of the project. The gas supply relationships with
Statoil, Qatargas and Gazprom, the acquisition of additional assets and the
securing of new licences for exploration blocks are examples of how we continue
to develop our portfolio. 

Change management

What are the risks? 

The level of change experienced by our business is significant, deriving from:

* capital projects; 
* IT change programmes; and 
* organisational change.

We assess large capital projects as a means of growth. Such large-scale
initiatives carry complexity and could result in the Group entering new markets,
whilst exposing us to the risk of build quality issues, cost and timetable
overruns, unsuccessful development of partnership opportunities and health,
safety, security and environmental failures. 

Internal IT change programmes are equally large and complex. Work on existing
systems carries the risks of:

* trying to deliver too much change and over-stretching resources; 
* change being completed but systems integrity being undermined and threatening
business continuity; and 
* cost overruns and/or expected benefits not being realised.

Organisational change stems from internal restructuring as we drive to make our
business as efficient and effective as possible, without detriment to our levels
of customer service. Our recent announcements mean that the Group will face a
period of increased change activity in 2013. 

How do we manage these risks? 

Change is a constant in any successful organisation. The Group continues to
change and adapt to remain competitive and provide the best service at the
lowest cost. We address difficult decisions and challenging situations head on
in order to provide energy to Britain`s homes and businesses. 

Change activity is managed through a combination of project/programme boards and
regular review at both a business unit and executive level. In 2012, we created
a project management directorate to improve governance of large capital projects
in our upstream business. 

We also assess carefully the overall cumulative impact of the level of change
across the organisation at any one time. 

Information security

What are the risks? 

Effective and secure information systems are essential for efficient management
and accurate billing of customers, upstream operations and energy trading and
hedging activities. The confidentiality, integrity and availability of our
information systems could be affected by:

* accidental or deliberate exposure of share-price sensitive information,
customer or employee and contractor personal data; 
* viral effect of employees, crusader consumers or `hacktivist` groups using
social media channels that expose the Group to legal liabilities, damage our
reputation or disclose confidential information; 
* accidental or deliberate changes to financial and other data the Group relies
* lack of availability of systems due to inadequate infrastructure and
data-recovery processes; and 
* an external online attack that renders the Group unable to conduct normal
business activities and/or results in the loss or exposure of personal data,
intellectual property or other confidential information or the disruption of
control systems.

The threat of cyber attacks against our industry continues to escalate to
similar levels experienced by government agencies and financial institutions.
There could be multiple sources of motivation for these attacks. These risks,
however, which could arise from inadequate or inconsistent implementation of IT
security controls, could seriously affect the Group`s reputation, lead to legal
action and/or outages that could cause financial and operational loss. The US
and EU data privacy proposals increase the implications of such risks
materialising, due to proposals around public notification of any data breach
and the scale of associated fines for non-compliance. 

How do we manage these risks? 

Controls include network segregation, monitoring, storage system access
restrictions, regular third party security reviews and vulnerability assessments
of infrastructure and applications. Our Group Information Systems (IS) risk team
monitors and reviews adherence to the IS risk policy and works with the UK
Government to exchange information and threat intelligence between government
agencies and the energy sector. 

Business continuity plans are in place to manage significant outages or
interruptions. To improve efficiency, the Group continues to invest in systems,
supported by strong project management, to minimise the associated
implementation risk. In 2012, the Group continued to implement IS programmes,
with specific efforts in North America to consolidate the systems of new


What are the risks? 

Key to our ability to successfully deliver business plans and strategic growth
is the attraction, retention and succession planning of senior management and
individuals with key skills. This applies to customer service, the delivery of
new systems, and in particular to areas where there is strong competition for
technical and project management capability, such as our upstream business. 

As we continue to change, the business must be organised in the most effective
and efficient way possible to ensure its cost base is as low as possible, so
that we can offer customers competitive prices and products. This includes both
cultural and behavioural change as well as ambitious technical-change

As part of this, the Group also needs to maintain good relations with trade
unions, primarily the Centrica Energy upstream business operational workforce
and British Gas engineers. There is a risk that industrial relations with the
GMB and/or UNISON fail or become ineffective as a result of a breakdown in
negotiations over employment terms or as a response to widespread union unrest
in the UK. 

Failure to maintain a high calibre, engaged and stable workforce could
compromise achievement of the Group`s strategy and could have a material adverse
effect on its business, results of operations and overall financial condition. 

How do we manage these risks? 

We regularly review our organisation to make sure that people are empowered to
make the right decisions at the right time, and to look for ways to work better,
smarter and safer. 

We regularly review the capability of the organisation to deliver our strategic
objectives. An extensive exercise has been undertaken in critical areas to
ensure we have the right capabilities to deliver our plans for growth and

In 2012, reward reviews were carried out in specific areas to retain key skills
and prevent the possibility of an escalation in attrition. 

The Group invests in developing all employees, including technical, behavioural
and leadership skills. The Group engages with unions on restructuring and issues
that could impact terms and conditions and provides channels for employees to
discuss concerns. HR is involved in merger and acquisition activity to ensure
that, following integrations, we retain key attributes and recruit the right
talent, especially in an emerging market. 

Related Party Transactions

During the year, the Group entered into the following arms length transactions
with related parties who are not members of the Group and had the following
associated balances:

                                                                                       2012                                                           2011         
                                       Sale             Purchase         Amounts       Amounts     Sale              Purchase          Amounts        Amounts      
                                       of goods         of goods         owed from     owed to     of goods          of goods          owed from      owed to      
and services    
and services    
and services     
and services     
 Joint ventures:                                                                                                                                                   
 Wind farms (as defined in note 16)    27               78               459           47          25                92                312            46           
 Nuclear (as defined in note 16)       157              598              8             73          278               516               19             65           
 Other                                 4                -                18            -           -                 8                 17             -            
                                       188              676              485           120         303               616               348            111          

Investment and funding transactions for joint ventures and associates are
disclosed in note 16. 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 for bad or doubtful debts
owed by related parties was required (2011: £nil). 

Key management personnel comprise members of the Board and Executive Committee,
a total of 14 individuals at 31 December 2012 (2011: 15). Key management
personnel and their families purchase gas, electricity and home services
products from the Group for domestic purposes on terms equal to those for other
employees of the Group.

 Remuneration of key management personnel                    
 31 December                                 2012    2011    
                                             £m      £m      
 Short-term benefits                         8       7       
 Post-employment benefits                    2       2       
 Share-based payments                        6       8       
                                             16      17      

Directors Responsibility Statement

This statement is repeated here solely for the purposes of complying with
Disclosure and Transparency Rule 6.3.5. This statement relates to and is
extracted from the Annual Report 2012. It is not connected to the extracted
information presented in this announcement or the preliminary results
announcement released on 27 February 2013. 

The Directors, who are named on pages 152 and 153, are responsible for preparing
the Annual Report, the Directors' Remuneration 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 Companies Act 2006 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

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

Each of the Directors, whose names and functions are listed in pages 152 and 153
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 profit of
the Group. In addition, they confirm that the Directors' Report contained in
pages 5 to 75, together with other disclosures given on pages 152 to 154,
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. 


Centrica Investor Relations: +44 (0)1753 494900 

Centrica Media Relations: +44 (0)800 107 7014

Centrica PLC 

Copyright Business Wire 2013

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