Centrica Regulatory News (CNA)

Preliminary results for the year ended31 December 2019

IAIN CONN, GROUP CHIEF EXECUTIVE

"2019 operating profit and earnings were materially impacted by a challenging environment, most significantly the implementation of the UK default tariff cap and falling natural gas prices. Against this backdrop Centrica delivered growth in customer accounts, higher net promoter scores, significant cost efficiencies in excess of our target, and full year adjusted operating cash flow and net debt within its target ranges. As expected, performance during the second half was much improved compared to the first half, demonstrating momentum as we enter 2020.

Looking to 2020, we expect to deliver earnings momentum relative to 2019 from our core customer divisions, but Upstream earnings are likely to be impacted by the lower commodity price environment. However, with our continued focus on financial discipline we expect 2020 sources and uses of cash flow to remain broadly balanced.

2020 will be another busy year as we complete the re-positioning of the company towards the customer, focused on our strengths of energy supply and its optimisation, and on services and solutions centred around energy, with an emphasis on helping our customers transition to a lower carbon future."

GROUP FINANCIAL SUMMARY

See notes 2, 5 and 10 to the Financial Statements and pages 64 to 66 for an explanation of the use of adjusted performance measures.

1. The Group has amended the presentation of certain energy derivative contracts and re-presented prior period accordingly. See note 1 to the Financial Statements for further details.

2. Includes an impact of Centrica adopting IFRS 16 from 1 January 2019 of £394m. See notes 1(c) and 11(b) for further details.

HEADLINES

·; Full year adjusted earnings and adjusted operating cash flow down vs 2018 reflecting impacts of UK default tariff cap, low wholesale gas prices and nuclear outages. Significantly improved in H2 2019 vs H1 2019.

·; Adjusted operating cash flow (AOCF) and net debt both within 2019 target ranges.

·; Full year dividend per share of 5.0p, in line with the rebasing announced in July at the Interim Results.

·; Net exceptional charge before tax of £1,103m, including impairments of E&P and Nuclear assets predominantly due to a reduction in commodity price forecasts, and restructuring costs of £356m.

·; Consumer customer account holdings up 722,000 or 3%. UK Home accounts up 78,000 with growth in services more than offsetting a reduction in energy supply. UK energy supply net losses of 286,000 significantly lower than in 2018, with H2 2019 account losses lower than H1 2019.

·; £315m of cost efficiencies delivered in 2019, taking cumulative annual savings to £1.26bn compared to a 2015 baseline with 2020 nominal like-for-like costs expected to be well below 2015 levels per our five year target.

·; Consumer and Business expected to benefit from adjusted earnings and AOCF momentum in 2020, but Upstream expected to be impacted by very low current wholesale commodity prices. 2020 AOCF expected to be in the range £1.6-£1.8bn based on 31 December 2019 commodity prices, assuming the existing portfolio.

·; Cost efficiencies of £350m expected in 2020, with associated cash restructuring costs expected to be £300m.

·; Continued focus on financial discipline. 2020 cash capital expenditure expected to be around £800m.

·; Targeting broadly balanced sources and uses of cash flow in 2020 with closing net debt expected to be in the range £3.2-£3.6bn, including an expected additional £0.2bn of non-cash lease commitments and before the impact of planned divestments.

ENQUIRIES

Investors and Analysts: tel: +44 (0)1753 494900 email: ir@centrica.com

Media: tel: +44 (0)1784 843000 email: media@centrica.com

Performance metrics

Centrica Group

1. Group, Divisional and Business Unit total recordable injury frequency rate (per 200,000 hours worked) is on a 12 month rolling basis.

2. Direct Group headcount excludes contractors, agency and outsourced staff.

Centrica Consumer

3. Active Home Solutions customers only. The equivalent figure for cumulative customers can be found in the Business Unit KPIs appendix on pg16.

4. Includes services account holdings. 2018 has been restated accordingly.

5. Redefined to exclude minor contract add-ons on home warranty contracts. 2018 has been restated accordingly and includes 182,000 accounts associated with the Clockwork divestment.

6. Excludes Clockwork customers and accounts in 2018.

7. 2018 includes a one-off bad debt credit of £8 per customer.

Centrica Business

8. Includes services account holdings. 2018 has been restated accordingly.

Upstream

9. Centrica share of generation and achieved sales price.

10. See pages 64 to 66 for an explanation of the use of adjusted performance measures.

Group Overview

OVERVIEW

2019 performance

Centrica delivered customer account growth, higher net promoter scores in most businesses and significant cost efficiencies in excess of its target in 2019. However, the Company's portfolio was impacted by a challenging environment, with the implementation of the UK default tariff cap, low UK natural gas prices and extensions to outages at the non-operated Hunterston B and Dungeness B nuclear power stations.

Reflecting these factors, adjusted operating profit and adjusted earnings per share were both down 35% and adjusted operating cash flow was down 18% compared to 2018. We also recognised £1,103m of net pre-tax exceptional charges, largely relating to impairments of E&P and Nuclear assets due to the reduction in commodity price forecasts and restructuring costs associated with the Group's cost efficiency programme. Reflecting these exceptional charges and including the impact of a loss from certain re-measurements, the statutory loss attributable to shareholders for the period was £1,023m in 2019 compared to a profit of £183m in 2018.

Adjusted operating cash flow of £1,830m was within the Group's 2019 targeted range of £1.8-£2.0bn and closing net debt of £3,181m was within the Group's 2019 targeted range of £3.0-£3.5bn. We also delivered significantly higher adjusted earnings and adjusted operating cash flow in the second half of the year compared to the first half, as we indicated was expected in the Interim Results in July 2019. We delivered £315m of efficiency savings during the year, in excess of original £250m target. The proposed 2019 full year dividend per share is 5.0p, in line with the rebasing announced in July 2019.

Overall Consumer customer account holdings were up 722,000 in 2019. Importantly, UK Home accounts were up 78,000, with growth in services offsetting a 286,000 decline in energy supply. This decline was significantly reduced compared to a 742,000 decline in 2018 and was lower in the second half of 2019 than in the first half.

Strategic progress

We provided a strategic update alongside our Interim Results in July 2019. Since 2015 we have been repositioning Centrica towards the customer and we announced in July that we would be completing this shift by exiting oil and gas production, in addition to our previously announced intention to exit from Nuclear power generation. Centrica will become an international Energy Services and Solutions provider which will focus on its distinctive strengths of energy supply and its optimisation, and services and solutions centred around energy, with a major emphasis on helping our customers transition to a lower carbon future.

We are making progress towards delivering the business unit objectives we laid out in July, specifically the fundamental rebasing of UK Home, the refocusing of our Home Solutions activity towards the UK and Ireland, improving returns in North America Business and growing Centrica Business Solutions.

In addition, the simplified portfolio will enable further rebasing and focusing of Centrica, unlocking material additional efficiencies as be target becoming the lowest cost provider in all our markets by 2022, consistent with our chosen brand positioning and propositions. This will enable us to stabilise and grow customer numbers and gross margin. Including the £315m savings achieved in 2019, we have now delivered over £1.25bn of annualised cost efficiencies since 2016 and we are targeting to have delivered £2bn by 2022, including around £350m in 2020.

Outlook

In addition to pursuing the planned divestments of Spirit Energy and Nuclear, our focus in 2020 is on continuing to grow customer relationships, delivering further efficiencies, continuing to build on our customer-facing capabilities and maintaining financial discipline.

Our customer facing activities in Centrica Consumer and Centrica Business are expected to benefit from adjusted earnings and cash flow momentum in 2020, reflecting the improved performance in the second half of 2019. However, we expect the remaining legacy gas contract in Centrica Business to be loss-making in 2020. In addition, recent significant commodity price falls are expected to negatively impact achieved prices in both E&P and Nuclear in 2020, despite some benefit from forward hedging.

Taking these factors into account, at 31 December 2019 commodity prices and assuming the current portfolio, we expect 2020 adjusted operating cash flow to be in the range £1.6bn-£1.8bn. This is lower than adjusted operating cash flow in 2019. However, the adjusted earnings impact from the lower commodity price environment is likely to be much less material, which includes the impact of lower depreciation resulting from the year-end impairments. As a result, we would expect the positive earnings momentum from our core customer-facing businesses to be broadly offset by the negative earnings impact from the legacy gas contract and the Upstream portfolio.

With 2020 capital expenditure expected to be around £800m in 2020, in line with 2019 and reflecting our continued focus on capital discipline, we expect Group sources and uses of cash flow to be broadly balanced in 2020. Reflecting this, we are expecting 2020 Group net debt to be in the range £3.2bn-£3.6bn, including an additional £0.2bn of lease commitments, before any impact from the planned disposals of Spirit Energy and Nuclear.

2019 FINANCIAL PERFORMANCE

Adjusted operating profit and earnings

·; Group adjusted gross margin fell by £401m or 9% to £3,852m and adjusted operating profit fell by £491m or 35% to £901m compared to 2018.

·; Centrica Consumer adjusted gross margin was down £291m or 11% to £2,315m and adjusted operating profit was down £245m or 33% to £505m.

- This includes a £300m negative revenue impact resulting from the implementation of the UK residential energy supply default tariff cap.

- We delivered cost efficiencies of £229m in Consumer in 2019 and we also recognised a £34m credit relating to the renegotiation of one of our smart metering contracts. These positive impacts more than offset a negative effect from competitive pressures on underlying margins in energy supply and the non-recurrence of a bad debt provision release of £59m in UK Home in 2018.

·; Centrica Business adjusted gross margin was up £148m or 17% to £1,030m and adjusted operating profit was up £142m or 189% to £217m.

- These increases reflect a significant improvement in achieved power retail margins in North America, good European trading and optimisation performance and a benefit from the decision to defer delivery of gas from 2019 into 2020 from the one remaining large legacy gas contract. Centrica Business also delivered £40m of cost efficiencies in 2019.

·; Upstream adjusted operating profit was down £388m or 68% to £179m.

- Nuclear adjusted operating profit was down £27m or 59% to £19m largely reflecting lower output. This predominantly relates to extensions to outages at the Dungeness B and Hunterston B nuclear power stations, the impact of which was not fully offset by a higher achieved power price.

- Exploration & Production adjusted operating profit was down £361m or 69% to £160m, including reduced achieved gas sales prices due to the lower wholesale commodity price environment and lower volumes from the Rough field reflecting the field's natural decline. We also saw higher depreciation and amortisation rates following asset write-backs at the end of 2018 and a production mix shift to higher DDA rate fields, and higher field specific write-offs.

·; The net finance charge decreased by 7% to £255m, reflecting lower gross debt levels resulting from a bond repurchase programme completed in March 2018 and the maturity of a bond in September 2018.

·; The Group adjusted effective tax rate reduced from 41% to 34%, predominantly due to the more highly taxed E&P business contributing a significantly lower proportion of adjusted operating profit.

·; Adjusted earnings attributable to shareholders reduced by 34% to £419m and adjusted EPS fell by 35% to 7.3p.

Exceptional items and statutory profit

·; Total statutory gross profit was down 21% to £3,206m. This includes the impact of an increased reported loss from certain re-measurements, largely reflecting the mark-to-market impact of falling gas prices on energy procured to meet the future needs of our customers.

·; A net pre-tax exceptional charge of £1,103m was recognised in operating costs in 2019, with the largest elements being a £476m impairment of E&P assets and a £372m impairment of our nuclear investment, both predominantly reflecting the reduction in commodity price forecasts. We also recognised £356m of exceptional restructuring costs relating to the Group's cost efficiency programme.

·; Reflecting lower adjusted operating profit, the loss from certain re-measurements and higher exceptional charges, the Group statutory operating loss was £849m in 2019 compared to a statutory profit of £987m in 2018.

·; After net finance costs and tax, the statutory loss attributable to shareholders for the period was £1,023m in 2019 compared to a profit of £183m in 2018.

·; The statutory basic EPS loss was 17.8p compared to statutory earnings per share of 3.3p in 2018.

Cash flow and net debt

·; EBITDA fell by 13% to £2,119m and adjusted operating cash flow reduced by £415m or 18% to £1,830m, broadly in line with the reduction in adjusted operating profit.

·; Group net debt was £3,181m at the end of 2019 compared to £2,656m at the end of 2018. This includes an impact of Centrica adopting IFRS 16 from 1 January 2019, which increased the Group's 2019 opening net debt by £394m.

·; The IAS19 net pension liability increased slightly to £163m over the year. The triennial pensions review has now been finalised, with the company committing to make additional cash contributions. Deficit contributions were £235m in 2019, including £12m of pension strain payments, and we have agreed further deficit payments as part of the triennial review and these now total £175m per annum from 2020-2025 with a balancing payment of £93m in 2026.

GROUP COST EFFICIENCY PROGRESS

·; The Group is targeting £1bn of efficiency savings across all its business units over the period 2019-22, with the total cost of restructuring across the period expected to be around £1.25bn. This will take total efficiency savings across the period 2015-22 to around £2bn.

·; £315m of cost efficiency savings were delivered in 2019.

·; A significant proportion of the 2019 savings came from the transformation of our customer and field operations activities in the UK. We delivered further digitalisation of customer journeys, including focus on self-serve and automation, and simplification of core business processes to allow us to better serve our customers.

·; The Company also agreed pension reforms with its employees which came into effect in June and reduced the amount of regular company contributions from the second half of 2019.

·; We delivered further savings from continued functional activity review and transformation, through further procurement and supply chain efficiencies, from the efficiency of core processes and change programmes, and a focus on overhead cost and management structures in all businesses.

·; We also continue to review our property portfolio. In April, we announced the closure of two UK customer operations sites, while in the second half of the year we announced our intention to close a number of office locations in late-2019 or in 2020.

CENTRICA CONSUMER PERFORMANCE AND PROGRESS

·; Centrica Consumer is focused on three areas, energy supply, in-home servicing and home solutions, with a geographic focus on the UK, Ireland and North America.

Growth in customer accounts

·; Centrica Consumer customer accounts grew by 722,000 in 2019, after adjusting for the impact of the disposal of the Clockwork North America home services business in April which had 182,000 customer accounts at the end of 2018.

·; In the UK, total accounts increased by 451,000 in 2019, with 364,000 growth in services due to higher sales of products bundled with energy and 373,000 growth in cumulative home solutions customers, including growth from our remote boiler diagnostics proposition, BoilerIQ, and Cloud storage offer. This more than offset a reduction in energy supply accounts.

·; UK Home energy supply customer accounts fell by 286,000, although the rate of losses significantly reduced compared to 2018 against a backdrop of continued high levels of price competition and market switching. Net losses were also lower in the second half of the year compared to the first half and accounts remained broadly stable over November, December and January 2020. This reflects the launch of a number of attractive customer offers in the fixed price market, including increased sales of energy and services bundles.

·; Total accounts were broadly stable in Ireland against a backdrop of high levels of competitive intensity. 

·; In North America Home, accounts increased by 206,000 as we won some energy supply aggregation auctions in the US North East. We also delivered an increase in sales to customers on fixed price contracts.

Improved customer experience and enhanced customer offers

·; We continue to focus on improving customer experience and our digital platforms in all markets, leading to a reduction in call volumes in UK Home, North America Home and Ireland.

·; The British Gas Brand Net Promoter score (NPS) improved to +12. NPS for Bord Gáis Energy, Direct Energy and Hive remained at relatively high levels, although Bord Gáis Energy saw a reduction to +23 against a backdrop of new entrants and increasing competition in the Irish market.

·; In UK Home, we saw a 16% increase in digital visits in 2019 compared to 2018, and our new digital app had over 2m downloads in the year. The proportion of transactions completed online had increased to 55% by the end of 2019 compared to 50% at the end of 2018 and call volumes dropped by 4.3m, or 15%.

·; We now have more 'online only' than 'offline only' UK energy supply customers.

·; We fulfilled 98.2% of UK services appointments on the scheduled day compared to 97.6% in 2018.

·; In North America Home, energy digital marketing and web sales were up 30% compared to 2018 and made up 21% of total energy sales. The proportion of transactions completed online increased to 49% in 2019 compared to 45% in 2018 and call volumes dropped by 93,000 or 2%, despite growth in customer accounts.

·; We launched over 160 propositions in 2019 in UK Home, including bundled energy and services offers, with 71% of customers who took a bundled offer being new to services.

·; We launched our first residential electric vehicle tariff in the UK during the year and in November installed our first domestic charging point.

·; In January 2020, British Gas launched its new 'Green Future' tariff, one of the greenest tariffs on the market which offers customers green gas and renewable energy.

Progress towards fundamentally rebasing UK Home

·; In July 2019, we announced that we were developing plans to fundamentally rebase our UK Home business.

·; In UK energy supply, our focus will be on continuing to improve the customer experience while moving towards becoming the lowest cost supplier by 2022. Achieving cost leadership will enable sustainable customer and margin growth.

·; In UK in-home servicing, we are also focusing on improving our levels of competitiveness while maintaining a high-quality customer experience.

·; We removed around 800 non-customer facing roles across energy and services in 2019 as part of our efficiency plans, with energy supply back office costs 15% lower in 2019 than in 2018.

·; The cost per UK energy supply customer was £109 in 2019 compared to £103 in 2018, although the underlying figure in 2018 was £111 when excluding the impact of a one-off bad debt credit. The decrease in the underlying figure came despite the lower average number of customer accounts than in 2018 and the impact of inflation.

·; UK services cost per customer in 2019 decreased to £330 compared to £348 in 2018, with significant levels of cost efficiency more than offsetting the impact of inflation. Revenue per customer was flat.

·; In addition to the progress already made in 2019 to improve the customer experience, we have plans in place to drive a further increase in digital transactions to help reduce call volumes. We are also upskilling contact centre colleagues to reduce the number of internal call transfers, reducing costs and improving the customer experience.

·; We continue to develop plans to re-organise around customer end-to-end journeys and transform our technology stack to be more flexible and lower cost. We now have two end-to-end customer journey teams up and running and have a proof of concept technology platform based on our online-only British Gas Lite offer live in the market.

·; We are preparing ourselves to benefit from new market opportunities, such as electric vehicle integration. In 2019, we upskilled around 100 of our service engineers to install electric vehicle charging points.

Refocusing Home Solutions

·; We announced in July 2019 that our Home Solutions activity would be focused on the UK and Ireland, as we continue to leverage our distinctive field force and look to launch propositions focused around Home Energy Management and Remote Diagnostics and Monitoring.

·; Centrica Home Solutions revenue increased by 10% to £74m in 2019 and the gross margin percentage increased to 22% compared to 19% in 2018.

·; In May, we launched Hive thermostatic radiator valves which allow customers to digitally manage the temperature in individual rooms in their houses. We have sold over 100,000 units to date.

·; Customer satisfaction rates remain high, with the Hive brand NPS at +39, and we continue to see a positive impact on our energy and services businesses. The energy NPS of a Hive customer is 20 points higher on average than for an energy only customer.

·; We have taken actions to lower operating costs in the second half of the year, reducing headcount in Centrica Home Solutions by around 40%. As a result, we expect to deliver £15m of operating cost savings and £10m of capital expenditure savings in 2020 when compared to 2019.

CENTRICA BUSINESS PERFORMANCE AND PROGRESS

·; Centrica Business is focused on three areas, Energy Supply, Energy Optimisation and Business Services & Solutions, with the geographic focus predominantly on the UK, Ireland, Continental Europe and North America.

Customer number stability and volume growth

·; UK Business delivered growth in small and medium enterprise (SME) energy supply customer accounts, including from the online only British Gas Lite tariff.

·; North America Business energy supply customer accounts were down 6%, reflecting our decision to focus our sales and retention activity on higher value, higher consuming customers. Total gas volumes were up 10%, reflecting this focus and the full year impact of small bolt-on acquisitions completed during 2018. 

Improved customer experience

·; UK Business Brand NPS increased by 13pts over the year to +1, reflecting further operational improvements and enhancements to our digital platform.

·; North America Business Brand NPS improved by 4pts to +32, as we continued to launch new customer propositions, including those offering optionality on hedging profiles giving the customer more control.

·; Centrica Business Solutions Brand NPS remained high at +29.

Improving returns in North America Business

·; We announced in July 2019 that, following a review of our business energy supply and optimisation activity in North America, we were making structural interventions to improve returns.

·; Actions taken to improve margin delivery and customer quality, reduce costs and optimise capital employed have resulted in an improvement in post-tax economic returns to 9% in 2019 from 6% in 2018.

·; Further actions underway are expected to result in post-tax average economic returns of 10-12%, which we are targeting to achieve in 2020, and no worse than 8% at the bottom of the cycle.

Growing Business Solutions

·; We are delivering growth in Business Solutions through leveraging existing energy supply customer relationships and the expansion of our technology range, with the focus increasingly on lower-carbon solutions. We are targeting £1bn of revenue by 2022 and EBITDA break-even by 2021.

·; The Centrica Business Solutions order book has increased by 19% compared to the end of 2018, revenue in 2019 was up 36% to £285m and the adjusted operating loss reduced.

·; On 1 July 2019, we acquired the energy services and solutions company Smartwatt for a total consideration of $37m, adding further capabilities in energy efficiency, lighting retrofits, HVAC, building automation, water conservation and performance assurance in North America.

·; We continue to utilise our Flexpond Demand Side Response platform in support of our customer solutions and are also offering it as a 'software as a service' offer to third parties, including an agreement with Japanese utility TEPCO to provide flexibility services for the reserve market in the Kyushu region of Japan.

Expanding our global LNG footprint and route-to-market offering

·; In LNG, we signed a landmark LNG sales and purchase arrangement in February under which Tokyo Gas and Centrica will jointly purchase 2.6 million tonnes per annum, delivered ex-ship, from the Mozambique LNG Project from the start-up of production until the early 2040s.

·; In customer solutions, our global total route-to-market capacity under management is now 25.0GW, 9% higher than at the start of 2019.

UPSTREAM PERFORMANCE AND PROGRESS

Production and generation performance

·; Nuclear generation volumes were down 14% to 10.2TWh in 2019 compared to 2018, reflecting the extensions to outages at the Dungeness B and Hunterston B power stations.

·; Total E&P production volumes were down 10% to 52.3mmboe in 2019 compared to 2018.

- Spirit Energy production was down 2% to 45.8mmboe with a slight increase in gas production volumes offset by lower liquids production. We saw improved operational performance from the operated Morecambe field which largely offset natural decline across the portfolio and lower availability at Statfjord.

- Rough production was down 42% to 6.5mmboe, in line with the expected decline profile of the reservoir.

E&P development and exploration progress

·; In March 2019, the Oda field, Spirit Energy's first development as the operator on the Norwegian Continental Shelf, came on line five months earlier than originally planned and under budget.

·; The development of the Nova field in Norway is proceeding as planned, with production due to begin in the third quarter of 2021. The field has an estimated 77mmboe of 2P reserves and Spirit Energy owns 20%.

·; In January 2020, we announced plans with our Statfjord partners to drill up to 100 new wells and extend production from the area by more than 10 years.

·; Spirit Energy's 2P reserves were 14mmboe higher at the end of 2019 than at the end of 2018, with 64mmboe of positive revisions more than offsetting the impact of production and the Valemon and Sindre divestments in the year. This represents a 2P reserves replacement ratio of 140%. The Statfjord life extension resulted in 31mmboe of the revision, with positive revisions also recognised at Kvitebjorn, Cygnus and South Morecambe.

·; In 2019, three wells were drilled in the Greater Warwick Area, in which Spirit Energy owns a 50% interest. The Lincoln Crestal well confirmed the presence of Iight oil and produced at potentially commercial rates. The Warwick area yielded mixed results. Warwick Deep proved unsuccessful with water production and minor oil encountered. Warwick West was a discovery and confirmed the presence of light oil which was produced to surface during well testing. Further technical analysis is required to understand reservoir quality in this area.

REGULAtory developments

·; On 13 November 2019, it was announced that Centrica had been successful in a judicial review which challenged the UK energy regulator Ofgem's treatment of wholesale energy costs in the initial period of the UK default tariff cap in the first quarter of 2019.

·; Ofgem announced in January 2020 that they were consulting on the appropriate adjustment mechanism.

·; This outcome underlines the importance of transparent and rigorous regulatory processes to ensure well-designed regulation that is in the interest of a well-functioning energy market, which in turn allows participants to operate with confidence and ultimately benefits all energy consumers.

·; In December 2019, the New York Public Service Commission (NYPSC) issued an Order which will reform the New York retail energy market for residential and small commercial customers in 2020. The Order includes a price cap for fixed price products relative to the utility, a preference for green offers, a restriction on variable tariffs to be capped at the local utility rate, more significant licensing requirements and a requirement that the NYPSC approve any offer of value-added products. We have around 140,000 customers in New York. We will continue to engage with the NYPSC to ensure customers are treated fairly and can benefit from choice and competition.

DIVESTMENTs

·; In February 2018, we announced our intention to divest our 20% interest in the UK operating nuclear fleet of power stations by the end of 2020. Operational issues at Hunterston B and Dungeness B have impacted the process, and while we are still pursuing the divestment, we may not be able to dispose of all of our share in a single transaction. As a result, we may still hold an interest in nuclear at the end of 2020.

·; In July 2019, we announced our intention to divest our 69% shareholding in Spirit Energy. The process started in the second half of 2019 and we expect to receive initial bids around the end of the first quarter of 2020.

·; We also announced three non-core divestments in 2019 as part of a £500m programme, with proceeds across 2019 and 2020 expected to total around £350m.

- We completed the $300m sale of the Clockwork home services portfolio and operations in April 2019.

- We completed the sale of non-core E&P assets at Valemon and Sindre during the year.

- We announced the sale of the King's Lynn CCGT in December 2019 for a headline price of £105m. The transaction completed on 12 February 2020.

OUTLOOK

Our focus in 2020 is on continuing to grow customer relationships, delivering further efficiencies, continuing to build on our customer-facing capabilities and maintaining financial discipline, in addition to delivering the planned divestments.

Adjusted earnings and adjusted operating cash flow were both weighted towards the second half of 2019 and this momentum is expected to benefit our customer facing activities in Centrica Consumer and Centrica Business in 2020, including the absence of the £70m one-off UK price cap impact, cost efficiency momentum, improved retail power margins in business energy supply in North America, further growth in UK services and revenue growth and reduced losses in Home Solutions and Business Solutions.

However, we expect the remaining legacy gas contract in Centrica Business to make an adjusted operating loss of up to £100m in 2020, having been slightly profitable in 2019, while the significant fall in UK wholesale gas and power prices will negatively impact achieved prices in both E&P and Nuclear, despite some benefit from forward hedging. As a result, at 31 December 2019 commodity prices and assuming the current portfolio, we expect adjusted operating cash flow to be in the range £1.6bn-£1.8bn in 2020. Given commodity falls since the start of the year, if current prices persist, we would expect to be around the bottom of this range.

This is lower than adjusted operating cash flow in 2019. However, the adjusted earnings impact from the lower commodity price environment is likely to be much less material, which includes the impact of lower depreciation resulting from the 2019 year-end impairments. As a result, we would expect the year-on-year earnings momentum from our core customer-facing businesses to be broadly offset by the negative earnings impact from the legacy gas contract and the Upstream portfolio.

Capital expenditure is expected to be around £800m in 2020, reflecting our continued focus on capital discipline. This includes a one-off payment of around £100m relating to the decision not to proceed with the Hejre E&P project in Denmark. As a result, we expect Group sources and uses of cash flow to be broadly balanced and we are expecting Group net debt to be in the range £3.2bn-£3.6bn in 2020, including around £200m of additional lease commitments under IFRS16 and before any impact from the planned disposals of Spirit Energy and Nuclear.

Financial performance remains subject to the usual variables of weather patterns, commodity prices, operational performance and regulatory change.

SUMMARY

We made further good progress in 2019 on reducing costs, building on our customer relationships, improving the customer experience and developing new propositions and technologies. However, the environment was challenging for Centrica's portfolio, which impacted the Company's 2019 financial performance.

The momentum gained in our customer-facing businesses during the second half of the year is expected to benefit Centrica in 2020. However, significant falls in wholesale commodity prices create a more challenging environment for the Upstream businesses. In response we remain focused on capital discipline and expect sources and uses of cash flow to remain broadly balanced in 2020.

Our intention to exit our positions in both E&P and Nuclear means we will complete our shift towards the customer. This will allow Centrica to focus on its strengths of energy supply and its optimisation, and services and solutions centred around energy, with an emphasis on helping our customers transition to a lower carbon future.

The world of energy is changing rapidly and the market positions and capabilities that Centrica has developed means the Company is well placed for the long-term, as we focus on being a leading Energy Services and Solutions provider.

Group Financial Review

GROUP REVENUE

·; Group revenue included in business performance reduced by £0.6bn or 2% to £26.8bn (2018: £27.4bn). Gross segment revenue, which includes revenue generated from the sale of products and services between segments, reduced by £1.0bn or 3% to £28.0bn (2018: £29.0bn).

·; Centrica Consumer gross segment revenue was broadly flat as the impact of energy supply customer account growth in North America offset the impact of a lower average number of energy supply accounts in the UK and lower prices, in part due to the introduction of the UK default tariff cap.

·; Centrica Business gross segment revenue fell by £0.7bn, largely due to the impact of lower wholesale commodity prices and warmer weather on gas optimisation revenue in North America.

·; Upstream gross segment revenue fell by £0.4bn due to reduced oil and gas production and nuclear power generation volumes and lower achieved gas prices due to falling wholesale commodity prices.

OPERATING PROFIT

·; The statutory operating loss was £849m (2018: operating profit of £987m). Adjusted operating profit was £901m (2018: £1,392m). 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:

Adjusted operating profit

·; Centrica Consumer adjusted operating profit was down £245m or 33% to £505m.

- There was a £300m negative revenue impact from the UK residential energy supply default tariff cap, including a one-off £70m impact in the first quarter due to Ofgem's revision to the methodology calculating supplier wholesale costs during the transitional period.

- Total efficiency savings more than offset lower gross margin resulting from lower average UK energy supply accounts and a change in customer mix in both energy and services towards lower priced products.

·; Centrica Business adjusted operating profit was up £142m or 189% to £217m.

- This includes the impact of a significant improvement in power retail margins in North America and good trading and optimisation performance in Europe.

- It also includes benefit from the decision to defer delivery of gas from 2019 into 2020 from the one remaining large legacy gas contract and strong trading and optimisation performance in Europe.

·; Upstream adjusted operating profit was down £388m or 68% to £179m.

- Nuclear adjusted operating profit was down £27m or 59% to £19m, with lower output resulting from extensions to outages at the Dungeness B and Hunterston B nuclear power stations not fully offset by the impact of a higher achieved power price.

- Exploration & Production adjusted operating profit was down £361m or 69% to £160m, largely due to lower achieved gas sales prices reflecting the falling UK NBP price, lower volumes from Rough reflecting the field's natural decline, higher depreciation charges following 2018 asset write-backs and production mix, and field specific write-offs.

Exceptional items

·; A net exceptional pre-tax charge of £1,103m was included within Group operating loss before taxation in 2019 (2018: £185m) including:

- A £476m charge relating to the impairment of E&P assets, predominantly due to the reduction in near-term prices and long-term price forecasts and a conclusion that certain field reserves levels were not sufficient for development.

- A £381m charge relating to the impairment of power assets, including £372m related to the nuclear investment largely as a result of a reduction in price forecasts and availability issues at the Hunterston B and Dungeness B power stations.

- A £77m charge following the strategic decision to refocus Centrica Home Solutions activity on the UK and Ireland, largely related to asset impairments (including goodwill), inventory write-downs and onerous contract provisions.

- £356m of restructuring charges arising from the continuation of phase 2 of the Group's cost efficiency programme, principally related to redundancy, change resource, consultancy, property rationalisation costs, and other transformational activity including member compensation payments from renegotiating UK defined benefit pension arrangements.

- A £152m net credit relating to pension changes. This includes a £260m credit in relation to a rule amendment 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 pension age, partially offset by £108m of pension strain costs associated with redundancy.

- A £35m net gain on disposals of the Clockwork assets, Valemon, Sindre, the King's Lynn power station (which is held for sale) and contingent consideration on the historic disposal of Trinidad and Tobago E&P assets.

·; These charges in total generated a taxation credit of £116m (2018: £89m). As a result, total net exceptional charges after taxation were £987m (2018: £235m).

·; Further details can be found in note 6(a).

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.

·; The Group has shown the fair value adjustments on 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 loss of £647m (2018: £220m) relating to these re-measurements, with the decline in gas prices over the period being reflected in the fair valuing of historic and current energy procurement to meet the needs of our customers.

·; These re-measurements generated a taxation credit of £103m (2018: £39m). As a result, the total net re-measurement loss after taxation was £544m (2018: £181m).

·; 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 6(b).

GROUP FINANCE CHARGE AND TAXATION

Finance charge

·; Net finance costs decreased to £255m (2018: £273m), largely reflecting the impact of a £1.1bn repurchase of gross debt which was completed in 2018 and the maturity of a bond in September 2018. There were no exceptional net finance items (2018: £139m).

Taxation

·; Business performance taxation on profit decreased to £218m (2018: £461m). After taking account of tax on joint ventures and associates, the adjusted tax charge was £217m (2018: £458m). The resultant adjusted tax rate for the Group was 34% (2018: 41%). The decrease in adjusted tax rate reflects the more highly taxed E&P businesses contributing 18% of adjusted operating profit, compared to 37% in 2018. An adjusted effective tax rate calculation is shown below:

GROUP EARNINGS

Adjusted earnings

·; Profit for the year from business performance decreased to £428m (2018: £658m) and after adjusting for non-controlling interests, adjusted earnings fell by 34% to £419m (2018: £631m). This reflects the overall decline in adjusted operating profit, partly offset by the lower net finance costs and adjusted tax charge as described above.

·; Adjusted basic EPS was down 35% to 7.3p (2018: 11.2p).

Group statutory loss

·; The statutory loss attributable to shareholders for the period was £1,023m (2018: profit of £183m). 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 movement to a statutory loss, compared to a statutory profit in 2018, is due to the reduction in adjusted earnings and the increase in the exceptional charges and loss from certain re-measurements, all as described above.

·; The Group reported a statutory basic EPS loss of 17.8p (2018: profit of 3.3p).

DIVIDEND

·; In addition to the interim dividend of 1.5p per share, the proposed final dividend is 3.5p, giving a total full year dividend of 5.0p (2018: 12.0p).

GROUP CASH FLOW, NET DEBT AND BALANCE SHEET

Operating cash flow

·; Adjusted operating cash flow, which is reconciled to net cash flow from operating activities in the table below, fell by £415m or 18% to £1,830m, largely in line with the reduction in adjusted operating profit after accounting for the increase in depreciation.

·; Net cash flow from operating activities decreased to £1,250m (2018: £1,934m), which reflects the reduction in adjusted operating cash flow as described above, higher pension deficit repair payments as agreed with the trustees as part of the triennial review, increased exceptional payments largely relating to the Group's restructuring programme and an inflow of margin cash compared to an outflow in 2018.

1. Net margin and cash collateral outflow includes the reversal of collateral amounts posted when the related derivative contract settles.

Net cash flow

·; Net cash outflow from investing activities decreased to £503m (2018: £1,007m) primarily due to the Clockwork disposal proceeds, reduced capital expenditure and lower acquisition spend.

·; Net cash outflow from financing activities fell to £1,077m (2018: £2,540m) largely reflecting lower repayment of borrowings due to the debt repurchase programme and a bond maturity in 2018, and a slight reduction in cash equity dividends paid reflecting the rebasing of the 2019 interim dividend paid in November 2019.

Net debt 

·; Reflecting all of this, and the Company adopting IFRS 16 which increased opening 2019 net debt by £394m, the Group's net debt increased by £525m to £3,181m in the year (2018: £2,656m), including cash collateral posted or received in support of wholesale energy procurement.

Balance sheet

·; Net assets decreased to £1,795m (31 December 2018: £3,948m) driven by the statutory loss made in the year, net actuarial losses, exchange differences on translation of foreign operations and dividend payments made during the year.

2019 ACQUISITIONS AND DISPOSALS

·; On 1 July 2019 the Group acquired Smartwatt Energy Inc., a leading energy services and solutions company in North America, for consideration of $37million (£29 million). There have been no other material acquisitions during the year.

·; On 30 April 2019, the Group disposed of Clockwork Home Services for a gross consideration of $300m which, after deal-specific adjustments related to working capital, resulted in a net consideration of $279m (£215m).

·; The Group also disposed of Norwegian exploration and production assets, Valemon and Sindre, during the year. Proceeds of £33 million were equal to the carrying value of the assets disposed of subsequent to the recognition of an impairment charge of £49 million. The impairment charge is included in net gain on disposal programmes within exceptional items.

·; Further details on acquisitions, assets purchased and disposals are included in notes 5(e) and 15.

EVENTS AFTER BALANCE SHEET DATE

·; On 23 December 2019, the Group agreed to sell its 382MW King's Lynn combined cycle gas turbine (CCGT) power station to RWE Generation for headline consideration of £105 million, adjusted for final working capital, based on a valuation date of 31 December 2019. The deal completed on 12 February 2020.

·; Further details of events after the balance sheet date are described in note 17.

RISKS AND CAPITAL MANAGEMENT

·; The nature of the Group's principal risks and uncertainties are largely unchanged from those set out in its 2018 Annual Report, with two changes to note. The Information Systems and Security risk has been separated in to two principal risks, enabling more focussed conversations on our digital transformation and ongoing security. A new principal risk, Regulated Insurance and Services, has also been identified.

·; In addition, there continues to be a high degree of uncertainty surrounding the future relationship between the EU and UK including trade agreements and the supply of electricity and gas.

·; Details of how the Group has managed financial risks such as liquidity and credit risk are set out in note 4. Details of the Group's capital management processes are provided under sources of finance in note 11(a).

ACCOUNTING POLICIES

·; UK listed companies are required to comply with the European regulation to report consolidated financial statements in conformity with International Financial Reporting Standards (IFRS) as adopted by 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. Changes include the presentation of the income statement for energy derivative contracts following an IFRIC agenda decision on the recognition of fair value.

Appendix: Business Unit KPIs

Centrica Consumer

UK Home

1. 2018 Brand NPS has been restated to show the British Gas only score.

2. Complaints per 100,000 customers as reported to Ofgem for UK energy supply and the FCA for UK Home services.

North America Home

1. Complaints per 100,000 customers as reported by various regulatory bodies.

2. Redefined to exclude minor contract add-ons on home warranty contracts. 2018 has been restated accordingly.

Ireland

1. Complaints per 100,000 customers as reported to the Commission for Regulation of Utilities, Water and Energy (CRU).

2. 2018 restated to include services account holdings.

Centrica Home Solutions

Centrica Business

UK Business

1. Complaints per 100,000 customers as reported to Ofgem.

2. Includes services account holdings. 2018 has been restated accordingly.

North America Business

1. Complaints per 100,000 customers as reported by various regulatory bodies.

Centrica Business Solutions

Energy Marketing & Trading

1. 2018 has been restated to include the Spalding tolling agreement.

Upstream

Nuclear

Exploration & Production

1. Lifting and other cash production costs are total operating costs and cost of sales excluding depreciation and amortistion, dry hole costs, exploration costs and profit on disposal.

2. Realisations are total revenues from sales of gas and liquids including hedging and net of NTS costs. 2018 has been restated due to incorrectly excluded NTS cost.

3. See pages 64 to 66 for an explanation of the use of adjusted performance measures.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Group Financial Statements in accordance with applicable law, regulations and accounting standards. In preparing the Group 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 European Union have been followed, subject to any material departures disclosed and explained in the Group Financial Statements; and

·; prepare the Group Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

Each of the Directors confirms 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; and

·; the Strategic Report contained in the Annual Report and Accounts, from which this narrative is extracted, 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.

On behalf of the Board on 12 February 2020

Iain Conn Chris O'SheaGroup Chief Executive Group Chief Financial Officer

Group Income Statement

(i) The Group has amended the presentation of energy derivative contracts following an IFRIC agenda decision in March 2019 and a review of its trading businesses. Prior year results have been restated accordingly. See note 1 for further details.

(ii) Gains and losses on disposals include any impairments and write-backs associated with the assets and businesses disposed of or classified as held for sale.

The notes on pages 26 to 61 form part of these Financial Statements.

Group Statement of Comprehensive Income

The notes on pages 26 to 61 form part of these Financial Statements.

Group Statement of Changes in Equity

The notes on pages 26 to 61 form part of these Financial Statements.

Group Balance Sheet

The Financial Statements on pages 21 to 61, of which the notes on pages 26 to 61 form part, were approved and authorised for issue by the Board of Directors on 12 February 2020 and were signed below on its behalf by:

Iain Conn Chris O'SheaGroup Chief Executive Group Chief Financial Officer

Group Cash Flow Statement

The notes on pages 26 to 61 form part of these Financial Statements.

Notes to the Financial Statements

1. General information, basis of preparation and summary of significant new accounting policies and reporting changes

(a) 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 Company has its listing on the London Stock Exchange.

The Financial Statements for the year ended 31 December 2019 included in this announcement were authorised for issue in accordance with a resolution of the Board of Directors on 12 February 2020.

The preliminary results for the year ended 31 December 2019 have been extracted from audited accounts (with the exception of notes 18 to 23 which have not been audited) which have not yet been delivered to the Registrar of Companies. The Financial Statements set out in this announcement do not constitute statutory accounts for the year ended 31 December 2019 or 31 December 2018. The financial information for the year ended 31 December 2018 is derived from the statutory accounts from that year. The report of the auditors on the statutory accounts for the year ended 31 December 2019 was unqualified and did not contain a statement under Section 498 of the Companies Act 2006.

(b) Basis of preparation

The accounting policies applied in these Financial Statements for the year ended 31 December 2019 are consistent with those of the Annual Financial Statements for the year ended 31 December 2018, as described in those financial statements, with the exception of standards, amendments and interpretations effective in 2019 and other presentational changes.

(c) Standards, amendments and interpretations effective or adopted in 2019

From 1 January 2019, the following standards and amendments are effective in the Group's consolidated Financial Statements:

·; IFRS 16: 'Leases';

·; Amendments to IAS 19: 'Plan amendment, curtailment or settlement';

·; Amendments to IFRS 9, IAS 39 and IFRS 7: 'Interest rate benchmark reform' (early adopted);

·; Amendments to IFRS 9: 'Prepayment features with negative compensation';

·; Amendments to IAS 28: 'Long-term interests in associates and joint ventures';

·; Annual improvements to IFRS Standards 2015 - 2017 cycle; and

·; IFRIC 23: 'Uncertainty over income tax treatments'.

The impact of adoption of IFRS 16 and the key changes to the accounting policies are disclosed below. Amendments to IAS 19 resulted in the re-measurement of pension scheme assets and liabilities subsequent to the plan amendments during the year, as reflected and detailed further in note 14.

Amendments to IFRS 9, IAS 39 and IFRS 7: 'Interest rate benchmark reform' was issued in September 2019 and endorsed by the EU on 16 January 2020. The amendments modify specific hedge accounting requirements to allow hedge accounting to continue for affected hedges during the period of uncertainty before the affected hedging instruments are amended as a result of the ongoing interest rate benchmark reforms. The amendment impacts only hedging instruments in fair value hedge relationships.

Other amendments effective during the year did not impact the consolidated Financial Statements.

IFRS 16

The Group adopted IFRS 16: 'Leases' from 1 January 2019. Adoption represents a significant change in accounting for lease arrangements in which the Group is a lessee as the standard mandates the on-balance sheet recognition of all lease liabilities and a corresponding right-of-use asset.

In accordance with the transition provisions of IFRS 16, for contracts entered into before 1 January 2019, the requirements of the standard have been applied only to contracts previously identified as leases in accordance with IAS 17: 'Leases' or IFRIC 4: 'Determining Whether an Arrangement Contains a Lease'. For contracts entered into or modified after that date, the definition of a lease in IFRS 16 has been applied.

On application of IFRS 16 comparative information has not been restated.

The Group utilised the recognition exemptions for both short-term leases applicable to machinery, property and exploration and production assets that have a lease term of 12 months or less and for leases of low value assets, including IT equipment. The lease payments associated with those leases are recognised as an expense on a straight-line basis over the lease term. The Group has also applied wherever applicable the following transition allowances:

·; C10(a) application of a single discount rate to a portfolio of leases with reasonably similar characteristics;

·; C10(b) reliance on previous assessment of whether leases are onerous in accordance with IAS 37: 'Provisions, Contingent Liabilities and Contingent Assets' immediately before the date of initial application as an alternative to performing an impairment review;

·; C10(c) election not to apply the measurement requirements of the standard to leases where the term ends within 12 months of the date of initial application;

·; C10(d) exclusion of initial direct costs from the measurement of the right-of-use asset at the date of initial application.

On transition, the Group measured lease liabilities for leases previously assessed as operating at the present value of the remaining lease payments and elected to measure the associated right-of-use assets at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments. For arrangements previously assessed as finance leases, the asset and liability balances at 31 December 2018 were carried forward as the opening IFRS 16 balances and subsequently measured in accordance with the new standard.

Application resulted in the recognition of total lease liabilities and right-of-use assets on 1 January 2019 of £620 million and £463 million respectively. £402 million of the lease liability is incremental to the IAS 17 position. An £8 million sub-lease asset was also recognised on transition.

Right-of-use assets are presented in Property, plant and equipment on the Group Balance Sheet. Lease liabilities are included in Current and Non-current Borrowings.

The difference between the value of the lease liability and the right-of-use asset predominantly relates to the Spalding tolling contract. The legacy finance lease position reflected a lease liability of £99 million and a fully impaired asset. An incremental £65 million lease liability was recognised post transition on re-measurement of the contract to reflect lease payments as defined under IFRS 16 and the associated asset impaired to its recoverable amount of £31 million. The current year impairment charge is offset by the release of the onerous contract provision previously recognised in respect of this arrangement.

A reconciliation of the operating lease commitment at 31 December 2018 to the opening IFRS 16 lease liability is shown below, along with a summary of the key judgements applied by the Group in determining these opening positions:

The weighted average incremental borrowing rate used by the Group for IFRS 16 is 2%.

Extension and termination options

The existence and assessment of whether a renewal or termination option is 'reasonably certain' to be exercised is particularly relevant to the Group's significant property portfolio. The Group considers, amongst other factors, the type of property and its purpose, the location of the property, the strategic direction of the business the property is used by and how far into the future the option arises when determining whether exercise is reasonably certain, along with consideration of whether economic incentive to exercise the option exists.

Where exercise of an option is considered to be reasonably certain, the termination period or renewal period is excluded or included in the lease term, respectively, when calculating the lease liability.

Identifying the customer for arrangements involving assets used in joint operations

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.

The comparative information continues to be reported in accordance with IAS 17 and IFRIC 4.

Significant changes in the Group's accounting policy applicable from 1 January 2019

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.

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. 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.

When the lease liability is remeasured 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.

(d) Standards and amendments that are issued but not yet applied by the Group

The Group has not applied the following standards and amendments in the consolidated Group Financial Statements as they are not yet effective, and have not yet been endorsed by the EU:

·; IFRS 17: 'Insurance contracts', effective from 1 January 2021; and

·; Amendments to IFRS 3: 'Business Combinations', effective 1 January 2020.

IFRS 17: 'Insurance contracts', issued in May 2017, will not be effective before 1 January 2021. 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.

Management does not expect the future application of the IFRS 3 amendments, or other issued but not effective amendments to have a material impact on the consolidated Financial Statements.

(e) Restatements

In March 2019, the International Financial Reporting Interpretations Committee (IFRIC) issued an agenda decision on the Physical Settlement of Contracts to Buy or Sell a non-Financial Item. The committee concluded that, for physical commodity trades within the scope of IFRS 9: 'Financial instruments', entities should not transfer previously recognised, unrealised marked-to-market movements to different income statement line items upon realisation. As the Group previously recognised fair value movements on the re-measurement of certain energy contracts net within cost of sales up to the point of realisation (when the underlying contract would be recognised, either in revenue or cost of sales), presentation of the Group's revenue and cost of sales in the results for the year column has been amended to comply with the requirements of the IFRIC agenda decision. Comparative results have been represented with no impact on gross profit.

The Group will continue to present the impact of realised positions (and any unrealised fair value movements on proprietary trades) in the scope of IFRS 9 in the business performance column as either revenue or cost of sales, as this better reflects the underlying economic performance of the Group's trading, however the effect of these positions will then be removed from revenue or cost of sales through a separate column (the exceptional items and certain re-measurements column) and reflected instead in a new 'Re-measurement and settlement of energy contracts' line item.

In addition to the above, the new line item in the exceptional items and certain re-measurements column of the Income Statement includes fair value movements on those unrealised commodity derivative trades that are prohibited from being treated as 'own use' (primarily due to net settlement terms) but are economically related to our upstream assets, capacity/off-take contracts or downstream demand, in line with the policy detailed at note 2.

The effect of this re-presentation for 2018 is a reduction in revenue and cost of sales of £4.1 billion and £6.8 billion respectively. There is no impact on gross profit.

The exercise to determine the above restatement required the Group to perform a detailed review of revenue and cost of sales across its wider business. During this review, the Group specifically considered the presentation of certain European commodity trades in the business performance column. These trades (both purchases and sales) have historically been presented gross as revenue or cost of sales, however, as the primary purpose of the book is speculative, and to ensure consistency with other similar activities undertaken by the Group, net presentation is deemed more appropriate and accordingly, trades are now presented net within revenue in the business performance column. The prior year comparative has been restated and whilst there is no impact on gross profit, business performance revenue and business performance cost of sales have been reduced by £2.3 billion.

The restatement arising from the IFRIC determination has been applied to the business performance revenue and business performance cost of sales results as adjusted for the presentation of European commodity trades noted above.

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:

·; Centrica Consumer

·; Centrica Business; and

·; Upstream

The revised operating segments incorporate similar products and services, as well as the major factors that influence the performance of these products and services, such as regulatory environments within Centrica Consumer, and access to commodity markets and trading counterparties within Centrica Business, across different geographical locations in which the Group operates. Further information on the operating segments of the Group is shown at note 5.

2. Centrica specific accounting measures

(a) Use of adjusted performance measures

The Directors believe that reporting adjusted measures (margin, profit, earnings per share and operating 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 gross margin and adjusted operating profit to evaluate segment performance. They are defined as 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.

Adjusted operating cash flow is used by management to assess the cash generating abilities of each segment. Adjusted operating cash flow is defined as net cash flow from operating activities before:

·; payments relating to exceptional items;

·; deficit reduction payments made to the UK defined benefit pension schemes; and

·; movements in variation margin and cash collateral that are included in net debt;

but including:

·; dividends received from joint ventures and associates.

Deficit reduction payments and movements in variation margin and cash collateral are excluded because the Directors do not consider these to represent the operating cash flows generated by underlying business performance, as they are predominantly triggered by wider market factors and, in the case of variation margin and cash collateral, these represent timing differences. Dividends received from joint ventures and associates are considered by the Directors to represent operating cash flows generated by the Group's operations that are structured in this manner.

(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 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.

3. Critical accounting judgements and key sources of estimation uncertainty

(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 2015, as part of the smart meter roll-out, the Group renewed meter rental arrangements with third parties, with a further extension of one contract in 2018. 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.

One of the meter rental arrangements was renegotiated during 2019 and a reassessment of the contract was performed in accordance with IFRS 16. 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. Contracts to buy and sell LNG are not considered to meet the definition of a derivative as there is currently no active market for LNG and contracts are not capable of being net settled. As a result, they are accounted for on an accruals basis.

(b) Key sources of estimation uncertainty

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.

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. Unbilled revenue recognised on the Group Balance Sheet within Trade and other receivables at 31 December 2019 was £1,342 million (2018: £1,542 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 2019 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.

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 2019 is unchanged at 1.2%. A 1% change in this discount rate would change the decommissioning liability by approximately £160 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 62.

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.

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.

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.

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 6. Note that Spirit Energy was not considered to be an asset held for sale as at the reporting date as its disposal was not deemed to be highly probable within one year.

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 possibility of life extensions. Further details of the methodology, assumptions, impairment booked during the year and related sensitivities are provided in note 6. Note that the Nuclear investment was not considered to be an asset held for sale as at the reporting date as its disposal was not deemed to be highly probable within one year.

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.

Further details on the goodwill balances, assumptions used in determining the recoverable amounts and impairment booked during the year are provided in note 6. Sensitivity to the assumptions is also found in note 6 for goodwill for goodwill allocated to impaired CGUs in the year.

Credit provisions for trade and other receivables

The methodology for determining provisions for credit losses on trade and other receivables uses an expected credit loss model, which calculates the expected loss applicable to the receivable balance over its lifetime. 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 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. Further details, including sensitivities to these assumptions, are provided in note 14.

Brexit

The Group has considered the potential impact of a no-deal Brexit. Economists have suggested that failure to agree a satisfactory trade deal could lead to lower base interest rates and higher inflation, following a likely weakening of sterling against other currencies. This would have an impact on the Group's pension scheme discount rate assumptions (if high quality corporate bond yields follow base rates) and could change forward energy prices (particularly in sterling terms). The sensitivity of the Group's pension schemes to a change in key assumptions is disclosed in note 14.

The sensitivity of a change in forward energy prices and the impact this would have on impairment of the Group's assets is disclosedin note 6. Macroeconomic impacts on existing trade receivable recoverability are expected to be immaterial but could have a greater impact on future trade receivable recoverability.

4. Risk management

The Group's normal operating, investing and financing activities expose it to a variety of risks. Risk management is fundamental to the way the Group is governed and managed. The system of risk management and internal control is set out in the 2018 Annual Report and Accounts.

During 2019, the risks that were prioritised for leadership attention related to:

·; risk of political or regulatory intervention, or change to the political or regulatory landscape;

·; risk of failure to ensure compliance with legal, regulatory and ethical requirements;

·; risk of failure to protect the health, safety, and security of customers, employees and third parties, and the risk of causing a negative impact on the environment;

·; risk of failure to protect from cyber and other security threats, internal misuse of assets and inability to recover business continuity; and

·; risk of failure to execute change programmes and business restructuring.

The Group's financial performance and price competitiveness is dependent upon its ability to manage exposure to wholesale commodity prices for gas, oil, carbon and power, interest rates for long-term borrowing, fluctuations in various foreign currencies, and environmental factors. Financial risk has been delegated by the executive Group Ethics, Risk Assurance, Control and Compliance Committee (GERACCC) to the Finance Risk, Assurance & Controls Committee (FRACC) where it is reviewed quarterly by the senior Finance stakeholders to review Group financial exposures and assess compliance with risk limits. The four main areas of financial risk are managed as follows:

·; 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;

·; wholesale credit risks associated with commodity trading and treasury positions are managed in accordance with the Group's credit risk policy; and

·; downstream customer credit risk management is carried out in accordance with individual business unit credit policies.

Credit risk for financial assets

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.

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. 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 2019, the Group had undrawn committed credit facilities of £3,072 million (2018: £3,879 million) and £1,167 million (2018: £1,079 million) of unrestricted cash and cash equivalents. 95% (2018: 93%) 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 10.6 years (2018: 11.1 years).

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 note 11 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.

5. Segmental analysis

(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. Previously reported segments have now been amalgamated into the higher-level Centrica Consumer, Centrica Business or Upstream areas (as shown below). The exception to this was Central Power Generation, where the Nuclear investment was reallocated to Upstream, whilst the Spalding power station tolling contract remained within Centrica 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:

(b) Revenue

(i) Segmental revenues have been restated to reflect the new operating structure of the Group. Group revenue has been restated to exclude revenue from contracts in the scope of IFRS 9. Group revenue and group revenue included in business performance have also been restated to include the net result of certain commodity purchases and sales trades that are deemed to be speculative in nature. See note 1 for further details.