Centrica Regulatory News (CNA)

Interim results for the period ended30 June 2020

CHRIS O'SHEA, GROUP CHIEF EXECUTIVE

"Centrica delivered a resilient performance against the unprecedented backdrop of the Covid-19 crisis during the first half of the year. That is due to the response of colleagues across the Group to keep our customers warm, safe and supplied with energy and services during the pandemic. I am truly grateful for their efforts. Our mission now is to turn around the Company by putting customers at the heart of everything we do and creating a simpler, leaner, more modern and more sustainable company. The sale of Direct Energy is a fundamental step towards this, and although we have a lot more to do, we have the people, the brands and the market positions to deliver a successful turnaround."

FINANCIAL SUMMARY

See notes 2, 5 and 10 to the Financial Statements and pages 56 to 57 for an explanation of the use of adjusted performance measures.

RESILIENT FIRST HALF PERFORMANCE

· Resilient performance overall against the backdrop of Covid-19. Focus has been on protecting the business and keeping customers warm, safe and supplied with energy.

· Good customer service levels maintained and continued high customer retention. Total customers down 0.8% since the start of the year with a number of sales channels unavailable in Q2.

· Adjusted operating profit down 14% or £56m compared to H1 2019. Negative impacts of Covid-19, low commodity prices and warm weather largely offset by mitigating actions and improved underlying performance.

· Adjusted EPS up slightly to 2.5p, reflecting a reduction in the Group adjusted effective tax rate from 47% to 35% with a shift in profit mix away from highly taxed E&P activities.

· Net exceptional charge of £1,036m, including restructuring costs of £251m, and impairments of E&P and power assets totalling £785m which reflect a reduction in commodity price forecasts and nuclear plant availability issues. Statutory operating loss of £135m.

· Robust cash flows and liquidity. Net debt down £0.4bn since the start of the year to £2.8bn, reflecting working capital inflows and prompt actions taken to reduce cash expenditure in response to Covid-19.

· No interim dividend declared.

· No specific full year guidance provided given continuing Covid-19 related uncertainties.

· Prompt actions already taken and the Group's cash flow flexibility leave us well positioned to navigate current and future uncertainties.

FOCUS ON BALANCE SHEET AND QUALITY OF EARNINGS

· Centrica remains a customer-focused energy services and solutions company, helping customers transition to a low carbon future.

· Accelerated focus on simplifying and modernising the Group, to become more sustainable.

· Agreement to sell Direct Energy to NRG Energy for $3.625bn (£2.85bn) further simplifies the Group, allows increased focus on core UK and Ireland activities and strengthens the Group's balance sheet.

· Significant restructure underway, putting the customer at the heart of everything we do and accelerating planned cost savings.

· Spirit Energy E&P divestment process to restart once commodity and financial markets have settled.

· Nuclear divestment process currently paused.

PERFORMANCE METRICS

A pre-recorded results presentation will be available on Centrica.com at 8am BST on 24 July 2020 and Centrica will host a conference call for institutional investors and analysts at 9am BST on 24 July 2020. To register for the conference call please visit https://webcasts.centrica.com/centrica109/vip_connect.If you would like to join in listen only mode, please register at https://webcasts.centrica.com/centrica109.

ENQUIRIES

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

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

Group Overview

HELPING COLLEAGUES, CUSTOMERS AND COMMUNITIES DURING COVID-19

Centrica was significantly impacted by the Covid-19 pandemic during the first half of the year. However, colleagues responded with incredible commitment and dedication, as we ensured the continuity of the supply of gas and electricity and the provision of essential energy services to homes and businesses, while following all advice from governments and relevant health authorities.

Looking after our colleagues

Looking after our colleagues to ensure they can continue to offer our customers the level of service they demand has been a key focus during the first half of the year. Our service engineers continued to carry out essential work such as boiler breakdowns, as we provided them with appropriate personal protection equipment. We were also able to provide our customer agents with all the necessary equipment to work from home.

We committed to find flexible working options for parents and carers to support them juggle work with their other responsibilities, and during the crisis our commitment to offer mental health and wellbeing support to our colleagues has been more important than ever, with a variety of options available to them to get any help they may need.

Being there for customers

We remained available to all our customers, while prioritising those who are vulnerable and needed additional support. Over 80,000 of British Gas' most vulnerable customers had additional help in the first half of the year, through advance credit for prepayment customers or deferred payments for credit customers, while there were over 90,000 occasions of Direct Energy customers in North America receiving assistance with their bill, including through its 'Neighbor-to-Neighbor' programme in Texas.

Supporting our communities

We also continued to help the communities we serve, and through our partnership with the Trussell Trust in the UK more than 1,500 British Gas engineers volunteered to help get food to people who need it most. Our engineers have now delivered the equivalent of over 4 million meals across the UK. We also helped fund extended helpline hours for Carers UK and partnered with the Sagesse charity in Alberta to promote the organisation's 'REAL Talk' campaign focusing on recognising signs of domestic violence.

RESILIENT OPERATIONAL AND COMMERCIAL PERFORMANCE

Customer satisfaction levels broadly maintained

Customer satisfaction levels were broadly maintained through the Covid-19 pandemic, with all businesses reacting flexibly to continue to meet customer needs.

· Customer complaint rates were lower in UK Home, UK Business and both North American businesses.

· We continued to fulfil over 98% of UK services essential breakdown appointments on the scheduled day during the Covid-19 pandemic.

· We continue to invest in our digital platforms and encourage our customers to interact with us online, particularly during the Covid-19 pandemic as we prioritised calls from more vulnerable customers. In UK Home, 67% of all transactions were completed online in H1 2020 compared to 50% in H1 2019. In North America Home it improved to 54% compared to 48% in H1 2019.

· Brand NPS levels were broadly stable overall compared to the end of 2019, with small improvements in Direct Energy Home, Direct Energy Business and Hive, no change in Centrica Business Solutions and small declines in British Gas Home and British Gas Business.

Customer retention remained high, although sales performance impacted by Covid-19

Covid-19 did impact our commercial performance, with some of our key sales channels not available during lockdown periods. As a result, although overall customer retention remained high at above 80%, overall customer numbers were down 102,000 or 0.8% compared to the start of the year to 12.9m.

The number of products per customer was stable at 2.00, and the number of customer accounts fell by 382,000 or 1.5% over the first six months of the year to 25.8m.

· UK Home energy supply customer accounts were down 226,000 or 2% with some core sales channels unavailable during Covid-19 related lockdowns. In addition, we limited our activity in the fiercely competitive price comparison website market as some competitors priced at negative gross margin while falling commodity prices helped unhedged smaller competitors.

· Although UK Home services retention remained high in core channels, the number of customer accounts fell by 130,000 or 2%, while the number of installs and on demand jobs were down 27% vs H1 2019. Both these activities were impacted by significantly reduced customer visits and therefore lower sales opportunities during the lockdown period. The restrictions to customer visits also impacted Home Solutions sales, with the number of active customers increasing by 71,000, lower than in recent periods.

· UK Business customer accounts fell by 19,000 or 3% in the six months to June, with the number of SME accounts stable. The number of industrial and commercial accounts reduced by 9,000 as part of an ongoing review to de-risk our customer book, with 10,000 reduction in services accounts due to increased customer price sensitivity at renewal following the Covid-19 outbreak.

· Ireland retention rates improved, however customer accounts reduced by 14,000 or 2% in the first half due to the impact of Covid-19 on services sales channels and aggressive competitor pricing in energy markets.

· North America Home customer accounts fell by 50,000 or 1% in the first half despite improved retention, largely due to the loss of face-to-face sales channels.

· North America Business customer sites reduced by 14,000 or 3% as we continue to focus our sales and retention activity on higher value, higher consuming customers. Demand was 6% lower in gas and 14% in electricity, which reflects reduced business activity due to Covid-19 lockdowns and warmer weather.

· Centrica Business Solutions delivered further growth, with customer sites up 4%. Order intake of £154m was 36% lower than in H1 2019 reflecting companies delaying investment decisions during the early stages of the Covid-19 pandemic. However, we are beginning to see signs of recovery, with June 2020 order intake the third highest month since the business was formed in 2016. The forward order book of £736m was 11% higher than at the end of 2019.

· Energy Marketing & Trading total route-to-market capacity under management increased slightly from 12.1GW to 12.6GW, with around 10GW of capacity relating to renewable assets.

Continuing to improve the customer experience and stabilising and growing the number of customers we serve remain key priorities. The significant restructure we announced in June 2020 to create a simpler, leaner, more modern organisation with a lower cost base will be a key enabler to help us deliver against these priorities.

E&P performance broadly in line with expectations, Nuclear impacted by operational issues

· Spirit Energy volumes were down 3% to 23.7mmboe, with natural field decline and lower Morecambe up-time only partially offset by higher production from Cygnus and Chiswick in the North Sea and Oda and Vale in Norway.

· Production volumes from CSL's Rough field of 1.7mmboe were 67% lower than H1 2019, reflecting the natural decline of the field.

· On the Greater Warwick Area oil development prospect, of which Spirit Energy owns 50%, activity levels have been significantly reduced due to the current environment. Spirit Energy continues to work with its partner Hurricane Energy on developing next steps, including on the Lincoln discovery.

· Nuclear generation volumes of 4.5TWh were 7% lower than H1 2019, which includes the impact of outages at Hinkley Point B and Heysham 2. Ongoing outages at Dungeness B and Hunterston B resulted in neither site generating power in the period, as was the case in H1 2019.

Operating profit impacted by Covid-19 and low commodity prices

Compared to the first half of 2019, EBITDA was down £206m or 19% to £869m, and when taking into account the impact of lower deprecation largely due to impairments of E&P assets at the end of 2019, adjusted operating profit was down £56m or 14% to £343m.

As we indicated was expected in our Trading Update in April, Covid-19 had a significant impact on financial performance in the first half of the year.

· The impact from Covid-19 on adjusted operating profit is estimated at around £220m before mitigating actions, with approximately £100m of the impact related to the combined effects of reduced overall energy consumption, the related sell back to the market of commodity not required, and higher balancing costs. Of the remainder, around £60m was driven by gross margin lost due to reduced services and solutions activity as only essential work was undertaken, and around £60m from increased bad debt provisions.

· Mitigating actions of approximately £160m meant the net impact of Covid-19 was approximately £60m. The largest element of these mitigating actions was due to our decision not to pay senior management bonuses relating to 2019 performance, which resulted in the release of an accrual made last year. The mitigating actions also included discretionary cost savings and the use of government job retention schemes.

· In addition, falling commodity prices impacted the Upstream division, with an estimated negative impact of approximately £190m compared to H1 2019, and warmer than normal weather impacted the energy supply businesses by an estimated £60m.

· However, we benefited from the non-recurrence of a one-off cost of £70m incurred in 2019 due to Ofgem's revision to the methodology calculating supplier wholesale costs during the transitional period in Q1 2019.

· In addition, underlying performance was resilient, with improved underlying gross margins in North America Business, benefits from efficiency delivery, in particular in UK services and Centrica Home Solutions, and strong trading performance in Energy Marketing & Trading.

Stable adjusted earnings per share

The net finance charge was broadly unchanged at £129m resulting in adjusted profit before tax of £214m, 22% lower than in H1 2019. The Group adjusted effective tax rate was 35% compared to 47% in H1 2019, which includes the impacts of a lower weighting of profit towards more highly taxed E&P activities, partially offset by a deferred tax charge due to a change in future UK corporation tax rates.

Reflecting the above, adjusted earnings attributable to shareholders rose by 10% to £147m and adjusted EPS was up 4% to 2.5p.

Significant exceptional charge due to restructuring costs and upstream impairments

A pre-tax exceptional charge of £1,036m was recognised in H1 2020, including restructuring costs of £251m and impairments of E&P assets and our investment in Nuclear totalling £785m. The impairments are predominantly due to the reduction in price forecasts and Nuclear plant availability issues. After tax, the exceptional charge was £888m compared to £260m in H1 2019.

When also including a gain from certain net re-measurements after tax of £459m, compared to a loss from these certain re-measurements in H1 2019, the statutory loss attributable to shareholders was £193m compared to £550m in H1 2019. A statutory EPS loss of 3.3p was reported compared to a loss of 9.6p in H1 2019.

Robust cash flows and liquidity

Overall cash flows were robust, despite the reduced EBITDA. This includes £154m of working capital inflow compared to an outflow of £260m in H1 2019, including the impact of working capital requirements reducing as revenues fell in our business energy supply activities. However, it also includes approximately £250m related to a number of timing items, the most significant being a one month deferral of our Danish VAT bill, which we expect to reverse in the second half of the year.

The reduction in net debt further demonstrates the flexibility we have to manage our cash flows, and the prompt and prudent actions we took to reduce cash expenditure in response to the Covid-19 pandemic. Organic capital expenditure was down £54m compared to H1 2019 while exceptional cash flows were £114m lower.

Reflecting the above, Group free cash flow of £750m, which is reconciled to statutory operating cash flow in the Group Financial Review, was £320m higher than in H1 2019. After taking into account net interest and pension deficit cash payments, net cash inflow was £593m, which includes the impact of our decision announced in April to cancel the 2019 final dividend due for payment in 2020 in response to the uncertainties caused by Covid-19.

When including non-cash movements, net debt reduced by £402m over the first six months of the year to £2.8bn.

We also retain significant access to liquidity. As at the end of June, the Company had £1.3bn of available cash and cash equivalents (net of bank overdrafts) and £2.9bn of undrawn credit facilities.

The IAS19 net pension deficit increased by £359m in the period to £522m.

WELL POSITIONED TO NAVIGATE THROUGH UNCERTAINTIES

Looking forward, as lockdowns ease in our core markets we have already seen some recovery in energy demand and more normal sales of services and solutions. We would expect these trends to continue into the second half of the year, assuming a second wave of Covid-19 does not lead to further severe lockdowns in our core markets.

However, we remain cautious on the potential for incremental working capital outflow and bad debt cost during the second half of the year, if customers delay or defer payments given the uncertain economic outlook and the implications for unemployment. Given the uncertainty this causes, we are not providing any specific financial guidance for the full year at this time, having withdrawn adjusted operating cash flow guidance at the time of our Trading Update in April.

Full year performance also remains subject to the usual variables of commodity price movements and volatility, weather patterns and operational and commercial performance. However, the prompt and prudent actions we have taken, and the flexibility we have in our cash expenditure, leave us well placed to navigate through the uncertainties.

SIGNIFICANT RESTRUCTURE UNDERWAY

Centrica has strong market positions

Centrica has leading positions in energy supply, services and solutions for both residential and business customers, with our principal geographic focus on the UK and Ireland. However, our organisational structure has been too complex and has got in the way of us being able to serve customers as effectively as we would want.

Creating a simpler, leaner, more modern Company

In June, we announced plans for a significant restructure designed to create a simpler, leaner Group focused on delivering for our customers. This included a proposed new organisational design and the start of a consultation process to simplify terms and conditions for colleagues in the UK. The restructure will help to simplify and modernise the Group and allow us to put customers at the heart of everything we do.

The Company now operates with fewer customer-facing business units, all of which report directly to the Group Chief Executive .

· British Gas will continue to serve UK residential energy supply and services customers as well as customers previously served by Centrica Home Solutions. Alongside British Gas we have also created a new business unit which will utilise a low-cost 'software as a service' platform for energy only customers and is designed to compete more effectively with challenger brands. We will look to migrate residential and smaller business customers to this platform over time.

· Centrica Business Solutions will continue to offer low carbon energy solutions for businesses and will also serve the energy supply needs of customers previously served by UK Business.

· Bord Gáis Energy (previously Ireland) and Energy Marketing & Trading will both continue as business units in their current form.

· Direct Energy Home (previously North America Home) and Direct Energy Business (previously North America Business) will both continue in their current form until the proposed sale of Direct Energy is complete.

Acceleration of targeted cost savings

With the majority of restructuring expected to take place in the second half of 2020 following consultation on the proposals with colleagues, the implementation of the revised operating model is expected to accelerate the delivery of targeted cost savings. We now expect to achieve the vast majority of our targeted annualised cost savings of £2bn between 2015 and 2022 by next year, having delivered £1.26bn by the end of 2019. This is planned to result in a more competitive cost structure, in particular in our UK energy supply and services businesses, an improved customer experience, and provide a platform for growth.

The reorganisation will lead to a reduction of around 5,000 roles across the Group, with the expected cost for this provided for in the first half exceptional restructuring charge of £251m. Over half of the reduction is expected to come from management roles and we have already commenced a process to decrease the number of organisational layers from nine to six, creating a flatter, less bureaucratic organisation which is closer to, and focused on, the customer. Group direct headcount was around 1,100 lower at the end of June compared to the end of 2019, and the number of roles at the three most senior levels of the organisation have been reduced by around 45% since the announcement of the restructure in June. The large majority of the role reductions are expected to take place in the UK, and therefore delivery of the cost savings is not expected to be materially impacted by the sale of Direct Energy.

A more flexible workforce

In addition to the proposed new organisational design, the company has commenced consultation to simplify terms and conditions for employees in the UK. Centrica has over 80 different employee contracts, each with multiple variants, with many of the agreements dating back over 35 years. We need to modernise these to enable us to best serve the changing expectations of today's customers while retaining the quality of our service.

PROPOSED DIVESTMENT OF DIRECT ENERGY

We announced on 24 July 2020 that we had entered into an agreement to sell our North American business, Direct Energy, to NRG Energy for $3.625bn (£2.85bn) in cash, on a debt free, cash free basis.

Since Centrica's entry into North America in 2000, Direct Energy has been a valuable and strategically important part of the Group. However, having received a highly compelling unsolicited offer from NRG Energy to acquire Direct Energy, we entered into a limited period of exclusive negotiations in May with NRG Energy, to explore further the basis for a transaction. The Board believes the transaction results in an attractive price for Direct Energy, representing a multiple of 7.9x 2019 Underlying Adjusted EBITDA of $457 million.

The transaction enables Centrica to simplify further its business, which alongside the significant restructuring that is now underway will create a simpler, leaner Company, focused on its core markets of the UK and Ireland.

It will also increase the long term strength of the Group's balance sheet, with net cash proceeds intended to be used to reduce net debt significantly and to make a material contribution to the Group's defined benefit pension schemes. In addition, it will result in a more stable financial profile for the Group, with an increased proportion of its cash flows generated from contracted services, and removal of volatility that is inherent within Direct Energy Business.

The transaction is conditional upon approval by Centrica's shareholders and various other approvals, including regulatory approvals, and is expected to complete in the fourth quarter of 2020.

E&P AND NUCLEAR DIVESTMENT PROCESSES ON PAUSE

Our intention remains to exit oil and gas production and nuclear power generation in line with our strategic shift towards the customer.

In 2019, we announced our intention to divest our 69% shareholding in Spirit Energy, in line with our strategy to exit E&P. We were due to receive initial bids around the end of March, however we took the decision to pause the process against the uncertain backdrop created by the Covid-19 pandemic. We still intend to exit E&P, and plan to restart the Spirit Energy process once commodity and financial markets have settled. While we still own this business we will actively manage it. The steps we have taken with our partner and the management team in Spirit mean we expect to be, at worst, free cash flow neutral in both 2020 and 2021, even in the current low commodity price environment.

In 2018, we announced our intention to divest our 20% interest in the UK operating nuclear fleet of power stations. We continue to consider options for the sale, however the divestment process is currently paused given the operational issues, and as previously stated we may still hold an interest in nuclear at the end of 2020.

NEAR-TERM PRIORITIES FOCUSED ON SIMPLIFYING CENTRICA

Centrica retains leading positions in energy supply and services in all its core markets, which generate significant and stable cash flows. These businesses will remain the Group's core focus, and they will be further strengthened by the actions we are taking to simplify the Group, to improve the customer experience and reduce operating costs. This is intended to position us for customer-facing growth.

Therefore, our near term priorities will be on delivering the restructure, alongside progressing the planned divestments and maintaining financial discipline to help us navigate Covid-19 related uncertainties.

We remain focused on becoming a wholly customer-focused energy services and solutions company and are well positioned to support and benefit from new market opportunities in the decarbonisation of power, heat and transport, while supporting a green economic recovery. However, we will pursue opportunities in a disciplined way and focus our attention on those that we believe will be beneficial to our customers and will add the most material value to the Group.

SUMMARY

Centrica's performance in the first half of the year was significantly impacted by the Covid-19 pandemic. However, the Group's performance was resilient and cash flow and liquidity remain robust, reflecting the flexibility the Group has in its cash expenditure. We are well positioned to navigate through the significant uncertainties that still exist in the second half of 2020.

There is a lot to achieve in the second half of the year, as we focus on progressing planned divestments and deliver a significant Group restructure, while maintaining tight discipline on all cash expenditure to ensure a strong balance sheet.

These changes will result in a simpler, leaner, more modern, more customer-focused energy services and solutions company, which will be able to better capitalise in its leading positions and capabilities and enable millions of customers to transition to a lower carbon future.

Group Financial Review

GROUP REVENUE

Group revenue included in business performance reduced by £1.3bn or 9% to £12.5bn (2019: £13.8bn). Gross segment revenue, which includes revenue generated from the sale of products and services between segments reduced by £1.7bn or 12% to £12.8bn (2019: £14.6bn). This was driven largely by lower demand for energy from businesses due to Covid-19.

OPERATING PROFIT

The statutory operating loss was £135m (2019: £446m). Adjusted operating profit was £343m (2019: £399m). The difference between the two measures of profit relates to exceptional items and certain remeasurements. A table reconciling the different profit measures is shown below:

Adjusted operating profit

· In Centrica Consumer, adjusted operating profit was up £88m or 37%.

− UK Home operating profit rose £48m or 27% compared to H1 2020.

− UK Home energy supply profit increased by £7m or 8%, which includes a benefit from the non-repeat of the default tariff cap related one-off cost of £70m in Q1 2019. Excluding this impact, benefits from cost efficiency delivery were more than offset by lower average energy customer account holdings, and lower overall energy consumption as the impact of warmer weather more than offset the increase in demand which resulted from more people working at home during Covid-19.

− UK Home services profit increased by £41m or 43%, with the benefit of cost efficiencies and higher average services customer account holdings in the period. The impact of Covid-19 was limited in the period, as reduced revenue and margin resulting from around a 40% reduction in boiler installations were mitigated by use of the Government's furlough scheme and tight cost control. However, reflecting the fact that we were not able to carry out non-essential workload in the first half of the year, there may be the need to compete additional workload in the second half.

− Ireland operating profit was down £1m or 3%, as gross margin growth from an improved customer mix and good trading performance was more than offset by factors including an increased bad debt charge as a result of Covid-19.

− North America Home operating profit increased by £22m or 29%, as cost efficiencies more than offset minor impacts from Covid-19 of a higher bad debt charge and lower services demand.

− Centrica Home Solutions operating loss reduced by £20m or 41%, with a significantly lower cost base following the decision in 2019 to focus activity on the UK and Ireland. Revenue was down by £14m reflecting reduced sales activity as a result of the Covid-19 pandemic, however overall gross margin was only £2m lower, as the revenue mix moved towards higher-margin offers.

· In Centrica Business, an adjusted operating loss of £4m was reported in H1 2020, compared to a £9m profit in H1 2019.

− UK Business adjusted operating loss was £39m compared to a £19m profit in H1 2019. This reflects Covid-19 related energy demand reduction, which also required commodity hedges to be unwound at a loss and resulted in higher electricity balancing costs. The bad debt charge also roughly doubled due to increased provisions.

− North America Business adjusted operating loss was £47m, compared to a £14m loss in H1 2019. Underlying retail power margins improved, reflecting lower capacity market charges. However, Covid-19 resulted in lower energy demand which required commodity hedges to be unwound at a loss, and an increase in bad debt provisions.

− Centrica Business Solutions reported an adjusted operating loss of £34m compared to £27m in H1 2019, reflecting lower revenue as less sales and workload were carried out during Covid-19 lockdowns.

− EM&T operating profit increased by 259% to £115m, with strong performance in proprietary and LNG trading. There was a partial offset from an increased loss of £27m from the one remaining legacy gas contract, compared to a loss of £18m in H1 2019.

· Upstream operating profit fell 87% to £19m.

− Spirit Energy E&P adjusted operating profit fell by 63% to £33m, with the impact of lower achieved prices in the falling commodity price environment partially offset by lower depreciation resulting from 2019 impairments, lower field write-off costs and tight cost control.

− CSL adjusted operating profit was £1m compared to £58m in H1 2019, due to lower achieved prices and lower production due to the natural decline of the Rough field.

− Nuclear adjusted operating loss was £16m compared to profit of £2m in H1 2019, due to the impact of lower generation reflecting operational issues at a number of power stations and a deferred tax adjustment following the UK Government's decision to cancel the proposed reduction in the future corporation tax rate below its current level of 19%, partially offset by an increase in achieved power price.

Exceptional items

· A net exceptional pre-tax charge of £1,036m was included within Group operating loss before taxation in H1 2020 (H1 2019: £346m) including:

− A £381m charge relating to the impairment of E&P assets, predominantly due to the reduction in near-term prices and long-term price forecasts.

− A £404m charge relating to the impairment of power assets, including £395m related to the nuclear investment largely as a result of a reduction in price forecasts and availability issues at the Hunterston B, Dungeness B and Hinkley Point B power stations.

− £251m of restructuring charges have arisen in the period relating to the Group's restructuring and headcount reduction announcement in June 2020 in relation to expected future severance costs. In addition, costs associated with the continuation of the Group's cost efficiency programme principally related to property rationalisation costs and other transformational activity have been incurred in the first half of 2020.

· These charges in total generated a taxation credit of £148m (2019: £86m). As a result, total net exceptional charges after taxation were £888m (2019: £260m).

· Further details on exceptional items, including on impairment accounting policy, process and sensitivities can be found in notes 6(a) and 6(c).

Certain re-measurements

· The Group enters into a number of forward energy trades to protect and optimise the value of its underlying production, generation, storage and transportation assets (and similar capacity or off-take contracts), as well as to meet the future needs of our customers. A number of these arrangements are considered to be derivative financial instruments and are required to be fair valued under IFRS 9.

· 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 profit of £558m (2019: loss of £499m) relating to these re-measurements, largely due to the unwind of out of the money positions from December 2019.

· These re-measurements generated a taxation charge of £99m (2019: credit of £95m). As a result, the total net re-measurement profit after taxation was £459m (2019: loss of £404m).

· 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 costs

· Net finance costs increased to £129m (2019: £123m), due to a reduction in the interest income earned on items such as short-term investments in money market funds, bank deposits and government bonds.

Taxation

· Business performance taxation on profit decreased to £63m (2019: £133m). After taking account of tax on joint ventures and associates, the adjusted tax charge was £81m (2019: £128m). The resultant adjusted tax rate for the Group was 35% (2019: 47%).

· This included a deferred tax adjustment following the UK Government's decision to cancel the proposed reduction in the future corporation tax rate below its current level of 19%, which increased the tax charge by £35m.

· When excluding the impact of this deferred tax adjustment the underlying tax rate was 20%, reflecting the more highly taxed E&P businesses contributing 10% of adjusted operating profit compared to 37% in 2019.

· An effective tax rate calculation is shown below:

GROUP EARNINGS

Adjusted earnings

· Profit for the period from business performance increased to £151m (2019: £143m) and after adjusting for non-controlling interest, adjusted earnings increased by 10% to £147m (2019: £134m). This reflects the decline in adjusted operating profit and small increase in net finance costs, more than offset by the lower adjusted tax charge as described above.

· Adjusted basic EPS was up 4% to 2.5p (2019: 2.4p).

Group statutory loss

· The statutory loss attributable to shareholders for the period was £193m (2019: £550m). The reconciling items between Group profit for the period from business performance and statutory profit are related to exceptional items and certain re-measurements.

· The Group reported a statutory basic EPS loss of 3.3p (2019: 9.6p).

GROUP CASH FLOW, NET DEBT AND BALANCE SHEET

Group cash flow

· Free cash flow is being reported alongside adjusted operating cash flow as management believe it provides relevant information to show the cash generation of the business after taking account of the need to maintain its capital asset base. Free cash flow will be used as the primary measure of cash flow going forward. Free cash flow and adjusted operating cash flow are reconciled to statutory net cash flow from operating activities in the table below. See the explanatory notes on page 58 for further details.

· Adjusted operating cash flow increased by 34% to £998m despite lower adjusted operating profit, reflecting an inflow in working capital compared to an outflow over the same period last year.

· Free cash flow increased by 74% to £750m compared to H1 2019, reflecting the increase in adjusted operating cash flow, lower organic capital expenditure due to ongoing capital discipline and lower payments relating to exceptional charges as we delayed restructuring programmes during the first half of the year, partially offset by lower divestment proceeds.

· Net cash flow from operating activities increased from £177m in H1 2019 to £903m in 2020. This reflects the increase in adjusted operating cash flow as described above, lower defined benefit pension deficit payments and a margin cash inflow in the period compared to an outflow in H1 2019.

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

· Net cash outflow from investing activities reduced to £39m in H1 2020 (H1 2019: £100m), including the impact of lower proceeds from sale of businesses, lower capital expenditure and a higher cash inflow from the sale and settlement of securities.

· Net cash outflow from financing activities reduced to £169m in H1 2020 (H1 2019: £570m) as no dividend was paid to Centrica shareholders or Spirit Energy minority shareholders.

Net debt

· All of the above resulted in a £695m increase in cash and cash equivalents over the year, and when also including non-cash movements such as £124m of new leasing arrangements and exchange adjustments, net debt reduced by £402m to £2,779m, including cash collateral posted or received in support of wholesale energy procurement.

· Further details on the Group's net debt are included in note 12.

Balance sheet

· Net assets decreased to £1,419m (31 December 2019: £1,795m) reflecting the statutory loss and actuarial losses made in the period partially offset by exchange differences on translation of foreign operations.

Pension deficit

· The Group's IAS 19 net pension deficit increased by £359m to £522m in the period, with a reduction in the discount rate due to low interest rates increasing the obligation. The increase was partially offset by the effects of an increase in the value of the pension assets, inflation and agreed deficit payments.

2020 ACQUISITIONS AND DISPOSALS

· On 23 December 2019, the Group agreed to sell its 382MW King's Lynn combined cycle gas turbine power station to RWE Generation. The disposal was classified as held for sale as at 31 December 2019. The transaction completed on 12 February 2020, resulting in the receipt of consideration of £102m, after adjustments for final working capital balances and after transaction costs.

· Further details on assets purchased, acquisitions and disposals are included in notes 4(e) and 11.

EVENTS AFTER BALANCE SHEET DATE

· On 24 July 2020, the Group announced it had agreed to dispose of its North American supply, services and trading business, Direct Energy, to NRG for headline consideration $3.625 billion (£2.85bn) on a debt free, cash free basis.

· Details of events after the balance sheet date are described in note 17.

 RISKS AND CAPITAL MANAGEMENT

· Whilst the nature of the Group's principal risks and uncertainties are unchanged from those set out in its 2019 Annual Report, the Group has actively responded to those risks heightened by Covid-19.

· Our top three Principal Risks continue to be Political & Regulatory Intervention, Financial Markets and Balance Sheet Strength and Credit Position and all have been amplified by Covid-19. The degree of government support globally, in the form of government aid and stimulus programmes, will ultimately determine the degree of customer debt we may see. It will also create implications in how we respond to debt management for vulnerable customers and will impact the speed of recovery in the commercial sector. These factors will also impact a number of other Principal Risks. Falls in commodity prices and asset valuations have heightened our risks associated with Financial Markets and Balance Sheet Strength and Credit position. People risk is also intensified as we progress through our programmes of change.

· Details of how the Group has managed financial risks such as liquidity and credit risk are set out in note 19. Details of the Group's capital management processes are provided under sources of finance in note 12(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.

Appendix: Business Unit metrics

UK Home

1. 2019 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.

3. Rolling 12-month average.

North America Home

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

2. 2019 includes four months of Clockwork Home Services, sold 30 April 2019

Ireland

1. 2019 not provided due to an alignment to group methodology.

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

3. 2019 restated to include services account holdings.

Centrica Home Solutions

UK Business

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

2. Includes services account holdings. 2019 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. 2019 has been restated to include the Spalding tolling agreement.

Nuclear

Exploration & Production

1. Lifting and other cash production costs are total operating costs and cost of sales excluding depreciation and amortisation, 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 Spirit NTS costs.

3. 2019 restated to be aligned to group methodology. See pages 56 to 57 for an explanation of the use of adjusted performance measures.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Interim Results for the six-month period ended 30 June 2020 in accordance with applicable law, regulations and accounting standards. In preparing the condensed interim Financial Statements, the Directors are responsible for ensuring that they give a true and fair view of the state of affairs of the Group at the end of the period and the profit or loss of the Group for that period.

The Directors confirm that the condensed interim Financial Statements have been prepared in accordance with IAS 34: 'Interim Financial Reporting', as adopted by the European Union and that the Interim Results includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

· an indication of the important events that have occurred during the first six months and their impact on the condensed interim Financial Statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

· material related party transactions in the first six months of the year and any material changes in the related party transactions described in the last annual report.

The Directors of Centrica plc are listed in the Group's 2019 Annual Report and Accounts. A list of current Directors is maintained on the Centrica plc website which can be found at www.centrica.com.

On behalf of the Board on 24 July 2020

Chris O'Shea Johnathan FordGroup Chief Executive Group Chief Financial Office

Independent Review Report to Centrica plc

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 which comprises the Group Income Statement, the Group Statement of Comprehensive Income, the Group Balance Sheet, the Group Statement of Changes in Equity, the Group Cash Flow Statement and related notes 1 to 20. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Use of report

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Deloitte LLP

Statutory Auditor

London, United Kingdom

24 July 2020

Group Income Statement

The notes on pages 28 to 55 form part of these condensed interim Financial Statements.

Group Statement of Comprehensive Income

The notes on pages 28 to 55 form part of these condensed interim Financial Statements.

Group Statement of Changes in Equity

The notes on pages 28 to 55 form part of these condensed interim Financial Statements.

Group Balance Sheet

The notes on pages 28 to 55 form part of these condensed interim Financial Statements.

Group Cash Flow Statement

The notes on pages 28 to 55 form part of these condensed interim Financial Statements.

Notes to the condensed interim Financial Statements

1. General information

Centrica plc (the 'Company') is a company domiciled and incorporated in the UK. The address of the registered office is Millstream, Maidenhead Road, Windsor, Berkshire, SL4 5GD. The Company has its listing on the London Stock Exchange. The Company, together with its subsidiaries comprise the 'Group'.

The condensed interim Financial Statements for the six months ended 30 June 2020 included in this announcement were authorised for issue in accordance with a resolution of the Board of Directors on 24 July 2020.

These condensed interim Financial Statements do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2019 were approved by the Board of Directors on 12 February 2020 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified and did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 of the Companies Act 2006. The financial information contained in these condensed interim Financial Statements is unaudited. The Group Income Statement, Group Statement of Comprehensive Income, Group Statement of Changes in Equity, Group Cash Flow Statement for the interim period to 30 June 2020, the Group Balance Sheet as at 30 June 2020, and the related notes have been reviewed by the auditors and their report to the Company is set out on page 22.

2. Basis of preparation

These condensed interim Financial Statements should be read in conjunction with the Group's consolidated Financial Statements for the year ended 31 December 2019, which were prepared in accordance with International Financial Reporting Standards as adopted by the European Union, and applied by the Group at the time.

Preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expense. Actual amounts may differ from these estimates. In preparing these condensed interim Financial Statements, the significant judgements, estimates and assumptions made by management in applying the Group's accounting policies were consistent with those applied in the Group's consolidated Financial Statements for the year ended 31 December 2019, unless amended by the application of new accounting policies, standards or interpretations, or as a result of changes in estimation uncertainty or judgements as described in note 3.

Taxes on income in the interim period are accrued using tax rates that would be applicable to expected total annual earnings for each relevant source of income.

In the context of the economic uncertainty caused by Covid-19 and commodity price falls, the Directors have updated their going concern assessment to factor in the Group's updated principal risks, strategy and forecasts, together with modelling further downside sensitivities. The going concern assessment has considered the financial impact on the Group's credit and liquidity headroom of certain stress events impacting the Group's key risks: commodity price, weather, regulatory, liquidity and further impacts of Covid-19, over a 12-18 month horizon. Potential mitigating actions such as reducing costs, capital expenditure and future dividend payments were also considered. The Group's forecasts show that the Group should maintain sufficient headroom even before such mitigations are applied, underpinned by c£2.9bn of undrawn committed facilities, which remain committed until at least 2024. Accordingly, the Directors continue to believe it is appropriate to adopt the going concern basis of accounting in preparing the condensed interim Financial Statements, and note the significant level of undrawn credit facilities available to the Group.

3. Accounting policies

The accounting policies applied in these condensed interim Financial Statements are consistent with those used in the preparation of the Group's consolidated Financial Statements for the year ended 31 December 2019, as described in those annual Financial Statements, with the exception of policies, standards, amendments and interpretations effective as of 1 January 2020 and other changes detailed below.

(a) New accounting policies, standards, amendments and interpretations effective or adopted in 2020

From 1 January 2020, the following standards and amendments are effective in the Group's consolidated Financial Statements:

· Amendments to IFRS 3: 'Business combinations';

· Amendments to IAS 1: 'Presentation of financial statements' and IAS 8: 'Accounting policies, changes in accounting estimates and errors'; and

· Amendments to the Conceptual Framework for Financial Reporting.

The amendments to IFRS 3 modify the definition of a business in order to assist entities in determining whether an acquisition falls within the scope of the standard.

The amendments to IAS 1 and IAS 8 clarify the definition and application of the materiality concept in financial reporting.

The amendments to the Conceptual Framework make a number of clarifications and modifications to the concepts underpinning IFRS.

None of the changes to IFRS described above have a material impact on the Group's consolidated Financial Statements.

As a result of the economic impacts of the Covid-19 pandemic, a number of government programmes have been put into place to support businesses and consumers. Examples of such initiatives include the UK's Coronavirus Job Retention Scheme. In accounting for the impacts of these measures, the Group has applied IAS 20: 'Government grants'. Under the Group's accounting policy, grants are recognised when there is reasonable assurance that the Group will comply with the conditions attaching to them, and that the grant will be received. Government grants are recognised in the Group Income Statement on a systematic basis over the periods in which the related costs that they are intended to compensate are recognised. Grants related to income are deducted in reporting the related expense and are therefore presented net in the Group Income Statement. Government grants received in advance of the Group meeting the criteria for recognition in the Group Income Statement are deferred and presented within Trade and other payables. There is no impact of this policy on prior periods.

During the six months to 30 June 2020, the Group recognised an amount totalling £25 million receivable under the UK Government's Coronavirus Job Retention Scheme. This has been presented net in Cost of sales and Operating costs before exceptional items and credit losses on financial assets in the Group Income Statement.

(b) Standards, amendments and interpretations that are issued but not yet applied by the Group

Amendments to IAS 37: 'Provisions, contingent assets and contingent liabilities' are effective from 1 January 2022, subject to EU endorsement. The amendments specify which costs an entity should include when assessing whether a contract is onerous and therefore requires a provision.

Amendments to IAS 1 relating to the classification of financial liabilities are effective from 1 January 2023, subject to EU endorsement. The amendments clarify the meaning of settlement in the context of liabilities, and the circumstances in which liabilities are classified as current or non-current.

The Group is assessing the impact these changes will have on its consolidated Financial Statements.

In March 2020 the International Accounting Standards Board decided to defer the effective date of IFRS 17: 'Insurance Contracts' to 1 January 2023. The Group will complete its assessment of the impact the standard will have on the consolidated Financial Statements in line with this revised effective date.

Other issued amendments or interpretations that have not yet been applied by the Group are not expected to have a material impact on the Group's accounting policies.

(c) Centrica specific accounting measures

The Directors believe that reporting adjusted measures (revenue, gross margin, operating 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 revenue, adjusted gross margin and adjusted operating profit to evaluate segment performance. They are defined as revenue/gross margin/operating profit before:

· exceptional items; and

· certain re-measurements.

Exceptional items and certain re-measurements are excluded because these items are considered by the Directors to distort the Group's underlying business performance.

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 9.

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 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 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 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.

Exceptional items and certain re-measurements

The Group reflects its underlying financial results in the business performance column of the Group Income Statement. To be able to provide users with this clear and consistent presentation, the effects of 'certain re-measurements' of financial instruments, and 'exceptional items', are reported in a different column in the Group Income Statement.

The Group is an integrated energy business. This means that it utilises its knowledge and experience across the gas and power (and related commodity) value chains to make profits across the core markets in which it operates. As part of this strategy, the Group enters into a number of forward energy trades to protect and optimise the value of its underlying production, generation, storage and transportation assets and contracts (and similar capacity or off-take arrangements), as well as to meet the future needs of its customers (downstream demand). These trades are designed to reduce the risk of holding such assets, contracts or downstream demand and are subject to strict risk limits and controls.

Primarily because some of these trades include terms that permit net settlement, they are prohibited from being designated as 'own use' and so IFRS 9: 'Financial instruments' requires them to be individually fair valued.

Fair value movements on these commodity derivative trades do not reflect the underlying performance of the business because they are economically related to the Group's 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 period presents both realised and unrealised fair value movements on all derivative energy contracts, including those 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.

(d) Key sources of estimation uncertainty and critical accounting judgements

With the exception of the items noted below, key areas of critical accounting judgement and estimation uncertainty that have the most significant effect on the consolidated Group Financial Statements remain as disclosed in note 3(a) and 3(b) of the Annual Report and Accounts for the year ended 31 December 2019.

Covid-19

The Covid-19 pandemic has had a profoundly negative impact on the global economy, and there is significant uncertainty around the timing and shape of any economic recovery. This has given rise to an increase in estimation uncertainty for the Group, particularly regarding the matters noted below.

Impairment of long-lived assets

Upstream gas and oil assets

Forward prices for gas and liquids are a key input in the determination of the recoverable amount of the Group's gas and oil assets. The first half of 2020 saw significant falls in the prices for such commodities, both in terms of observable market prices and forecast forward prices in periods in which market prices are not available. This fall was exacerbated by the reduction in demand for commodities experienced as a result of the Covid-19 pandemic.

Details of impairments of gas and oil assets recorded as a result of this fall in prices, along with associated sensitivities, are provided in note 6.

Centrica Business Solutions - customer cash generating unit

The recoverable amount of the customer cash generating unit within Centrica Business Solutions is particularly sensitive to cash flows forecast in the final year of the model used to determine the fair value less costs of disposal of the unit. This is because the final modelled year is used to compute a terminal value, and therefore to give the value of the ongoing, mature business.

The carrying value of the cash generating unit (including goodwill and other intangible assets, and property, plant and equipment) is £316 million. The impairment test carried out at 30 June 2020 demonstrates limited headroom on this amount. Were operating cash flows forecast in the final year of the cash flow model to decrease by 6%, this headroom would be eroded. Any further deterioration in operating cash flows forecast in this year would give rise to an impairment.

Credit provisions for trade and other receivables

The economic effects of the Covid-19 pandemic have impacted the ability of the Group's customers to pay amounts due. While the impact on customers has been mitigated by a number of government support and stimulus schemes, the level of estimation uncertainty in determining the credit provisions required for customers in different sectors and geographies has increased. Details of the approach taken to determining the level of credit provision and associated sensitivities are provided in note 14.

Pensions and other post-employment benefits - asset valuation

The Group's defined benefit pension schemes hold part of their plan asset portfolio as unquoted assets. These include private equity and property interests that are typically subject to valuation uncertainty. The economic uncertainty arising as a result of the Covid-19 pandemic has increased this level of uncertainty. The valuation of these assets is based on the latest asset manager views and other relevant benchmarks. Further details of the Group's pension schemes are provided in note 13.

LNG contracts - valuation

The Group's 20-year agreement with Cheniere, under which LNG is purchased from the Sabine Pass liquefaction plant in the US, has been assessed to determine if the contract should be considered onerous. The contract has an intrinsic value that depends heavily on the gas price spread between both Henry Hub and NBP, and Henry Hub and Asian LNG markets. During the period these spreads have narrowed considerably, meaning that the intrinsic value of the contract is now close to nil based on forecast spreads as at 30 June 2020. The Group is satisfied that value remains in the contract as a whole, but this is reliant on the capture of extrinsic value. Based on forecasts as at the reporting date, on an intrinsic-only basis, a 1% movement in the aforementioned spreads would change the estimated value of the contract by c.£35 million. As at 30 June 2020, the Group is committed to make minimum payments of $4.7 billion (£3.8 billion) over the remaining life of the arrangement. Further details of the Cheniere contract are provided in note 23 to the Annual Report and Accounts for the year ended 31 December 2019.

North American business disposal - asset held for sale judgement

On 24 July 2020, the Group announced it had agreed to dispose of its North American supply, services and trading business, Direct Energy, to NRG for headline consideration of $3.6 billion (£2.85 billion) on a debt free, cash free basis. This disposal is (amongst other things) subject to shareholder and regulatory approval. The business was not classified as a disposal group held for sale as at 30 June 2020, because, at that time, the Group judged that the disposal was not highly probable, as there was insufficient certainty around reaching agreement with NRG, and then obtaining shareholder and regulatory approval. The businesses to be sold are reported as part of the Centrica Consumer and Centrica Business segments. Subject to the aforementioned approvals, the disposal is expected to complete in late 2020, or early 2021.

4. Segmental analysis

(a) Segmental structure

During the second half of 2019 the Group's reportable operating segments were 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 period are detailed below. Income sources are reflected in Group revenue unless otherwise stated:

(b) Revenue

(i) Segmental revenues have been restated to reflect the current operating structure of the Group, as described in note 4a.

The table below shows the Group revenue arising from contracts with customers, and therefore in the scope of IFRS 15, and revenue arising from contracts in the scope of other standards.

(i) Segmental revenues have been restated to reflect the current operating structure of the Group, as described in note 4a.

The Group applies the practical expedient in paragraph 121 of IFRS 15 and therefore does not disclose information related to the transaction price allocated to remaining performance obligations on the basis that the Group recognises revenue from the satisfaction of the performance obligations within energy supply contracts in accordance with Paragraph B16.

(c) Adjusted gross margin and adjusted operating profit

(i) Segmental results have been restated to reflect the current operating structure of the Group, as described in note 4a.

(d) Included within adjusted operating profit

(i) Segmental results have been restated to reflect the current operating structure of the Group, as described in note 4a.

(ii) The Other segment includes corporate functions, subsequently recharged.

(e) Capital expenditure