Centrica PLC — Annual Report 2017

Dec 31, 2017

Satisfying the changing needs of our customers

Annual Review 2017

Group Highlights

Group Financial Summary (Year ended 31 December 2017)

2016: £27.1bn ▲3%

2016: £1,515m ▼17%

2016: £895m ▼22%

Adjusted basic earnings per share (EPS)

2016: 16.8p ▼25%

2016: £2,686m ▼23%

2016: £3,473m 25%

Group revenue Return on average capital employed (ROACE)

▼2ppt

Adjusted earnings Statutory profit for the year

Statutory basic earnings per share Total customer electricity

Adjusted operating cash flow Statutory net cash flow from operating activities

Group net debt Net exceptional charge after taxation included in statutory profit

2016: £27m (credit)

Group Key Operational Performance Indicators

Total customer account holdings – Consumer('000)(1)(2) £28.0bn 14% 26,668 2016 ▼5% 25,316 2017

Adjusted operating profit Statutory operating profit Total customer account holdings – Business ('000)(2) £1,252m £486m 1,352 1,273 2017

2016

Total customer gas consumption (mmth)

£698m £333m 12,022 2016 11,630 2017

consumption (GWh)

12.6p 6.0p 144,810 2016 133,869 2017

Direct Group headcount(3)

Lost time injury frequency rate per 200,000 hours worked ▼20% 2017 0.36†

(1) 2016 account holdings have been reduced by 55,000 following data assurance activity of our analytical system. (2) Consumer customer account holdings now include Connected Home cumulative hubs installed.

Business customer account holdings now include Distributed Energy & Power (DE&P) active customer sites. 2016 figures restated to be consistent.

(3) Direct Group headcount excludes contractors, agency and outsourced staff.

Pages 30 to 31 Assurance We engaged

Read more about our Key Performance Indicators

PricewaterhouseCoopers LLP (PwC) to undertake a limited assurance engagement over 22 metrics highlighted with the symbol '†' throughout our Annual Review 2017.

We are an energy and services company.

Everything we do is focused on satisfying the changing needs of our customers.

Read more about Centrica Consumer Pages 18 to 23

Read more about Centrica Business Pages 24 to 29

Unless otherwise stated, all references to operating profit or loss, taxation, cash flow, earnings and earnings per share throughout the Strategic Report are adjusted figures, reconciled to their statutory equivalents in the Group Financial Review on pages 48 to 51.

Contents

Strategic Report

• 2 Centrica at a Glance
• 4 Chairman's Statement
• 6 Group Chief Executive's Statement
• 10 Our Strategy
• 12 Our Business Model
• 14 The Strategic Repositioning of Centrica
• 16 Customer Focus
• 18 Centrica Consumer
• 24 Centrica Business
• 30 Key Performance Indicators
• 32 Responsible Business
• 39 Our View on Taxation
• 40 Business Review
• 48 Group Financial Review 52 Our Principal Risks and Uncertainties

Governance

• 64 Board of Directors
• 66 Senior Executives
• 67 Summary Directors' and Corporate Governance Report
• 70 Summary Remuneration Report

Financial Statements

• 76 Independent Auditor's Statement
• 77 Summary Financial Statements

Other Information

• 79 Shareholder Information
• 80 Glossary

Centrica at a Glance

Our purpose

To provide energy and services to satisfy the changing needs of our customers.

Our Group structure

Centrica Consumer

UK Home

Supplying competitive and reliable energy to residential customers in the UK, and providing innovative services and solutions that help to keep their homes warm and working.

Ireland

Supplying energy and energy services to residential and business customers across Ireland.

Read more about Centrica Consumer Pages 18 to 23 and 41 to 42

North America Home

Supplying competitive and reliable energy and providing home services to customers in North America.

Connected Home

Helping customers get more from their homes, providing automation, energy management and peace of mind through our award-winning range of Hive connected home devices, software and services.

Centrica Business

UK Business

Supplying energy and services to a diverse range of business customers in the UK, using a variety of products tailored to meet their differing needs and help them more effectively manage their energy consumption and costs.

North America Business

Supplying competitive and reliable electricity and natural gas commodity and energy services to retail and wholesale customers across North America.

Distributed Energy & Power

Providing industrial and commercial customers with the ability to use energy more intelligently, giving them the tools to generate and manage their energy usage under the Centrica Business Solutions brand.

Energy Marketing & Trading

Providing risk management and wholesale market access for the Group, building on strong cross-commodity trading capabilities and a global presence in LNG.

Central Power Generation

Generating power from our larger gas fired power stations and our 20% interest in eight nuclear power stations in the UK.

Read more about Centrica Business Pages 24 to 29 and 43 to 45

Exploration & Production

Through Spirit Energy we are targeting a sustainable, selffinancing Exploration & Production (E&P) business, producing around 50 million barrels of oil equivalent a year, focused on the North Sea (the UK, the Netherlands, Norway and Denmark).

Read more about E&P and Centrica Storage Pages 46 to 47

Centrica Storage

The Group operates the Rough gas field in the UK North Sea, which is being converted from a strategic storage asset to a producing asset before decommissioning.

Group snapshot

The world of energy is changing and, with our chosen businesses, distinctive propositions and current capabilities, Centrica is well placed to deliver for its customers, shareholders and for society. We aim to be a good corporate citizen and an employer of choice.

Our areas of focus for growth are Energy Supply, Services, Connected Home, Distributed Energy & Power, Energy Marketing & Trading. We also have a material Exploration & Production division.

We supply energy and services to over 25 million customer accounts mainly in the UK, Ireland and North America through strong brands such as British Gas, Direct Energy and Bord Gáis Energy, all supported by around 15,000 engineers and technicians. We are focused on delivering high levels of customer service, engagement and loyalty.

Our performance

Breakdown of

Technology is increasingly important in the delivery of energy and services to our customers. We are developing innovative products, offers and solutions, underpinned by investment in technology. In 2017 we announced the creation of a new venture 'Centrica Innovations' to identify, incubate and accelerate new technologies and innovations.

At the end of 2017, phase one of Centrica's repositioning was complete. We have simplified our business and portfolio. We now have just three divisions – Centrica Consumer, Centrica Business and Exploration & Production. Our asset portfolio has been materially repositioned.

We delivered our £750 million per annum cost efficiency programme three years early and met our net debt targets. We are seeing encouraging signs of progress in our customer-facing businesses. In our next phase to 2020, we will further shift

investment towards those businesses and focus on performance delivery, specifically growing gross margin and driving a further £500 million per annum of cost efficiencies, while maintaining financial discipline.

Breakdown of adjusted

£8,536m £9,252m £827m £781m £2,722m £2,702m £42m £33m £1,830m £2,031m £8,158m £7,664m £171m £161m £4,766m £3,282m £622m £667m £1,600m £1,642m £148m £93m £819m £810m £47m £46m £119m £93m £4m £50m £71m £221m £104m £161m £35m £75m £184m £17m £187m £(95)m £(50)m £(53)m £(26)m £(52)m gross revenue operating profit/(loss) UK Home Ireland North America Home Connected Home UK Business North America Business Distributed Energy & Power Energy Marketing & Trading Central Power Generation Exploration & Production Centrica Storage 2017 2016 Read more in the Business Review Pages 40 to 47 Read more in the Group Financial Review Pages 48 to 51 Centrica plc Annual Review 2017 | 3

Chairman's Statement

2017 was a difficult year for Centrica and, to my deep regret, for our shareholders.

We are in the midst of a necessarily ambitious transition: from a diversified company, back to its core; to a customerfocused provider of value-added services and solutions; to a digital partner, providing data-led insights into the whole energy experience of our customers; to an offering that provides products, expertise and guidance, not simply molecules and electrons; to a business model in which we can control our own destiny to a far greater degree than in the past.

This would be a tough undertaking even in a benign and supportive political environment. As it is, the pressures we have faced from this quarter in our important home market have raised the degree of competitive difficulty and created an air of uncertainty that weighed heavily on our share price in 2017. I am disappointed that the many actions we have taken to help vulnerable customers, bring old tariff models to an end and reward loyalty have received little recognition from politicians.

Our response has been to strive to make Centrica more resilient to our external environment. This requires a fundamental repositioning of our organisation, processes and systems, integrating a hitherto fragmented structure, always in the service of our customers. This must all necessarily be executed at pace, because to stand still in our fast-moving sector is to invite obsolescence, and because our employees understandably want to get to the other side as quickly as possible. There is a palpable desire within Centrica to find new ways of accelerating cultural change, building innovative capabilities and better meeting our customers' expectations at a lower cost.

Accordingly, the business is being rebuilt on a firm foundation. Underlying everything, and essential to long-term value creation, has been the considerable work done by Iain Conn and his senior leadership team in focusing on our core businesses of energy supply and services, and the propositions which our customers expect today and desire tomorrow.

All the while ensuring that the fundamentals of change – our purpose, our new values and new ethical standards – are fresh, relevant and deep rooted, with safety, compliance and conduct at the top of our agenda.

The strategic transition is being delivered well and all of our declared financial targets have been met. But there have also been areas of weakness, particularly in our North American power book during the second half of the year. The impact of competitive and pricing pressures here was exacerbated by a seasonally weak performance from our North American gas business and the discovery of an historical accounting issue.

Our control systems are being enhanced and improved and the accounting issue was verified as having been a one-off. But not before deep damage had been done to confidence in the Company and its prospects, with commensurate harm to our share price layered on top of the impacts of the current political uncertainty. There was an understandably strong reaction from investors and doubts emerged about the detail and deliverability of the Centrica strategy.

I hope that our Executive team went a long way to addressing these concerns at the Preliminary Results in February. They reminded our stakeholders that the first phase of our strategic repositioning has been successfully completed. They reinforced the point that our Consumer division remains stable and profitable, with the prospect of real growth, and that there is further scope for cost efficiency gains.

They offered explanations, not excuses, for the performance issues in our Business division. Above all, they sought to reassure investors that, through our changing portfolio, cost efficiency and divestment options, Centrica has a strengthening resilience to uncertainty.

As ever, we recognise that the good governance of the Company is essential to the delivery of our strategy. So, in that spirit, let me offer a window into the business of your Board in 2017: the issues which will dominate our agendas in the coming year and our plans to build further on the new governance approaches to risk mapping, stakeholder engagement and board development that we have implemented in recent years.

The first and key question we revisit at each meeting, and in the round each October, is whether we are pursuing the right strategy. It can be tempting to alter course in the face of strong headwinds. And this has been the subject of renewed challenge by your Board since our trading update in November.

Our strong and shared contention is that strategy is not about short-term adjustments; it is about staying true to our purpose and aligning ourselves with the fundamental forces – consumer power and choice, decentralisation and digitisation in particular – that are changing the energy world, affecting both our customers and the planet. So, we believe the answer to be clear. Nothing has happened to invalidate the strategy which we set out in 2015.

Our vision is clear, our determination is unshakeable, our governance is robust and we are confident that we will return Centrica to real and sustainable growth.

Rick Haythornthwaite Chairman

In 2018, our focus is very much on strategy delivery and performance management. We are concentrating on those things which we can control and we are prioritising the performance of our existing businesses over expansion. We are confident that the shape of the business we now have is the right one to deliver growth over time and achieve our strategic goals.

Meanwhile, we have continued to revise and refresh our approach to risk management to ensure that we have a stronger framework in place as we pursue our strategic objectives. In 2017, we focused on embedding our redesigned process. The risk management framework makes a positive contribution to good decision-making and business growth and will be even stronger for the lessons learnt last year. Your Board discussed all aspects of our perceived risk exposure, with particular emphasis on process safety, political pressures, strategic delivery, cybersecurity, capability development and leadership succession.

Inextricably linked to leadership succession is our approach to the attraction and retention of key people, a component of which relates to their remuneration. This year we are putting a new Remuneration Policy to the vote at our Annual General Meeting and have sought, through extensive dialogue, to understand and reflect the evolving consensus of the body of our investor base. We recognise in our recommended Policy an increasing investor discomfort with reward for input if and when performance outcomes are lagging.

So, we are proposing that annual bonuses should be more closely tied to shareholder experience, regardless of the quality and intensity of the Executive team efforts. Longerterm reward remains very much aligned to the fortunes of shareholders, with deferred stockbased schemes ensuring that only sustained performance and growth is rewarded. But to strengthen this link further, we are proposing to add a Total Shareholder Return measure to the Long Term Incentive Plan. More details are set out in the revised Remuneration Policy at centrica.com/ar17

Throughout 2017, our Executive team worked tirelessly to deliver the first phase of the strategic transformation and, in the eyes of your Board, exceeded our expectations in their ability to close difficult divestments, navigate complex changes in the organisation in a very sensitive manner and bring home promised efficiency gains three years ahead of schedule. But that good strategic work was overshadowed by the disappointed expectations of short-term performance and the impact of UK government pressure, with the net result of a significant fall in the value of your Company. Our current Remuneration Policy would have resulted in significant annual bonuses, though considerably less than last year, even after adjustment for the effects of weather and commodity prices. The impact of the painful shareholder experience of 2017 would have had little impact on the calculated outcome. The newly proposed Remuneration Policy goes some way to redressing this mismatch. But, pending its adoption, your Board decided that discretion should be exercised under the current policy to reflect recent events, even though a significant portion of the impact was beyond the control of the Executive team.

Accordingly, no annual bonuses or pay rises were awarded to the Executive Directors for 2017 and, provided the new Remuneration Policy is adopted, stock awards under the forthcoming Long Term Incentive Plan will be reduced. This reinforces the broad and collective accountability of the Executive leadership.

In other matters, your Board spent much time over the past year ensuring that the business has the right teams in place with the right leadership style to achieve our strategic objectives. The future of our Company depends on having the best talent and on the motivation of that talent. Once again, our people have surpassed my expectations and I would like to thank them for all their hard work.

But we, as the leaders of this business, must do more to support our own people. Employee engagement levels fell again in 2017 as the transition process continued. Our Gender Pay Statement showed that women at Centrica are paid on average 12% less than men, although we have a strong track record of equal pay for equal work. This gap can be explained in part by the legacy of traditionally male-dominated field engineering roles in our business. But it must be closed and we are committed to doing so.

So, I have asked our Non-Executive Director, Joan Gillman, to undertake a review of key employee matters and how we might assure ourselves that the voice of our people is being heard loud and clear in the boardroom. Joan has wide-ranging experience in the media and communications sector, with a very evident empathy towards the importance of engagement, teamwork and diversity. Her review will allow her to bring more Centrica-specific content to her boardroom contributions and challenge.

We bade farewell to Lesley Knox who stepped down after six years of much appreciated service as a Non-Executive Director, for which she has our sincere gratitude. We are in the process of seeking a successor who will bring, not only digital insights into customer segmentation and journeys, but also the voice of the customer into the boardroom, ensuring that we avoid circularity and insularity of thinking.

To that end, we in particular need to focus more on our weakest performance if we are truly to improve customer experience levels and open up the powerful possibility of our customers becoming our advocates. This is the most reliable route to dealing with the trust gap that confronts business as a whole and the energy supply sector in particular. As Board members, we all have personal experience of handling complaints from customers who contact us directly. We cannot help but be affected by what we sometimes hear. But the flow is still too anecdotal to be helpful in holding the Executive team to account on its drive to improve service. So, once recruited, I will be asking our new Non-Executive Director to consider how best to keep our boardroom dialogues deeply connected to our customers, their needs and our responses.

In summary, what we are trying to achieve at Centrica is not easy. In fact, it is one of the most ambitious changes attempted by any company in one of the most competitive and challenging sectors of the economy. But we are not doing this out of ambition. We are doing this because it is absolutely necessary for the future of this business that we adapt to the changes in the energy landscape and that we find new ways to meet the changing needs of our customers.

We believed this in 2015 when we set out our new strategic direction. We believe it now. Our future is in the hands of our customers and, by extension, our own hands. We may occasionally stumble on the road and be jostled by powerful external forces. But our vision is clear, our determination is unshakeable, our governance is robust and we are confident that we will return Centrica to real and sustainable growth.

Rick Haythornthwaite Chairman

21 February 2018

Read more about Corporate Governance Pages 67 to 69

Group Chief Executive's Statement

2017 was a challenging year for Centrica. Our performance in the second half was weak, particularly in Business energy supply.

This, combined with uncertainty around our future prospects in UK energy supply, significantly amplified by the Prime Minister's announcement in October that the UK Government would pursue a market-wide price cap of the Standard Variable Tariff (SVT) and other default tariffs, resulted in a significant fall in our share price in 2017, particularly over the fourth quarter.

Some of the drivers were clearly beyond our control. But clearly we regret the outcome and the impact it has had on our shareholders and on our employees. I am determined to restore shareholder value and confidence. The underlying trends driving our strategy are clear, as are the distinctive capabilities we have to benefit from them. We are committed to delivering attractive returns and growth over the medium term. Our focus today is on performance delivery and financial discipline – on demonstrating top line growth as we deliver improved service and new propositions for our customers, and driving efficiency as hard as possible to underpin our competitiveness.

Although we delivered our 2017 published targets in terms of operating cash flow, cost efficiency and headcount reduction, capital discipline and net debt, our financial results were disappointing. Adjusted operating profit at £1.25 billion was down 17%, earnings were down 22%, at £698 million, equivalent to 12.6 pence per share. Adjusted operating cash flow was £2.07 billion. EBITDA of £2.14 billion was down 9%.

We delivered a disappointing result in our North America Business operation. This was both in terms of the performance of our power supply book and from a charge relating to historical revenue recognition in one of our billing systems going back to 2013. Performance in UK Business energy supply was also poor. Adjusted operating profit for Centrica Business as a whole was down 67%.

However, Centrica Consumer delivered robust performance with adjusted operating profit down only 1% despite the impacts of warm weather, the UK Government prepayment tariff cap, competitive intensity and investing for growth.

Despite the setbacks, the foundations of our businesses remain strong. We believe our business model is – and will continue to be – resilient, even under the pressures we face. Our strategy is clear. It is founded on an analysis of market trends and sources of growth, on our own capabilities and the efficiency necessary to pursue them profitably.

Centrica is an energy and services company. Our purpose is 'to provide energy and services to satisfy the changing needs of our customers'. This is the core of the Company and we have been supplying energy and services to customers since 1812. We are re-emphasising and returning to that core. However, it is not 1812, the needs of customers are indeed changing, and as we deliver for them the propositions we offer must change too.

Globally, the energy system is becoming more decentralised, customers are becoming more powerful because of increased choice, and technology is accelerating the pace of change. These trends, which we identified when we launched our new strategy in 2015, are even clearer today and are playing out in line with our views at the time. We are in step with where the energy world is going and the services which our customers desire. We do not believe that anything has happened since 2015 to invalidate our strategy or the core strengths of the Company.

As a result, Centrica is focusing more investment on the customer-facing businesses. We are also becoming simpler as an organisation. We now have only three divisions, Centrica Consumer, Centrica Business and Exploration & Production (E&P). Each has a clear participation strategy and strategic framework. The reason we have established Group-wide Consumer and Business divisions is that we have found that customer needs are very similar globally, and they are seeking more than simply energy supply.

Our focus today is on performance delivery and financial discipline – on demonstrating top line growth as we deliver improved service and new propositions for our customers and driving efficiency as hard as possible to underpin our competitiveness.

Iain Conn Group Chief Executive

What we are doing is not a radical departure from our roots; it is a natural extension of who we are and what we are good at. Through installing boilers, heating systems and their controllers we have always been in the 'home energy management' business. Our development of Hive, starting with the digital thermostat and the intelligent boiler, is the next phase in the evolution of home energy management and a direct extension of our in-home services business.

We are finding that consumers want these propositions and are willing to pay for them. We are also finding that many customers value receiving these services from the same provider as their energy supply. The same principles apply to our business customers. The new propositions and services we have developed are not a distraction or somehow unrelated to our legacy businesses. They are at the heart of what our legacy offerings have to incorporate and what the most valuable customer segments are demanding.

In our Consumer division, revenues have been stable and unit gross margins are attractive. We did see a fall of 1.35 million customer accounts during 2017. We have made active choices on which channels and customer segments we are seeking to engage, retain and serve. We do not like losing any customers but most of these customer accounts generated very low gross margin and were loss-making at the operating profit level.

In contrast, while we have seen some losses in higher value accounts, in 2017 we were successful in encouraging a net approximately 700,000 UK energy accounts from the SVT to our fixed-term tariffs. We have seen material growth in new services and relationships. We saw 18% growth in protection plans in the US. In Connected Home we saw cumulative installed hubs grow by 71% to 900,000 over 2017. We exceeded our target of 1.5 million products sold. Connected Home continues to grow in all of our energy supply geographies, and our first international partnership with Eni gas e luce in Italy will see its full commercial launch in April.

Our Local Heroes scheme has grown rapidly from its launch at the beginning of last year. We now have 7,000 tradespeople signed up, backed by our guarantee, and we have now completed over 25,000 jobs. This ondemand offer continues to accelerate and it complements our own contract relationships through British Gas.

We have also seen the number of British Gas services accounts deliver the first year of stability since 2010. Accounts grew by 77,000 in the second half, reversing the fall we saw in the first half. In addition, 700,000 customers have so far signed up for British Gas Rewards, enabling us to enhance the relationship and proposition for our loyal customers in combination with our other offers.

In our customer businesses, our goal is to focus on value, not volume, retaining and engaging our customers while continuing to drive costs down to maintain margins. This is what we will concentrate on across the Centrica Consumer portfolio as we extend the propositions we can offer our customers with the goal also to stabilise and grow the total number of relationships we have. We believe we can continue to make progress, even in the face of further price regulation in the UK.

As we have made clear, we do not support price controls in competitive retail energy markets and we believe they will not ultimately benefit customers. We believe price caps will reduce competition and choice, and prices tend to ultimately converge around the cap level. Instead, to improve the market our focus is on increasing customer engagement, driving cost efficiency, improving service levels, on rewarding loyalty and on delivering propositions that customers want.

Last year, we announced a package of actions and proposed measures to reform the UK energy market for the long term and really benefit customers, without the need for price controls. At its heart are our decision to withdraw the British Gas SVT and our call for the UK Government and the regulator to ban this sort of rolling tariff across the industry. We will introduce new, attractive fixed-term propositions including fixed-price, online only and bundled tariffs. We will introduce a new default tariff and increase choice to try to avoid people going onto a default tariff in the first place. Allied to a greater range of choice for customers and simpler bills, we think these measures will be far more effective in improving the market for customers than any price caps.

However, given the prospect of default tariff cap legislation we are taking a number of steps to reduce our relative exposure to price caps and their impact on Centrica. We will reduce our exposure to a cap, using our recent efficiency to continue to price competitively and to drive further cost reductions. We had 4.3 million customers on SVTs at the end of 2017 and we expect to reduce this to 3 million by the end of this year as the measures described above take effect. Secondly, as a result of our own cost efficiencies and other actions to date, our current SVT is cheaper than 85% of the market and is £41 a year below the average SVT of the large suppliers. Thirdly, our efficiency programme will deliver an additional estimated saving of £20 per dual fuel customer by 2020.

Taking all of this together, and recognising that the formula for any potential cap is not yet known, we believe that we can deliver a sustainable energy supply business in the UK with healthy returns under most conceivable scenarios.

Turning to Centrica Business, we have continued to develop our business across the five pillars of our divisional strategic framework. We find that in addition to the commodity offerings of energy supply and energy wholesale, business customers want access to more distributed energy generation solutions, and we are moving from building large central power generation plants to many smaller distributed units. Our customers want combined heat and power units, solar arrays and the grid operators want distributed power systems and technology to assist with the optimisation of local energy markets and micro-grids. Along with this, customers want to be able to gain insight from their energy use to save money and improve their operations, including in preventative maintenance. Customers who have distributed energy assets want to be able to optimise them and are willing to pay for optimisation services rather than do it themselves.

We have responded to these needs by developing capabilities in all of these areas, both organically and through targeted acquisitions of Panoramic Power, ENER-G Cogen, Neas Energy and REstore. We have also expanded our distribution and sales capability and built a new marketing platform for business customers under the brand Centrica Business Solutions.

We have also disposed of our large gas fired generation plants and our two large wind farms and continued to shift our portfolio to more distributed assets. We have converted some sites to peaking plant and have several projects underway to build new gas fired rapid response generation sites, as well as constructing a battery storage facility which is one of the largest in Europe. We also aim to divest our shareholding in UK nuclear power. Subject to ensuring alignment with our partner, and being very mindful of UK Government interests in this area, we would hope to achieve this by the end of 2020.

The business customer is also on the move and we are responding to their needs. They want more than just commodity energy supply, and the new capabilities and propositions we have developed once again reinforce the core of the relationship. The returns in value-added services tend to be higher than in pure commodity energy supply.

The big message, therefore, whether in Centrica Consumer or Centrica Business, is that the new propositions and services we have developed are at the heart of what Centrica's core offerings in energy and services now have to incorporate. They are at the heart of what important and valuable customer segments are demanding. Centrica has now developed the capabilities to offer them in a high-quality way. We are seeing improvements in the customer experience and the growth in demand is feeding through to revenues and at attractive margins.

Since we embarked on our new strategic direction we have made a number of acquisitions to provide the key capabilities we did not already have in-house. These acquisitions have all met, and in some cases exceeded, our expectations. We have widened the footprint of the Group beyond the UK and North America to serve customers in 40 countries. However, in the last three months of 2017 the risk envelope for Centrica changed, and as a result, we will not be pursuing growth through major M&A activities. This is because the uncertainty over the UK price cap is too great and we wish to maintain our hard-fought balance sheet strength. We will, however, continue to pursue smaller bolt-on acquisitions to build capability in key areas.

In our asset businesses we have made divestments of over £900 million – towards the top of our target range – and reduced capital investment into them. Last year, we combined our E&P operations with Bayerngas Norge AS, and the new business, Spirit Energy – in which we hold a 69% stake – began trading as an independent oil and gas operator. Our goal is to make Spirit

Energy stronger and more sustainable and we will now target further consolidation. We would be open to having a lower ownership percentage in a larger entity, provided our net E&P exposure remains broadly unchanged and we retain sufficient influence to shape the strategic direction of the business. We would therefore also be prepared to own less than 50% of Spirit Energy if the right opportunity came along.

We also concluded that our Rough storage asset was no longer capable of safe injection operations due to its age and condition and that, because of the economics of seasonal storage and the cost of refurbishing or rebuilding the facility, neither pathway would be economic. We therefore decided that we can no longer operate Rough as a storage facility and have now received all relevant consents and approvals to extract the recoverable gas from the reservoir. In the past, Rough has made a vital contribution to the nation's security of supply. But today, the UK is fortunate in benefiting from a diverse range of energy sources.

Centrica is halfway through a six-year strategic repositioning of the Company and I would now like to summarise what has been delivered during the first phase since 2015.

We have continued our reallocation of resources away from the asset businesses towards our customer-facing activities. We have made divestments of over £900 million and reduced capital allocation to E&P by £300 million per annum while investing an

additional £700 million across 2016 and 2017 in the customer-facing businesses. This has enhanced our capabilities and technologies, leaving us well positioned to capitalise on consumer trends.

We have been successful in reducing costs. We have delivered our £750 million cost efficiency programme three years early. We have also set out plans for further significant cost reductions, totalling an additional £500 million a year by 2020, which will release more savings to support our aim of becoming the most efficient price setter for our chosen propositions and brands.

We have reduced our net debt to less than £2.6 billion, in the lower half of our target end 2017 band, and our credit metrics are at levels currently required for the strong investmentgrade credit ratings that we aim for.

As we look forward to 2018/20, although we have still got some portfolio development to complete, the focus is on performance delivery and financial discipline. In performance terms, it is about growing gross margin through our customer relationships, and driving the next phase of cost efficiency. We will also be focusing on improving organisational effectiveness and securing the capabilities we need in 2020 and beyond. We must do all of this while continuing to deliver improvements in safety, compliance and conduct and in operational excellence across the Company, starting with customer service.

Key events in 2017 April Hive thermostat introduced in US, and subscription model launched in UK Read more on Page 20 22 February British Gas unveils Rewards, its major new loyalty programme Read more on Pages 19 and 41 09 June Centrica agrees the sale of its Canadian E&P business 2017 08 February Centrica announces global Consumer and Business divisions 20 February Centrica launches new innovations venture, Centrica Innovations Read more on Page 15 13 January Centrica announces sale of its remaining wind farm joint venture Read more on Page 45

We will be targeting delivery, on average, of £2.1–£2.3 billion of adjusted operating cash flow per annum. We believe this is deliverable, even taking into account a potential price cap, for the reasons outlined earlier. But there remains a risk that a particularly severe cap impact in the first year may put this target at risk for 2019.

As we continue to focus on financial discipline we will be limiting capex to no more than £1.2 billion per annum and targeting to maintain net debt within a £2.25–£3.25 billion range. Despite current pressures, we expect to continue to be able to balance sources and uses of cash in 2018, without materially affecting our ability to invest in the business and deliver on all aspects of our financial framework.

In terms of the dividend, we have indicated since 2015 that it would be linked to operating cash flow and we expect to maintain the current level of the dividend over the period 2018/20, subject to meeting our adjusted operating cash flow and net debt targets. We believe we can manage within both these constraints under most scenarios based on our current projections, but clearly, there are always risks associated with extremes of commodity price movements and regulatory interventions. We would intend to restore a progressive dividend only when, in addition to the criteria already mentioned, underlying cash flow growth capability is demonstrated.

The transformation of Centrica is also about the values which guide us as we go about our daily business. In 2017 we launched a new set of Group-wide values – 'our Values' of Care, Collaboration, Courage, Delivery and Agility – and in January this year we launched 'Our Code', which replaces the Business Principles and other codes of conduct within the Group. We wanted a clear, unified statement of the most important principles and expectations which apply to all of us. In essence, 'our Values' and 'Our Code' embody what we stand for. We hope that they will help all of us at Centrica make the right decisions.

The transition we are making has not been easy for our team. Our people have faced, and will continue to face, a number of new challenges. But they have shown extraordinary resilience, passion, commitment and talent, and I would like to thank each of them for all their contributions over the past year.

The first phase of our strategic repositioning is complete. We have strengthened the balance sheet, paid down debt, matched our sources and uses of cash, and refocused resources and capability towards the customer. But we are only halfway through a six-year repositioning and we must stay the course.

The next phase to 2020 is all about performance delivery and financial discipline, as we marry customer-led gross margin

growth with continuing to drive material levels of cost efficiency while maintaining capital discipline and a strong balance sheet.

It is this combination, our track record to date and an excellent and committed team which give us confidence to pursue our medium-term goals of delivering growth and returns through satisfying the changing needs of our customers, deal with the uncertainties posed by any default tariff cap in the UK and indicate a stable dividend outlook within defined boundary conditions.

It is undeniable that at present Centrica faces a higher level of external uncertainty. It is therefore imperative that we focus on the things we can control to underpin our performance.

This is how we will rebuild shareholder value and confidence, and I am determined to demonstrate this through our actions, one step at a time.

Iain Conn

Group Chief Executive 21 February 2018

12 June

Centrica announces national roll-out of industry-first Local Heroes

Read more on Pages 21 and 41

01 August

British Gas extended price freeze ends; increases electricity prices on the standard tariff by 12.5% but protects its most vulnerable customers from the rise

14 November

Centrica announces expansion of Connected Home business into Italy

Read more on Pages 20 and 42

11 December

Spirit Energy launched, following completion of Centrica and Bayerngas Norge E&P joint venture

spirit-energy.com

Read more on Pages 15 and 46

2017 2018

21 June

Centrica announces sale of Langage and South Humber Bank gas fired power stations

03 November

Centrica acquires Europe's leading demand response aggregator REstore

Read more on Pages 28 and 44

20 November Centrica sets out proposals for UK Energy Market reform

Read more on Page 18

12 December CMA terminates

Rough undertakings at Centrica Storage

Read more on Page 47

Our Strategy

Strategic context

In 2015 our Strategic Review was founded on an analysis of market trends and sources of growth, and the capabilities and efficiency necessary to pursue them profitably.

The three fundamental trends we identified and which are changing the energy landscape – decentralisation, shifting of power to the customer and digitisation – are even clearer today and are playing out in line with our views at the time.

Three macro-trends are driving the energy transition

Decentralisation

Globally, as we pursue lower carbon and more efficient solutions, the energy system is becoming decentralised with more technologies available and viable, close to the customer.

Power to the customer

As a result of increased choice and alternatives, the customer is becoming more powerful. Owning the relationship with customers and satisfying their needs is fundamental.

Digitisation

Technological developments, both physical and digital, are accelerating the pace of change. Capability in these areas is key to keeping up with customers and their changing needs.

These trends demand more decentralised technologies and propositions, more customer intimacy and better service, more agility and stronger technology capability.

The result of all these changes is that the customer is increasingly powerful. That is why, at Centrica, we have put 'satisfying the changing needs of our customers' at the heart of our strategy.

Consumers and business customers show similar trends across all global markets:

Consumer

Market trends

• Global demographic changes
• Adoption of technology
• Mobile first
• Self-service
• Traditional competitive boundaries blurring
• Growth of data and analytics

Customers need

• Value for money
• Solutions not just products
• Frictionless service
• Trusted brands
• Responsible use of data

Read more about Centrica Consumer Pages 18 to 23 and 41 to 42

Business

Market trends

• Volumes per customer reducing
• Margins under pressure
• Gas becoming global
• Mega-trends impacting energy sector
• Electricity system becoming more local

Read more about Centrica Business Pages 24 to 29 and 43 to 45

Customers need

• Reduced cost and increased productivity
• Supply security and resilience
• An expert partner to guide them through complexity
• A trusted and credible counterpart
• Not to be distracted from their main activity

Strategic approach

To deliver the strategy we announced in July 2015, we set ourselves a number of medium-term objectives to 2020. We have organised the Group to deliver customer-led growth through two global customer-facing divisions and refocused our Exploration & Production business.

Our Strategy:

• To deliver for the changing needs of our customers
• To deliver long-term shareholder value through returns and growth
• To be a trusted corporate citizen
• To be an employer of choice
• To be a 21st century energy and services company

Our strategic objectives:

• Customer-led growth
• Smaller and more focused E&P business
• £1.5 billion resource reallocation from E&P and Central Power Generation to customer-facing businesses 2015/20
• £750 million per annum efficiency programme delivery by 2020
• Strong financial discipline within a clear framework
• Adjusted operating cash flow growth of 3-5% per annum

Our focus areas for long-term growth:

• Energy Supply
• Services
• Connected Home
• Distributed Energy & Power
• Energy Marketing & Trading

We already have some or all of the characteristics of material market share, ability to manage large customer books and risk, strong product brands, leading capabilities and emerging products and offerings in these focus areas.

Identifying and managing risk is essential to delivering our strategy Read more about how we manage risk Pages 52 to 62

Customer-facing divisions

In 2017, we reorganised the Group around the customer, creating two new, customerfacing divisions: Centrica Consumer and Centrica Business. The customer needs addressed by each division are global. We have built strategic frameworks around those needs that go beyond energy supply and target those areas where we believe we have real competitive advantage.

Strategic pillars

Consumer

• 1. Energy supply
• 1. In-home servicing
• 1. Peace of mind
• 1. Home energy management
• 1. Home automation

Business

• 1. Energy supply
• 1. Wholesale energy
• 1. Energy insight
• 1. Energy optimisation
• 1. Energy solutions

Exploration & Production

Exploration & Production (E&P) will continue to play an important role for Centrica, but a more focused one. E&P provides diversity of cash flows and is a source of balance sheet strength. Following our divestment programme, the formation of Spirit Energy, and conversion of the Rough field to a producing asset, our E&P business will now be focused on Europe.

Our Business Model

Our business model is designed to deliver returns and growth through a focus predominantly on our customer-facing businesses.

Our Energy Supply, Services, Connected Home, Distributed Energy & Power and Energy Marketing & Trading businesses are organised into two global customer-facing divisions; Centrica Consumer is designed to support the needs of residential consumers and Centrica Business is designed to support the needs of the business customer. Each division has a strategic framework built around five pillars and these are set out in the diagram below.

Our Central Power Generation business is included within the Centrica Business division, given its role in the management and optimisation of central power generation and its interface with wholesale markets.

Our customer-facing businesses are supported by the common operating functions of Customer Operations and Field Operations. These functions are where we interact with the customer and are fundamental to our success.

Our remaining two business units, Exploration & Production and Centrica Storage, are operated separately and continue to play an important role in our portfolio.

To ensure our model remains efficient and scalable, all businesses are supported by a number of centre-led Group Functions that are responsible for setting boundaries and standards which allow us to effectively manage risk and ensure a strong system of internal control.

Our customer-facing strategic framework

Our Group Priorities

We are focused on five key priorities to deliver our strategy and we align performance and risk management processes around these, including our Key Performance Indicators.

Customer satisfaction and operational excellence

Cash flow growth and strategic momentum

Read more about Key Performance Indicators Pages 30 to 31

Read more about Remuneration Pages 70 to 74

Our stakeholder commitments

Customers

Help customers save time and money by delivering excellent customer service alongside innovative products and services.

Employees

Create a great place to work with a diverse and inclusive culture where our people feel motivated and able to achieve their full potential.

Investors

Deliver long-term shareholder value through financial returns and growth.

Society

Provide competitive energy prices and support for those who struggle to pay for their energy.

Regulators and government

Secure a more affordable and clean energy future through engagement while contributing positively to economic growth and tax receipts.

Suppliers

Treat our suppliers fairly and maintain high social, ethical and environmental standards in the products and services we buy.

Our long-term financial goals

Our long-term financial goals are delivered through a clear financial framework that enables us to deliver long-term shareholder value through returns and growth.

The risks to achieving the Group's strategy are monitored and reported regularly. For more information on managing our exposure to risk see Our Principal Risks and Uncertainties on pages 52 to 62.

Our priorities also ensure that progress in delivering performance in Safety, Customer Satisfaction, Operational Excellence and People is a core part of the overall Group performance, which is then measured through individual employee scorecards.

Adjusted operating cash flow (AOCF)

3-5%

Dividend Progressive in line with AOCF

Controllable costs(1)

Cost growth < inflation

Return on average capital employed (post-tax) 10-12%

Strong investment grade (Baa1/BBB+ or above)

Capital reinvestment Investment < 70%

per annum from 2018/20

of AOCF Limited to £1.2bn

Credit rating

⁽¹⁾ Controllable costs comprise controllable cost of sales (costs which management deem can be directly influenced and excluding items such as commodity costs and transmission and distribution costs) and adjusted operating costs (excluding depreciation and amortisation, smart metering and solar expenses, dry hole costs, profit on fixed asset disposals, business performance impairments, the impact of portfolio changes and foreign exchange movements). Like-for-like controllable costs are controllable cost of sales, excluding the impact of portfolio changes, foreign exchange movements and growth investment in Connected Home and Distributed Energy & Power, and adjusted operating costs, excluding growth investment in Connected Home and Distributed Energy & Power.

The Strategic Repositioning of Centrica

We have fundamentally repositioned Centrica

• 1. Stronger and more resilient
• 1. Capable of delivering customer-led growth
• 1. Focused on delivering returns and growth

Shifting resources to customer-facing businesses

As part of our customer-led strategy, we announced that we would commit about £1.5 billion of additional operating and capital resources by 2020 to drive growth in our focus areas, broken down as follows:

We have invested over £700 million in these activities since the end of 2015 and expect further growth investment of around £250–£300 million per year out to 2020. We are reducing resource allocation to our asset portfolio by about £1.5 billion over this period.

Acquisitions

AlertMe (Connected Home) Mar-2015	£37m	Provides the technology that underpins Connected Home activity
Panoramic Power (DE&P) Nov-2015	£39m	Leading provider of device-level energy management solutions
ENER-G Cogen (DE&P) May-2016	£138m	Established supplier and operator of combined heat and power solutions
FlowGem (Connected Home) Aug-2016	£18m	An early stage UK-based business developing unique and innovative technology to remotely detect water leaks
Neas Energy (EM&T) Oct-2016	£184m	One of Europe's leading providers of energy management and revenue optimisation services for decentralised third-party owned assets
REstore (DE&P) Nov-2017	£59m	Europe's leading demand response aggregator

Organic investments

Over £300 million of incremental investment across 2016 and 2017.

• Connected Home: introduced Hive in North America, increased marketing spend and launched the subscription model.
• UK Home: invested in building Local Heroes and launched British Gas Rewards.
• DE&P: supported global mobilisation of technology, propositions and development teams. Launched in North America and funded further geographic expansion.
• EM&T: focused on business development within existing markets.
• North America Home: growing services, primarily annuities/protection plan products and new home heating, ventilation and air conditioning installations.
• Centrica Innovations: first investments to identify, incubate and accelerate new technologies and innovations.

Asset portfolio materially repositioned

In 2015, we announced a £500 million to £1 billion disposal programme which has delivered proceeds of over £900 million by the end of 2017, including the disposals of:

Canada E&P	£255m
Trinidad & Tobago E&P	£26m
Combined cycle gas turbines	£314m
Wind assets	£308m

Exploration & Production (E&P)

In 2017 we created a new E&P business, Spirit Energy. Centrica owns 69%, with Bayerngas Norge's former shareholders, led by Stadtwerke München Group, owning 31%.

Centrica Storage

Following extensive well testing, we concluded that the Rough facility was no longer capable of safe injection operations. We have been granted the necessary approvals to produce the indigenous gas and liquids from Rough before decommissioning.

Central Power Generation

We have shifted our portfolio to more distributed assets. We have converted some sites to peaking plants, are redeveloping Kings Lynn A, building new flexible gas fired generation, and installing one of Europe's largest rapid response batteries. We consider our nuclear position as a financial investment.

E&P smaller and more focused

The formation of Spirit Energy creates a strong and sustainable European E&P business, combining Centrica's cashgenerative and relatively near-term production profile with Bayerngas Norge's more recently on-stream producing assets and development portfolio.

The new company is a robust, self-financing entity, and will invest in the range £400–£600 million per annum to deliver sustainable medium-term production of 45–55 mmboe.

It has operations across the UK, Norway, Denmark and the Netherlands, with interests in 28 producing fields and over 70 exploration licences.

Spirit Energy's focus in 2018 will be to maximise efficiency from its producing assets, as well as progressing several key projects including the development of the Oda field, submitting a plan for Skarfjell field development, appraisal drilling at the Fogelberg discovery and drilling on a number of exploration prospects.

Read more about E&P in the Business Review Pages 46 to 47

Technology and innovation

Building capability in technology and innovation is a key enabler in supporting our customer-facing businesses to improve our offerings, deliver new products, propositions and service delivery to meet our customers' changing needs.

Our Technology & Engineering function is maturing. We are investing in a portfolio of innovative projects covering areas such as energy storage, electric vehicles, artificial intelligence and blockchain. We filed 24 patents in 2017.

We strengthened our Quality Assurance capability to drive improvements in the manufacturing value chain. This will support greater reliability of our products in customer installations, reduce cost and improve our operational efficiency.

Read some examples of how we are using technology to benefit consumers and businesses Pages 16 to 29

Investing in innovation for competitive advantage

Centrica Innovations (CI) is a strategic investor, helping accelerate Centrica's transformation. Since its inception in February 2017, CI has invested in companies with pioneering technologies.

EtaGen

A California-based start-up developing a linear generator that offers businesses affordable, flexible, reliable and clean on-site power.

Io-Tahoe

An Artificial Intelligence driven data management company was created by combining internal innovation and acquired intellectual property.

Rokitt Astra

In May 2017, the assets of Rokitt Astra were acquired and combined into Io-Tahoe to add machine learning to in-house data discovery solutions.

LO3 Energy

An innovative start-up specialising in blockchain-based solutions for energy transactions.

With technology hubs around the world, our teams in New York, Houston, San Francisco, Seattle, London and Tel Aviv actively scan for companies with the latest innovations for integration within the Group. From the Internet of Things to the Internet of Energy, our customers are empowered to take more control over their energy use. In the connected world, Centrica has a solid position and strong capability.

Charles Cameron

Director of Technology & Engineering and Centrica Innovations

our cust omers' A strategy shaped by

Centrica Consumer

We want to make householders' lives easier, by providing seamless, time-saving services that are easy to use and help save them money.

Understanding and satisfying customer needs is critical to our success. We have around 27 million customer accounts. Every year we receive 36 million phone calls and support more than 31 million online transactions. Through these interactions, we gain an unrivalled understanding of our customers' needs in and around the home.

Residential customers are seeking value for money and solutions, not just products, especially in the home. They desire great service, when and how they need it, and the reassurance of trusted brands. Customers also increasingly understand the value of their own personal data. They expect it to be used responsibly and held securely.

We believe these trends present us with numerous opportunities.

Centrica Consumer Bringing our Consumer strategy to life centrica.com/video/consumeroverview

Customer commitments We want to create a fairer, more competitive and sustainable energy market

See page 18

Getting the most out of your energy Home comparison helps Direct Energy customers save money at their fingertips

centrica.com/video/dehomecomparison

Responding to Harvey

Our Direct Energy colleagues talk about their experiences after Hurricane Harvey centrica.com/video/hurricaneharvey

our cust omers' changing needs

Battery storage

Unlocking alternative energy sources with battery storage

centricabusinesssolutions.com/ batterysolution

Helping businesses reach their potential

Entering a pioneering contract with Europe's single biggest onshore wind installation

See page 29

Centrica Business

Managing the revolution in energy systems for our business customers

centrica.com/video/ businessoverview

Centrica Business

At Centrica Business, we aim to be the partner that our business customers will turn to for advice on how best to manage their energy needs.

Our business customers, like our residential customers, are cost conscious. They want their bills to be as low as possible and they want to increase their efficiency wherever they can. Energy is essential, so they need to know that their supply is resilient.

Energy processes are complex. Our customers want an expert adviser to help them understand their energy use; a trusted and credible partner, who can deliver energy solutions as promised.

We can and do help to meet all these needs.

Power in Your Hands Powering our business customers' ambitions with intelligent, end-to-end energy solutions

centricabusinesssolutions.com/ powerinyourhands

Centrica Consumer

Creating a fairer, lasting deal for energy customers

We want to create a fairer, more competitive and sustainable energy market for our customers.

Our commitments to customers

We have been listening to our customers and stakeholders. We froze our prices in the UK through the entire winter of 2016/17 until last August, longer than any other supplier, and introduced a loyalty reward scheme. But we recognise that we need to go further.

On 20 November 2017, we announced seven commitments to customers, which we are working to deliver. We will:

• 1. End Standard Variable Tariffs (SVTs) for new customers
• 1. Engage customers already on SVTs and offer them better deals
• 3.Offer a choice of competitive fixed-term tariffs at the end of their contract
• 1. Introduce a new fixed-term default tariff
• 5.Provide new offers to respond to customers' changing needs
• 6.Bring in simple, no-nonsense bills for all our customers
• 1. Continue improving our customer service and our own efficiency

Our actions alone won't improve the market. So, we have asked the UK Government and Ofgem to:

• 1. Phase out SVTs altogether
• 1. Level the playing field on social and environmental policy costs which are included in energy bills
• 3.Move the funding of all government policy costs away from energy bills
• 1. Make the smart meter roll-out more efficient and effective
• 1. Be more consistent in the way vulnerable customers are treated
• 1. Remove strict rules making energy bills complicated
• 1. Refresh the calculation of the price cap for customers on pre-payment meters

We feel these changes will be more effective than further government intervention in the shape of temporary price controls.

Digital engagement

We want to create better digital experiences, because our customers want and expect us to. Webchat means we can respond to customers' online queries more quickly and at a time convenient to them. Our British Gas Chatbot allows customers to seek help or book smart meter appointments without needing to call us up. They can also now interact with British Gas by using voice commands through Amazon Alexa. Our energy insight platforms – My Energy Live in the UK and Direct Your Energy in the US – help customers who have smart meters to gain greater insights into their energy use with just a few taps on their smartphone. We are currently trialling our next generation app, for roll-out later this year, which will include a range of enhanced functions, including tailored insights and alerts to help give customers more control over their spending.

Rewards

Inspired by the success of the Bord Gáis Energy Rewards Club in Ireland, the Centrica UK Consumer business launched British Gas Rewards. This programme gives customers highly personalised offers, giveaways and monthly prize draws as our way of saying thank you. So far, the benefits range from a free boiler service and a Hive Active Light Pack, to 10% off at Waitrose and Sky Store movies. Loyalty days provide customers with a number of days of free energy each year, linked to how long they have been with us.

+8

Increase in net promoter score (NPS) for British Gas Rewards members compared to non-Rewards customers

5.5m

Number of offers shown to our British Gas Rewards members by the end of 2017

70%

More than 70% of visits to britishgas.co.uk are now from mobile devices

Link to Consumer strategic framework Energy supply

Putting our customers at the heart of everything we do

Through our customer knowledge, insight and experience, we are putting customers in control of how they run their homes, helping to make their lives simpler and smarter.

Bringing Connected Home to customers in new markets

We have grown the Hive ecosystem, expanding the range of products and services that make our customers lives easier.

In 2017, Connected Home launched new subscriptions plans across the UK, Ireland and North America, to enable our customers to choose the package that works for their home. This includes smart bulbs and plugs, door and window sensors and a new smart home security camera.

In the UK, we launched the Hive Leak Plan, a subscription service featuring the new Hive Leak Sensor. This monitors water flow around the home, notifying the customer of potential leaks through the Hive app and connecting the customer with a British Gas engineer, who can repair the problem.

We are bringing the benefit of our Hive products to customers across the world including Ireland, North America and Italy. In Italy, this is through our five-year partnership with energy supplier, Eni gas e luce. This has the potential to enable Eni's eight million customers to access and use our products. Partnerships like this will increasingly be the focus for growing our Connected Home business.

Having full control of your central heating and hot water in the palm of your hand, it's so simple to use and the money it saves you over the 12 months is awesome.

UK Hive Active Heating customer

1.6m Connected Home cumulative products sold

+39 NPS for UK Hive customers

Link to

Consumer strategic framework Peace of mind Home energy management Home automation

Local Heroes goes nationwide

We know it's important for customers to get quick and easy access to reputable tradespeople if they need help with household breakdowns and other problems. Following a successful pilot, in June 2017 we launched a digital platform service in the UK that helps people to find trusted local tradespeople to complete jobs in the home and also helps tradespeople to source local work. It is quick and easy to use and has a 12-month guarantee backed by British Gas. By the end of 2017, more than 7,000 Local Heroes had signed up to the platform and completed nearly 25,000 jobs. The service provides us with access to the large and growing on demand market and has high customer satisfaction ratings.

Came out in less than an hour, called me 20 minutes before arrival and fixed the job in double quick time.

Local Heroes customer

25,000

Jobs completed for Local Heroes customers by the end of 2017

+81 Average NPS for Local Heroes customers

Link to Consumer strategic framework In-home servicing Peace of mind

Building workplace capabilities fit for the future

We are making long-term investments in our engineers' capabilities and tools so they are better equipped to serve our customers. In 2017, we invested £8.6 million in training and developing the skills of our 11,000 strong UK network of engineers and apprentices. Together, they completed over 385,000 hours of training last year. This equates to nearly one week per year for each engineer and will help them deliver a better customer experience across our full range of products and services – from boiler repairs to Connected Home devices.

We are also investing in technology so our engineers and technicians have the right tools at their fingertips. We have provided our engineers with smartphones so they can work more easily on the go. Our labs continue to develop new technologies and in 2017, we enhanced our diagnostic tool, XSOL, improving its ability to identify problems. It now provides our engineers with full diagnostic information across nearly 1,000 different types of boilers enabling us to reduce the time taken to fix our customers' boilers by 8%.

£8.6m

Invested in engineer and apprentice training

11,000 Engineers and apprentices in the UK

Link to Consumer strategic framework In-home servicing

Strategic Report | Centrica Consumer

Supporting our Texan colleagues and customers through Hurricane Harvey

In August 2017, Texas was hit by Hurricane Harvey. We worked hard to support our people, customers and communities through this difficult time and help them rebuild their lives.

We delivered hurricane preparedness checklists and evacuation information before the hurricane struck, via bill inserts and direct mail. Our aim was to help customers to be as prepared as possible. To cushion the financial impact of the event, we suspended late payment fees and disconnections for customers in affected areas and offered them flexible or deferred payment plans.

Our own people wanted to help too. So, we launched a Direct Energy donation page for them to pledge money to the American Red Cross who were co-ordinating the support effort in the hardest hit areas of Houston and Corpus Christi. This raised over US\$50,000 (£38,860) and Direct Energy made a matching donation.

The Direct Energy Back Office team was on the ground helping customers who really needed our personal attention after the devastation from Hurricane Harvey. The best part was seeing the relief on their faces.

Tara Norris Direct Energy Assistance Program Coordinator

>US\$100,000

(£77,720)

Total donation to help those affected by Hurricane Harvey

Watch our video about how our people responded to Hurricane Harvey centrica.com/video/hurricaneharvey

Link to Consumer strategic framework Energy supply In-home servicing

Going above and beyond to help our customers

Our engineers and technicians make thousands of visits to our customers' homes every week. In 2017, across our business, our engineers made nearly 11 million visits to customers' homes.

On one of those visits, British Gas installations engineer, Adam Downend, rang the bell and didn't get an answer. He called the phone number and could hear the phone ringing upstairs. Adam walked around the house and looked through the window to find the elderly customer lying on the sofa. After trying to get a response by banging on the window and shouting through the letter box, Adam then decided to gain access through an open bedroom window upstairs. Putting his ladder up to the window, he secured it safely and climbed in. When he got downstairs he found that the customer was barely conscious, so he put her in the recovery position and called for an ambulance. Adam then followed the instructions of the operator to keep her conscious while waiting for the paramedics to arrive and take her to hospital for treatment. When she got home, the customer thanked Adam for his help and quick thinking.

We are in a real position to help our customers through the millions of visits we make to their homes each year.

I'm very proud of Adam's actions which reinforce just how brilliant our people can be.

Andrew Reaney Installations Director, UK Field Operations

11m Number of engineer visits to customers' homes each year

Link to Consumer strategic framework In-home servicing Peace of mind

Centrica plc Annual Review 2017 | 23

Centrica Business

Turning energy into an opportunity

With advances in technology, the energy market has evolved. Power increasingly lies in the hands of our customers, turning energy from a simple commodity into a critical source of business advantage. Customers are starting to use energy to gain a competitive edge, increase their resilience, improve operational efficiency and to help to futureproof their businesses.

Helping St George's Hospital to deliver operational efficiency

St George's Hospital in Tooting is the largest healthcare provider in South West London. It serves 1.3 million people and 800,000 patients, as well as being a teaching hospital and advanced medical research centre. It employs over 8,500 people. During 2017, we continued working to deliver the hospital with endto-end solutions that improve their energy efficiency and operational performance, while reducing carbon emissions.

An energy centre is being installed to replace the existing 40-year-old system. This comprises a new combined heat and power plant, efficient boilers and lighting alongside heating, ventilation and air conditioning systems. Meanwhile, energy use is optimised through a building management system.

Each year the St George's Hospital project is projected to save:

£1m Cost savings

6,000tCO2e

Carbon emissions

The energy centre will deliver recurring savings in energy costs year-on-year which can be redirected into patient care. It also helps St George's Hospital meet their goal of reducing their carbon footprint.

Alan Barlow Director UK & Ireland Distributed Energy

Link to Business strategic framework Energy optimisation Energy solutions

Explore how distributed energy and power works centricabusinesssolutions.com/powerinyourhands

Powering Britain

There has never been a more important time for us to work with businesses and other large energy users to develop solutions for them which can unlock new revenue streams, become a source of competitive advantage and drive growth. Our report, 'Powering Britain's Economic Future', set out to measure those impacts and demonstrate the benefits of distributed energy solutions. It assessed the potential economic benefits to the UK if three major sectors – Industrial, Health, and Hospitality & Leisure, which together represent over a quarter of the UK economy – were to adopt a range of solutions including battery storage, on-site power generation and energy saving devices.

It found these solutions could generate in the UK(1):

£980m

Saving on annual energy bills

£18.5bn

Gross value added to economy

(1) Centrica Business Solutions research supported by FTI Consulting, Modelling 2017.

Read more in Responsible Business Pages 32 to 38

centricabusinesssolutions.com/poweringbritain

Link to Business strategic framework Energy supply

Increasing energy efficiency for Pittsburgh City-County building

The historic City-County building has stood in downtown Pittsburgh since 1917. Direct Energy is helping to bring it into the 21st century by optimising its energy use and improving its resilience.

In January 2017, we installed our energy insight solution, Panoramic Power, on the sixth floor of the building which houses part of the city's government offices and data centre. The system uses sensors and cloudbased analytics to transmit real-time data on energy use to the customer's dashboard. This can be viewed on a desktop or mobile device and provides actionable insights to improve operational efficiency.

Find out more about how Panoramic Power works centricabusinesssolutions.com/energyinsight

Link to Business strategic framework Energy insight

By capturing a variety of usage data, we are able to obtain a keen sense of consumption patterns and behaviour trends that will allow us to make more strategic decisions related to energy efficiency and capital upgrades.

Grant Ervin Chief Resilience Officer for the City of Pittsburgh

Empowering Gateshead Council to cope with local energy spikes

Centrica has installed one of the country's largest commercial battery storage schemes for Gateshead Council, giving it greater flexibility in managing its energy. The 3MW battery facility is equivalent to one million AA batteries and forms the final part of the Gateshead District Energy Centre, which also includes a pair of 2MW combined heat and power units.

Centrica will manage the battery project under a 10-year contract. This scheme will help keep the national electricity network in balance by responding to any fluctuations on the system in less than a second. In time, it will also be used to strengthen Gateshead's energy resilience by providing electricity to council-owned buildings through a private wire.

This is a bold, imaginative scheme that means we can also store and release energy when we choose, as well as supporting the National Grid, which helps raise more income to support Council services.

Councillor John McElroy Cabinet Member for Environment and Transport, Gateshead Council

24/7

Battery available to the grid 24 hours a day, seven days a week

3MW Battery capacity

Link to Business strategic framework Energy solutions

Acquiring REstore, Europe's leading demand-response aggregator

Whether it's reducing energy usage at certain times, supplying energy back into the grid or increasing consumption when the grid is over-supplied, demand response is helping energy markets to become more flexible. Last year, we strengthened our ambitions in this area by acquiring REstore NV. It delivers cloud-based demand-side management software and demand response services to over 150 of Europe's largest energy users, such as ArcelorMittal and Total. With these capabilities, we are now playing a leading role in reducing pressure on the electricity grid.

850MW

Business strategic framework Energy optimisation

Link to

Flexible power capacity to grid operators

One example of how these efforts are helping our customers is Lineage Logistics Europe (formerly known as Partner Logistics), a frozen food warehousing company in the UK. REstore works with the team to reduce the use of the cold store compressors and fans for short periods during peak demand without affecting overall operations. In return, Lineage Logistics Europe receives a reward from the electricity transmission system operator for being flexible, and the arrangement also helps the business to meet its own sustainability objectives.

This will be a significant growth area for us as global markets for demand response evolve.

Entering a pioneering contract with Europe's single biggest onshore wind installation

Providing a route-to-market for renewable power generators is one of the distinctive capabilities of Neas Energy, part of our Energy Marketing & Trading business. Neas has signed a landmark, long-term balancing and hedging contract with Europe's biggest onshore wind farm, Markbygden ETT in Sweden. The agreement includes the management of price risks in the Nordic electricity and certificate market, as well as the physical sale and balancing of power production in the Nordic wholesale market. Underpinning this contract is a 19-year fixed volume corporate Power Purchase Agreement (PPA) with Norsk Hydro, a leading global aluminium producer, where Centrica is offtaking power for the first year and subsequently 77% of the power will be bought by Norsk Hydro as a corporate PPA and the remainder will be sold on the power markets.

650MW Wind farm supported

497,000tCO2e

Carbon emissions avoided

Link to Business strategic framework Wholesale energy Energy optimisation

Helping the Government of Canada to achieve its energy ambitions

We are helping the Government of Canada to realise its energy ambitions through a new 10-year contract. Under this, we will supply up to 10 billion cubic feet of gas annually and secure access to new sources of renewable biomethane gas. We will also provide strategic counsel, including a detailed procurement strategy, budget preparation, billing and data management. Our comprehensive data amalgamation capabilities will allow detailed tracking and analysis of energy use. This will help to identify efficiency improvements, which the Government of Canada can make to reduce its energy costs and carbon footprint.

We are pleased to be a part of this collaboration effort to reduce natural gas consumption and cost while supporting green energy to lower our carbon footprint.

Honourable Ralph Goodale Minister of Public Safety and Emergency Preparedness

C\$8m (£4.7m)

Value of contract

Link to Business strategic framework Energy supply Energy optimisation

Key Performance Indicators

Our Key Performance Indicators (KPIs) help the Board and executive management assess performance against our Group Priorities.

Financial KPIs

Our Group Priorities

Adjusted operating profit

Operating profit is one of our fundamental financial measures. It is adjusted to a post-tax basis and a charge on capital is then applied to set the economic profit performance targets.

Adjusted operating profit was down 17%, reflecting reduced profit in our Centrica Business energy supply business units.

Adjusted basic earnings per share (EPS)

EPS is a standard measure of corporate profitability. EPS is adjusted to better reflect the underlying performance of the business.

Adjusted basic EPS was down 25%, which includes the impact of lower operating profit, a higher interest charge and a lower tax rate.

Link to Remuneration: Long-term incentive

Adjusted operating cash flow

Adjusted operating cash flow is our key measure of financial performance and is the financial metric for the short-term incentive plan for our Executive Directors.

Adjusted operating cash flow was down 23%, reflecting lower operating profit and the impact of £357 million of one-off working capital inflow in 2016 in UK Business.

Total shareholder return (TSR)

The Board believes that TSR is a valuable KPI to assess the Company's performance in the delivery of shareholder value.

Centrica underperformed the FTSE 100 return index over the three-year period ending in 2017 by 73%.

Link to Remuneration: Short-term incentive

Link to Group Priorities:

Link to Remuneration: Short and long-term incentive

Link to Group Priorities:

Adjusted operating cash flow

TSR indices (unaudited)

Non-financial KPIs

Lost time injury frequency rate (LTIFR)

We prioritise safety and aspire to have an incidentfree workplace.

Our LTIFR worsened to 0.36 in 2017. We are growing our safety culture by targeting interventions in key performance areas and introducing improved management systems.

Link to Remuneration: Long-term incentive

Link to Group Priorities:

LTIFR per 200,000 hours worked

Process safety

We focus on process safety where we source, generate and store energy to prevent potential incidents, such as fires and releases of gas.

In 2017, we experienced zero significant process safety events. We remain committed to strengthening our understanding, monitoring and controls related to process safety.

Link to Remuneration: Long-term incentive

Employee engagement

Having an engaged workforce is key to our success. We seek feedback on what we are doing well and where we can improve through our annual employee engagement survey.

In 2017, employee engagement was 52% favourable which is below the external employee engagement benchmark of 72%. While our score indicates a slight improvement from 2016 on like-for-like questions, morale remains affected by the continued restructuring of our business. We are taking meaningful action to improve engagement.

Net promoter score (NPS)

We strive to satisfy the changing needs of our customers. To measure customer satisfaction, we use NPS(2).

NPS performance across the business was mixed in 2017 (see pages 41 to 43). We are working to improve satisfaction by enhancing our customer service capabilities and delivering the new products and services our customers want.

The KPIs associated with our 2018/20 Remuneration Policy can be found at centrica.com/ar17. We will disclose our performance against these KPIs in our Annual Report and Accounts 2018.

(1) NPS and employee engagement linked to Executive remuneration arrangements are calculated using historical methodology and business areas which were approved by shareholders as part of the current Remuneration Policy. See centrica.com/ar17 for more information.

(2) NPS methodology was implemented consistently across the UK, Ireland and North America from 2017. Prior year figures have been restated where applicable.

Read about our wider performance in Responsible Business – Performance Measures at centrica.com/assurance

Link to Remuneration: Long-term incentive(1)

Link to Group Priorities:

Employee engagement (% favourable)

²⁰¹⁷ 52%† Measurement in 2017 moved to a new provider to enable best practice external benchmarking. Due to changes in methodology, direct prior year comparisons are not available.

Link to Remuneration: Long-term incentive(1)

Link to Group Priorities:

Assurance We engaged PricewaterhouseCoopers LLP (PwC) to undertake a limited assurance engagement over 22 metrics highlighted with the symbol '†' throughout our Annual Review 2017.

Further details are set out at centrica.com/assurance

Being a responsible business

We provide energy and services that are at the heart of our customers' lives. To continue doing that and generate greater value in society over the long term, we focus on being a responsible business.

This helps us realise our strategy to deliver for the changing needs of our customers

Contents

Vulnerable customer households helped Caring for our customers

Being an employer of choice Page 35

1m

Pages 33 to 34 1.6m Connected Home cumulative products sold

£10m Investment in training engineers, technicians and apprentices

57,300 Volunteering hours

Enabling the low carbon transition Page 36

Building strong communities Pages 37 to 38

Want to find out more? Explore how we do business responsibly and how we engage stakeholders on material issues at centrica.com/responsibility

31mtCO2e Customer carbon savings from measures installed since 2008

19% Total carbon emissions reduction

£156m Total community contributions

£10m

Investment committed to start-ups with innovative energy ideas that benefit society

Read more about our non-financial KPIs at centrica.com/assurance

Caring for our customers

We care about our customers and challenge ourselves to provide market leading products, services and solutions that not only satisfy them, but enhance their lives and business success.

1.7m

Customers who choose to contact us via our digital platforms

Making lives simpler and smarter

We are focused on saving our customers time and money, while making it easier for them to understand energy.

Smart meters improve bill accuracy and empower customers to reduce their use by providing insight into how much energy they are using and its cost in real-time. Since 2009, we have led the smart meter roll-out in the UK, installing around five million in homes and businesses. Building on this, a simpler, no-nonsense British Gas bill will be introduced during 2018.

We are making it easier for customers to control and optimise their energy. In 2017, we established Centrica Innovations with a £100 million investment to build, collaborate and invest in purposeful startups that will make energy work better for customers by focusing on control, convenience and affordability. Cumulatively, we have also sold over 1.6 million Connected Home products that can be controlled conveniently with just a tap on the app – from smart thermostats, plugs, lights and cameras, to window, door and motion sensors.

We are investing in our customer service capabilities so that we can provide an excellent service.

In 2017:

• UK Home invested in training and intelligent call-routing;
• North America Home improved training and self-serve capability;
• Ireland increased training, process automation and enhanced customerfacing IT platforms;
• UK Business strengthened bill accuracy and timeliness; and
• North America Business improved its online customer platform as well as digital journeys for acquisitions.

Over time, these efforts will help reduce customer complaints and improve satisfaction.

Read more in Centrica Consumer and Centrica Business

Pages 16 to 29 Read more in the Business Review

A growing number of customers are able to interact with us when and how they want. Meet our social media customer service team to see how we are responding to customer needs in real-time.

Cherry Healey @cherryhealey Does anyone have a Hive heating control system? Are they any good?

Sarah Willingham @sarahwillers Yes and yes. V good! Gets a bit obsessive 26 Jan 2018

89% Customers with smart thermostats who feel more in control over their heating

Caring for our customers (continued)

Powering competitive advantage

Through our Distributed Energy & Power (DE&P) business, we are giving large-scale energy users the power to operate and optimise their energy so that they can use it more efficiently. This increases their operational resilience and unlocks new sources of revenue for growth. In 2017, we made it easier to harness these benefits by launching our offer to businesses under a new Centrica Business Solutions banner, providing end-to-end customer solutions – from flexible and local generation, battery storage and energy efficiency measures, to smart building management systems and energy trading technologies.

Key sectors in the UK could save millions of pounds a year if they adopted distributed energy solutions(1):

£540m

Industry

£130m

Healthcare

(1) Centrica Business Solutions research supported by FTI Consulting, Modelling 2017.

Read the full report at centrica.com/economicfuture

Helping those in need

We have worked hard to deliver a fairer, more competitive energy market for everyone, especially those in need. Having cut prices in 2016, however, we made the difficult decision to increase them in 2017. British Gas' electricity prices rose by 12.5% due to an increase in costs relating to energy policy and the delivery to customers' homes. Similarly, Bord Gáis Energy put up prices by 5.9% for electricity and 3.4% for gas, following a rise in wholesale energy costs and distributing energy to the network. In the UK, we have set out a range of initiatives to help drive engagement with the energy market and ensure customers get a better deal. This includes closing our standard variable tariff to all new customers and introducing fixed-term competitive tariffs (see page 18).

In 2017, we helped over one million vulnerable customer households through mandatory and voluntary schemes.

This included:

• 667,900 customers accessing bill assistance via the UK's Warm Home Discount scheme and North America's Neighbor-to-Neighbor programme;
• 297,000 customers supported with bill assistance following Hurricane Harvey in North America;
• 26,900 customers and non-customers helped with debt advice and grants through the British Gas Energy Trust; and
• 53,200 households receiving energy efficiency improvements via the UK's Energy Company Obligation, while five communities benefited from Ireland's Better Energy Communities scheme.

Our award-winning customer service training ensures we identify and support those who need a helping hand. By the end of 2017, over 21,000 employees had become Dementia Friends, improving our ability to help those living with the condition. We also supported the development of industry guidance that will enable the utility sector to become dementia-friendly.

Innovative products and services are creating a better world for people with disabilities and those in later life. In 2017 for example, we launched a video relay service for customers who use British Sign Language, allowing them to interact with us much more effectively.

See how our support can benefit those in need centrica.com/BGET

This programme has given us a level of awareness I never could have imagined. We'll not only improve our profit margins, but become better corporate citizens and better professionals.

Rafael Ruíz Muñoz Corporate Brand Director, CMR Chili's

A restaurant chain in Mexico who use Panoramic Power sensors, part of our distributed energy solutions

Being an employer of choice

We want to be the best at attracting and retaining a talented and diverse workforce who are motivated and able to deliver for our customers.

Building skills for the future

We are creating a workforce fit for the future by investing in our people's development and providing opportunities that attract a diverse array of talent.

In 2017:

• 15,000 engineers, technicians and apprentices enhanced their skills, supported with an investment of more than £10 million in training;
• 5,800 employees seized the opportunity to learn new skills through volunteering, generating 57,300 volunteering hours; and
• 180 young people developed workplace skills on our graduate programmes.

We are known for our world-class engineering apprenticeships. We are building on this success by expanding our customer service apprenticeships and providing new ones in leadership, management and digital amongst other areas during 2018.

We are using our expertise to nurture the skills that our society needs. Since 2010, we have reached nearly 562,000 young people with our curriculum-based lesson plans, helping to improve skills in the key areas of science, technology, engineering and maths (STEM). Over the past four years, we have also helped 1,160 young, unemployed people to secure workplace skills through the Movement to Work scheme. Around 60% of scheme participants went on to secure permanent employment or further training. We will provide a further 300 places in 2018.

My main highlight is not only the professional development you get but the personal growth that happens day-to-day. Mal Prasad HR Graduate

Embracing workforce diversity

Reflecting the diversity of our customers and communities in our workforce is vital if we are to attract and retain the talent to satisfy our customers. We are working hard to become a more diverse and inclusive workplace and in 2017, we launched a new Disability and Wellbeing Employee Network to complement our other employee networks. Business in the Community (BITC) have recognised our efforts in this area, awarding us a Bronze award for our commitment to gender and race inclusion.

Hear from our people about what diversity and inclusion means to them centrica.com/ourdiversity

Respecting our people

Our success depends on our people. That is why we want our people to stay safe and why we respect and respond to their needs. We have robust processes in place to uphold equal pay and reward our people fairly, which includes paying at least the Living Wage in the UK and taking action to close the gender pay gap. We also conduct an employee engagement survey to understand how our people feel, so that we can improve our result.

Read more about employee engagement Page 31

0.98†

Total recordable injury frequency rate per 200,000 hours worked (2016: 0.98)

Enabling the low carbon transition

We are tackling climate change by reducing emissions across our business and providing products and services that lead to a lower carbon future.

Helping customers cut their carbon emissions

More than 90% of our carbon emissions are associated with the energy consumed by our customers. So the biggest contribution we can make in tackling climate change is to help them cut their carbon by using our energy efficiency and Connected Home products, alongside the solutions offered by our DE&P business. We calculate this has saved our customers nearly 31mtCO2e since 2008 – equivalent to the annual emissions of around nine million UK homes.

Decarbonising the energy system

Centrica is revolutionising the way energy is generated, managed and consumed, by leading the transition to a decentralised energy system that enhances grid flexibility, supports renewables and reduces reliance on fossil fuels.

During 2017, we:

• created Centrica Business Solutions, a one-stop-shop for large-scale energy users to harness distributed energy products and services;
• completed a 3MW battery storage scheme for Gateshead Council, to help keep the national electricity network in balance;
• invested £62 million to acquire REstore, Europe's leading demand-response aggregator, enabling us to counter grid imbalance by managing demand from commercial and industrial customers; and
• launched a £180 million investment programme to build three new flexible power generation facilities and one of the world's largest battery storage facilities, to meet peaks in local demand and back-up intermittent renewables.

We are additionally playing an important role in growing the infrastructure needed to lower emissions from transport, having installed around 13,000 electric vehicle charge points since 2013.

Read more about Centrica Business Pages 24 to 29

Reducing operational impact

We have shifted away from being a largescale energy producer and now emit over 70% less carbon for every pound of revenue than we did in 2010.

In 2017, our total carbon emissions decreased by 19%. This was mainly due to the sale of our Exploration & Production business in Canada and two power plants in the UK. The average carbon intensity of our Central Power Generation remained relatively stable at 125gCO2/kWh. Instead of generating power for our customers, we will now predominantly buy it for re-sale from third parties.

Meanwhile, the internal carbon footprint of our property, fleet and travel reduced 11% in 2017. The decline was achieved through planned carbon reduction activities alongside headcount reductions arising from the reorganisation of our business. Following these changes, we are reassessing our targets for both carbon intensity of Central Power Generation and internal carbon footprint.

Total carbon emissions

2017†	4,103,348tCO2e
2016(1)	5,073,320tCO2e
Scope 1
2017†	4,044,754tCO2e
2016(1)	4,986,299tCO2e
Scope 2
2017†	58,594tCO2e
2016(1)	87,022tCO2e

Total carbon intensity by revenue

2017	146tCO2e/£m
2016(1)	187tCO2e/£m

We report on an equity basis with practices drawn from WRI/WBCSD Greenhouse Gas Protocol, IPIECA's Petroleum Industry Guidelines for Reporting Greenhouse Gas Emissions and Defra's Environmental Reporting Guidelines – see the Basis of Reporting at centrica.com/assurance for full details. (1) Restated due to availability of improved data.

We are a world leader for disclosure and action on tackling climate change and water scarcity

Building strong communities

We are increasing the positive impact our presence has in society by working with communities to address key issues, while contributing to the local economy.

Developing local energy markets

Through our DE&P business, we are exploring the potential for local energy markets to put communities in control of their energy, drive down bills and unlock further renewable generation.

Towards this in 2017, Centrica Innovations acquired a stake in LO3, a start-up with a focus on developing peer-to-peer power market trading and were involved in the Brooklyn local energy market in New York.

Cornwall's energy ambitions

At the end of 2016, we announced a £19 million local energy market trial in Cornwall, UK. The three-year trial will test how flexible demand, generation and storage can reduce pressure on the electricity grid, enable the growth of renewables and avoid expensive network upgrades. Since then, over 300 homes and businesses registered to get involved and in 2017, we welcomed our first business to the trial – a working farm and holiday retreat. Pioneering battery storage technology was installed to help them better manage the energy generated by their solar panels. In 2018, we expect to roll-out storage and solar panels in 100 homes and commence larger installations of storage, renewables and distributed generation across 15 businesses.

We believe our trial will not only help Cornwall realise its energy ambitions, but lead the way for the UK and other countries to do the same.

Collaborating to help communities

Our strategic partnerships are building a better future – whether it's helping vulnerable households with their energy (see page 34), or tackling bad housing and homelessness. To support these issues in 2017, we invested £156 million in mandatory, voluntary and charitable contributions. A further £10 million has been committed to start-ups developing innovative energy ideas that benefit society, helping 38,000 people since 2013.

Making a difference through our flagship partnerships

4m

people are expected to benefit from campaigning that led to changes in law relating to the UK's private rented sector, including improvements in gas and electrical safety alongside protection from retaliatory evictions

(2015–Ongoing)

(2012/17)

1,000 families in Ireland have been prevented from homelessness as a result of our €1.2 million (£1 million) partnership

(2014–Ongoing)

3.3m

lives of children and their families have been improved across North America through our support of local hospitals

Building strong communities (continued)

Boosting the economy

Our business depends on and creates value in the communities where we operate. During 2017, we generated £1,591 million in wages for our 33,140-strong workforce and we contributed £307 million in taxes. We also spent nearly £4 billion on goods and services, supporting 36,000 suppliers and thousands of jobs.

Distributed energy solutions have the potential to generate widespread economic benefits. It is estimated that these solutions could help the UK meet decarbonisation targets more effectively, saving £8 billion a year by 2030(1). Likewise, key sectors could save millions of pounds each year while boosting the economy (see page 34).

(1) National infrastructure commission, September 2016.

If just 50% of the UK's Industry, Healthcare, and Hospitality & Leisure sectors utilised distributed energy solutions, the potential economic benefits to the UK would be(2):

£18.5bn

Gross value added to the economy

260,000 Jobs

1.5% boost Economic output

(2) Centrica Business Solutions research supported by FTI Consulting, Modelling 2017.

Being a good corporate citizen

We are committed to working with integrity so that we can maximise the positive impact we have in society. To support this, we launched a new Company-wide set of values and a code of conduct in 2017/18. Taken together, our Values and Our Code, demonstrate our commitment to being a responsible business and bind us together in common pursuit of our strategy and purpose.

Through Our Code, we reaffirmed that we will ensure our business partners and third parties share our dedication to eliminate bribery and corruption. We do not condone any payments we feel to be improper and take particular care when offering or receiving gifts and hospitality. We prohibit all forms of fraudulent conduct or dishonest behaviour and will report any serious matters to the relevant authorities. We also set out that we respect and uphold the fundamental human rights and freedoms of everyone who works for us, with us or lives in our local communities. As part of our response to the Modern Slavery Act in the UK, we have taken action to reduce risk relating to forced or compulsory labour in our business and supply chain.

In 2017, we assessed 138 suppliers on their social, ethical and environmental standards to guard against risks such as human rights and bribery and corruption. This resulted in an average supplier sustainability score of 56 (low risk), which is better than the multi-industry average of 44 (medium risk). If suppliers receive a medium or high-risk rating, we will consider appropriate next steps which may include collaborating to raise standards or ending our relationship and reporting the abuse.

Read more about our Values and Our Code centrica.com/ourcode

Read more about our Modern Slavery Statement centrica.com/modernslavery

Our View on Taxation

The Group takes its obligations to pay and collect the correct amount of tax very seriously. Responsibility for tax governance and strategy lies with the Group Chief Financial Officer, overseen by the Board and the Audit Committee.

22% Adjusted effective tax rate (see page 50)

£102m Corporate income tax paid

Our approach

Wherever we do business in the world, we take great care to ensure we fully comply with all of our obligations to pay or collect taxes and to meet local reporting and disclosure requirements.

We fully disclose information on ownership, transactions and financing structures to the relevant tax authorities. Our cross-border tax reporting reflects the underlying commercial reality of our business.

We are committed to providing disclosures and information necessary to assist understanding beyond that required by law and regulation.

We ensure that income and costs, including costs of financing operations, are appropriately recognised on a fair and sustainable basis across all countries where the Group has a business presence. We understand that this is not an exact science and we engage openly with tax authorities to explain our approach.

In the UK we maintain a transparent and constructive relationship with Her Majesty's Revenue & Customs (HMRC). This includes regular, open dialogue on issues of significance to HMRC and Centrica. Our relationship with fiscal authorities in other countries where we do business is conducted on the same principles.

We carefully manage the tax risks and costs inherent in every commercial transaction, in the same way as any other cost. However, we do not enter into artificial arrangements in order to avoid taxation nor to defeat the stated purpose of tax legislation.

We actively engage in consultation with governments on tax policy where we believe we are in a position as a Group to provide valuable commercial insight.

The Group's tax charge, taxes paid and the UK tax charge

The Group's businesses are subject to corporate income tax rates as set out in the statutory tax rates on profits table. The overall tax charge is therefore dependent on the mix of profits and the tax rate to which those profits are subject.

Statutory tax rates on profi s

Group activities	%
UK supply of energy and services	19
UK oil and gas production	40
Norway oil and gas production	78
Netherlands oil and gas production	50
United States supply of energy and services(1)	35
Canada supply of energy and services and oil and gas production	26
Denmark energy services	22
Republic of Ireland supply of energy and services	12.5

As at 31 December 2017.

(1) US tax rate is 21% from 1 January 2018.

Tax charge compared to cash tax paid

	Current tax charge/(credit) £m	Cash tax paid/ (recovered) £m
UK	9	(88)
Europe	53	169
North America	(13)	21
Total	49	102

During the year, the UK received a cash refund of tax overpaid in periods prior to 2015; in Europe, Spirit Energy made a payment of tax in respect of 2016 Norwegian profits. These items contributed to differences between the current tax charge and taxes paid during 2017.

For details on the Group's effective tax rate and a breakdown between relevant jurisdictions and segments, see the Group Financial Review on pages 48 to 51.

Read more in the Group Financial Review Pages 48 to 51

Our Group Tax Strategy, a more detailed explanation of the way the Group's tax liability is calculated and the timing of cash payments, is provided on our website at centrica.com/responsibletax

Business Review

Contents

• UK Home
• Ireland
• North America Home
• Connected Home
• UK Business

• North America Business

• Distributed Energy & Power

• Energy Marketing & Trading
• Central Power Generation
• Exploration & Production
• Centrica Storage

UK Home

Our leading position in UK energy supply and services remains core to our business and we are making good progress on our transformational journey to improve customer service levels, reduce costs and develop propositions to expand and deepen relationships with households.

Delivering high levels of customer service is fundamental and total energy supply complaints fell by 224,000, or 20% per 100,000 customers, as we continued to invest in transforming customer journeys and agent training. However, the number of services complaints increased by around 31,000, or 30% per 100,000 customers, reflecting operational disruption following the centralisation of planning and dispatch activities. Our engineer customer visit net promoter score (NPS) remained high at 67 and we remain highly focused on improving customer service levels in 2018. UK Home Brand NPS reduced by 2pts to +1† , reflecting the impact of our standard tariff electricity price increase in September and a broader negative sentiment surrounding UK energy suppliers.

Cost efficiency is also fundamental in allowing us to maintain a competitive pricing position. Annualised cost per home account fell by 8% compared to 2016, with efficiencies realised through our new operating model including the combination of multiple customer operations teams into one organisation, lower incoming call volumes resulting from investment in our digital platform which has made it easier to complete transactions online, consolidation of our planning and dispatch activities, and the integration of seven separate field forces into one. Our leaner, more efficient operating model has also enabled us to improve our speed to take new offers to market, for example digital, rewards and bundling.

Total energy customer account holdings fell by 1,376,000, or 10%, during 2017, including the roll-off of 967,000 low-margin collective switch and white-label fixed price tariffs. The remaining 409,000 account losses include 195,000 prepayment customers, with the remaining 214,000 reflecting market switching trends. Within this, in line with our strategy to reduce the number of customers on the Standard Variable Tariff (SVT), we saw a 14% drop in SVT account holdings and an increase in the number of customers on British Gas fixed-term tariffs. The number of services accounts was flat, with growth of 77,000 in the second half of the year reflecting an increased focus on offers targeted at higher value energy customers and the deployment of digital offers to partner channels.

Our UK services business completed nine million customer visits in 2017 and remains a source of competitive advantage in the UK given our nationwide scale which is very difficult to replicate. In 2017, we further strengthened our services offer with the UK nationwide launch of our technology-led Local Heroes on demand services platform, which plays towards the market trend of more customers seeking on demand and home emergency offers. Local Heroes provides customers with access to local tradespeople backed by a British Gas guarantee, and growth accelerated throughout 2017, with over 7,000 tradespeople signed up and 25,000 jobs now completed.

In the fourth quarter we developed new customer offers targeted at increasing customer value, including the launch of our online-only tariff, bundling energy with services or connected home products and more sophisticated risk-based services pricing. We will continue to develop these offers further in 2018. We launched British Gas Rewards in April, which uses our data to gain a deeper understanding of customer preferences and allows customers to select personalised offers, like loyalty energy days. Over 700,000 customers have signed up to date and we are already seeing greater customer engagement, with retention rates 1.5ppt higher for customers signed up to British Gas Rewards.

We continue to lead the industry in the smart meter roll-out and have now installed around five million smart meters in UK homes, providing customers with additional insight on their energy usage and bringing an end to estimated bills for customers, reducing the number of calls we receive relating to billing and meter reading queries.

Overall UK Home adjusted operating profit was up 1% to £819 million, within which energy supply profit was up 3% to

£572 million. Energy gross margin reduced by 4%, reflecting the impact of warmer weather, lower customer account holdings and the implementation of the prepayment cap which came into effect in April 2017 as a result of the Competition and Markets Authority remedies. However, these negative impacts were more than offset by strong cost efficiency progress. Services gross margin was down 10%, which includes the impact of an increase in pension costs and lower average customer account holdings through the year. However, cost efficiency progress was strong and as a result, operating profit was down by less, by 4% to £247 million.

Ireland

Our Irish business, Bord Gáis Energy, performed well in 2017, and, as in the UK and North America, we are offering a wider choice of products to our customers.

We continue to focus on customer service, with increased training, robotics process automation and enhancements to our customer-facing IT platforms all contributing to an 18% reduction in complaints. We also successfully upgraded our enterprise billing platform in the year, which will support increased digitisation over the coming years. NPS fell by 3 points to +17† , reflecting a more negative customer perception of energy suppliers following the fourth quarter price increases.

Total customer account holdings fell by 13,000, or 2%, reflecting increased market competition, including from new entrants into the market. However, electricity customer account holdings increased by 7,000, or 2%, as we successfully converted more of our customers to a dual fuel offering. As in the UK and North America, we are offering a wider choice of products to our customers and having launched our range of Hive automation products in Ireland in the first half of the year, we are focused on building brand awareness around our Connected Home propositions.

Whitegate, our flexible gas fired power station, recorded another good performance, with a load factor of 85% and total generation volumes of 3,228GWh, up 3% compared to 2016.

Adjusted operating profit was up 2% compared to 2016, although down 4% in local currency. This reflects the impact of a competitive environment, which was broadly offset by cost efficiencies and good performance from our trading and power generation business. Adjusted operating cash flow was down 26% compared to 2016, which benefited from a one-off payment related to the cessation of a gas storage contract.

Business Review (continued)

North America Home

As in the UK, energy supply and services remains core to our customer offer in North America and we are well positioned to expand and deepen relationships with households.

We remain focused on improving the sustainability of our business in our chosen markets by improving customer service levels, reducing costs and developing innovative and differentiated offers.

We delivered further improvements in customer service in 2017, with additional training provided for our customer service agents to improve customer interactions, and enhancements to our digital platform enabling improved self-serve capability. These actions contributed to a 22% reduction in complaints compared to 2016, while our online reputation improved significantly. Brand NPS also increased in the second half of the year and ended 1pt higher than at the end of 2016.

Cost efficiency remains a core priority. The integration of our energy and services business combined with the disposal of noncore businesses in 2016 has allowed us to simplify our processes further, reduce headcount and consolidate office locations. We have now closed or sold a number of loss-making services businesses in noncore markets and have completed our exit from the residential solar market, which we announced in July. Centrica's participation in commercial solar in North America will continue as a part of the Distributed Energy & Power (DE&P) customer offering. Overall, annualised cost per home account fell by 2%.

The total number of energy supply accounts fell by 327,000, or 11%, during 2017. In the US North East, customer account holdings fell by 18%, driven by a competitive pricing environment and the loss of 108,000 lowmargin aggregated auction customers. In Texas, customer account holdings were down 7% due to competitive pressure and a pause of door-to-door sales due to regulatory concerns. However, in the second half of the year customer retention improved in Texas, compared to the second half of 2016, reflecting higher levels of customer service and proactive renewal of customers on fixed contracts. In Canada, regulatory changes required us to cease our door-todoor sales channel which contributed to a customer account decline of 6%. However, we have now entered into a number of retail partnerships that will expand our number of sales channels. Services customer account holdings were broadly flat compared to 2016, although within this paid Direct Energy protection plans rose 18%.

We are focused on differentiating our customer offer and developing bundled propositions. Direct Energy is currently a key channel for Hive products in North America with 80,000 Hive hubs having been sold with an energy supply tariff. In 2017, 21% of energy sales were bundled with one or more product or offer, such as a protection plan or a Hive product, compared to 17% in 2016.

North America Home adjusted operating profit increased by 28% and adjusted operating cash flow was up 5%. Within this, energy supply gross margin was up 2% despite the fall in customer account holdings, reflecting our focus on more valuable customer segments, while adjusted operating profit was up 6% which includes the benefit of cost efficiencies. Services gross margin was down by 7% reflecting the closure of the solar business, which when combined with other actions taken to improve efficiency resulted in a reduced adjusted operating loss.

Connected Home

Our Connected Home business is utilising technology to provide offers that meet customer needs across the strategic pillars of peace of mind, home energy management and home automation.

It is also an important source of differentiation for our energy and services businesses and the NPS for British Gas customers who have a Hive product is 10 points higher than those who do not.

In 2017, we launched three new products, the Hive Camera, Hive Leak and, in North America, the Hive Active Thermostat with air-conditioning; while in January 2018 we launched our new camera, Hive View. These new products take Connected Home more deeply into the peace of mind pillar, as we deepen our diagnostics capability to provide additional comfort to home owners. Additional planned product, proposition and feature launches in 2018 will strengthen our customer offer further.

The full range of Hive automation products was launched in North America and Ireland during the year, while we also signed our first strategic partnership deal outside of our core energy and services markets. Our partnership with Italian energy company Eni gas e luce will provide their 8 million customers in Italy with access to the full range of Hive home automation products. We continue to integrate with other connected home eco-systems, including through our successful partnership with Amazon Echo, where 23% of our customers have used Alexa, Amazon's voice assistant, in combination with Hive.

We sold 373,000 connected hubs in 2017, taking the total number installed to 900,000. Hive products are now being sold through around 50 retailers in the UK and we have sold over 1.6 million Connected Home products in total, with the number of products per hub increasing to 1.8 by the end of 2017 compared to 1.4 at the start of the year.

We now have 94,000 customers on subscription offers or payment plans. This includes 51,000 'Boiler IQ', which uses sensors to remotely diagnose boiler faults, and 43,000 on Hive propositions including 'Welcome Home', 'Close to Home' and our heating and cooling plans in the UK, Ireland and North America. These propositions enable customers to personalise, control and interact with their home through the Hive product range.

Gross revenue increased by 27% to £42 million, reflecting increased sales of hubs and products from our more diverse product range, with gross margins remaining attractive at around 20%. Connected Home reported an increased adjusted operating loss and adjusted operating cash outflow, reflecting higher investment in product and platform development, app user experience and customer acquisition costs.

UK Business

UK Business adjusted operating profit fell significantly in 2017.

This reflects the negative impacts of additional costs resulting from commodity volatility and energy volume settlements in the first quarter of 2017, relating to 2016, warmer weather and the impact of increased competition on customer account holdings.

The combination of these factors resulted in a 30% fall in gross margin in 2017, which was only partially offset by further cost efficiencies and reductions in bad debt, the latter enabled by improved operational performance.

Operationally, UK Business delivered improved customer outcomes in 2017, with better timeliness and accuracy of customer bills. This helped drive an 8% reduction in call volumes and a 24% reduction in complaints compared to 2016. However, customer account holdings fell 64,000 or 9%, with around half the losses in Industrial and Commercial, reflecting our decision not to pursue renewal of some low value multi-site contracts, but also increasing competitive intensity. The remaining losses were of small and medium (SME) customers, reflecting competitive intensity with 67 active competitors and high levels of switching activity.

Against this competitive backdrop, we are focusing our retention and acquisition activities on the higher value SME segments, continuing to build relationships with energy brokers and improving our customer portal facilities to allow them to manage their whole portfolio online. This has led to an increase in broker-led acquisitions, which should aid our commercial performance. In 2018, we expect some recovery in gross margin given a more normal weather and commodity environment, and, combined with further cost efficiency, expect adjusted operating profit to improve towards the levels seen in 2016.

Adjusted operating profit of £4 million was down 92% in 2017, reflecting the additional costs in the first quarter, warmer weather and lower customer account holdings, partly offset by cost efficiencies and bad debt reductions. Working capital management has remained a key area of focus, and reflecting this, adjusted operating cash flow was £131 million despite the material reduction in operating profit.

North America Business

North America Business delivered a poor financial result in the second half of the year, with adjusted gross margin down 26% and adjusted operating profit down 68%.

The drivers of lower gross margin were primarily in the power retail business. Total power adjusted gross margin was down 51%, reflecting increased competitive intensity, changes to the market structure and related input costs, including higher unit capacity charges, and the impact of warmer weather on consumption and a subsequent under recovery of unitised non-commodity costs. The financial result also includes a oneoff non-cash charge of £76 million (£46 million post-tax) relating to a reassessment of the historic recognition of unbilled power revenues. In addition, warmer weather reduced opportunities for gas optimisation, however, our gas retail business performed well and overall gas gross margin was slightly up.

In response to the challenges we faced in 2017, we have taken actions to drive improvements in profitability and reduce volatility in the retail power book. These include introducing a new standard product offering that more closely matches input cost recovery, completion of system enhancements to provide greater granularity of gross margin drivers, and improvements to the processes and controls around our load forecasting and risk management reporting. We also implemented several enhancements to our online customer platform during 2017, with improved response times on issue resolution and an enhanced digital journey for acquisitions helping improve the customer experience. Our digital Energy Portfolio platform, launched in the second half of 2016, has also given customers direct access to our energy expertise while providing dynamic energy procurement options. In addition, we made improvements to our billing processes and, reflecting all of this, complaints fell 38% compared to 2016 and NPS increased by 2 points to +33† .

We continue to expand our offering into new geographies and delivered higher sales in our key growth areas of the US Mid-Continent, California and Canada. Overall, total customer account holdings reduced by 20,000 during 2017, which reflects a focus on higher value accounts and a reduction in our small business accounts. However, the competitive environment impacted our sold unit margins, down 20% in power and 22% in gas for new contracts.

An increased focus on energy efficiency has lowered power usage per customer across the industry and we are well positioned to benefit from this market trend, with North America Business working closely with the DE&P business to develop joint propositions to deepen the customer relationship. North America Business continues to be an important sales channel for distributed energy products, including Panoramic Power's wireless energy insight management solutions. Over 11,000 sensors were deployed to Direct Energy customers in 2017. We are also planning to expand our combined heat and power offering in North America following the acquisition of ENER-G Cogen in 2016, while the DE&P acquisition of demand response company REstore provides additional capability.

North America Business reported a 68% fall in adjusted operating profit and a 69% reduction in adjusted operating cash flow. Around half of the reduction in adjusted operating profit reflects the impact of the competitive environment, warmer weather, fewer optimisation opportunities and the impact of higher capacity costs, with the other half reflecting the one-off non-cash charge. In 2018, we are focused on continuing to deliver a high-quality customer experience, targeted offers for higher value customer segments and offering an increasing range of DE&P products and propositions. However, we expect to see continued competitive pressure on electricity supply margins and, therefore, growth in adjusted operating profit will be limited, after adjusting for the impact of the one-off noncash charge.

Business Review (continued)

Distributed Energy & Power

Distributed Energy & Power (DE&P) is focused on the three Centrica Business strategic pillars of energy insight, energy optimisation and energy solutions.

Since the formation of the DE&P business unit in the second half of 2015, we have grown our capability both organically and inorganically. The targeted acquisitions of Panoramic Power, REstore and ENER-G Cogen provide us with strong positions in each of the three strategic pillars and enable us to capitalise on the global trend towards distributed energy and to develop a range of products and services to meet the needs of customers.

Our subscription-based Panoramic Power energy insight product provides customers with real-time visibility of their energy usage plus actionable insights. We now have 53,000 sensors deployed across more than 1,800 sites in 30 countries and are collecting around 14 billion data points per month. It has proved successful in changing the dynamic of the conversation with customers and provides opportunities to cross-sell energy optimisation and solutions services.

We acquired REstore, Europe's leading demand response aggregator, in November. REstore provides key capabilities in energy optimisation and provides over 850MW of flexible power capacity to grid operators. The power is aggregated from a 2.2GW flexible portfolio of industrial and commercial customers across Belgium, the UK, France and Germany and generates value for businesses through ancillary services including frequency response and capacity

markets. Through this acquisition, demand response aggregation will become a core part of our offer to customers, and DE&P's optimisation capacity has now increased to 1.9GW.

In energy solutions, DE&P now has over 1,400 long-term contracted sites and active solutions, mostly CHP-based, in 13 countries, having sold both off-the-shelf and bespoke end-to-end solutions. We have also expanded our distributed solutions offering in North America, which will be a major focus area for growth.

In total, the number of DE&P active customer sites has increased by 22% over the past 12 months, with growth particularly strong in the fourth quarter. Total secured revenue, our forward order book, increased 24% in 2017.

DE&P also includes our fleet of smaller gas fired peaking plants at Brigg, Peterborough and Barry. Construction is progressing well on our three new flexible generation projects, a 49MW battery storage facility at Roosecote and two 50MW fast response gas fired plants at Brigg and Peterborough. All three have 15-year capacity contracts starting in October 2020 and were successful in the 2018/19 T-1 capacity auction.

We continue to innovate in Local Energy Markets and now have over 300 homes and businesses registered to take part in our three-year trial in Cornwall. In 2017 we installed the largest flow battery in the UK and in 2018 we expect to install storage and solar PV in 100 homes and commence larger installations of storage, renewables and distributed generation across up to 15 businesses as part of the trial.

DE&P gross revenue increased by 6% compared to 2016, and by 34% on an underlying basis when reflecting the impacts of the disposal of the non-core building energy management systems business and the scaling back of our UK solar business following the removal of the feed-in-tariff. This growth reflects the organic increase in customer sites and a full year impact from ENER-G Cogen, which was acquired in May 2016. DE&P reported an increased adjusted operating loss of £53 million and an increased adjusted operating cash outflow of £30 million, reflecting increased headcount to build new capability and higher investment in the development of new customer propositions, sales channels and technology to drive growth. We expect DE&P to deliver continued revenue and gross margin growth in 2018, although we will continue to make further investment to drive this growth and therefore expect the current year operating loss to be similar to 2017.

Energy Marketing & Trading

Energy Marketing & Trading (EM&T) is focused on the Centrica Business strategic pillars of energy optimisation and wholesale energy.

In addition to expanding its route to market offers, global LNG presence, and trading and optimisation activities across Europe, EM&T continues to serve its core purpose of managing commodity profit risk and providing wholesale market access for the Group.

The acquisition of Neas Energy in October 2016 has enhanced EM&T's capabilities and geographical reach, as well as giving EM&T access to Neas' advanced optimisation platform, Neas Direct, which provides hedging and optimisation strategies and route to market services to our customers. EM&T now serves customers who own decentralised assets with installed capacity of around 10GW, predominantly in Denmark, the UK, Germany and Sweden, enabling them to access our expertise to capture value and provide flexibility services to their assets. Neas Energy has performed ahead of expectations since its acquisition, and it delivered a strong trading and optimisation result in 2017, particularly in the first half of the year during periods of power volatility in Northern European markets.

In LNG, we continue to expand our global business in advance of the first delivery from our contract with Cheniere, which is expected in September 2019 from the Sabine Pass facility in Louisiana. We have built a full range of LNG trading, optimisation and operations capability and continue to

transact multiple free on board and delivered ex-ship cargoes from a range of locations globally. In November, we traded our hundredth cargo outside the UK, just three years after trading our first cargo.

EM&T has major flexible legacy gas contracts and associated hedges with take or pay arrangements, where the payments are made for gas even if delivery is deferred to future periods. These were inherited by Centrica on demerger and are part of an overall profitable Centrica portfolio. The profit and cash flow from these contracts and hedges will vary between periods based on the commodity price environment and decisions we take to optimise them. In 2017, the three remaining contracts and associated hedging generated £36 million of gross margin, having made £118 million of gross margin in 2016, reflecting our take or pay strategy to maximise the contracts' value over their lives. During 2018, the two historically most profitable flexible legacy gas contracts will end, leaving one contract which expires in 2025 and is currently expected to be loss-making based on the current level of gas prices. As a result, we currently expect 2018 EM&T adjusted operating profit to be no more than half the level of 2017. This contract will continue to be managed for value and we will look to utilise the contract optionality to capture favourable market conditions as they arise.

EM&T adjusted operating profit was £104 million in 2017 compared to £161 million in 2016, although, after excluding the contribution from the flexible legacy gas contracts, adjusted operating profit associated with core EM&T activities increased by 58% to £68 million. This underlying increase reflects further strong trading and optimisation and route-to-market performance and a full year's impact of the Neas Energy acquisition. Adjusted operating cash flow increased by 32% to £262 million, predominantly reflecting the timing of cash flows associated with the flexible gas contracts between 2016 and 2017.

Central Power Generation

With our focus for growth on distributed energy and flexible generation, we made further significant progress in 2017 to reduce the scale of our Central Power Generation business in line with our strategy.

In February 2017, we completed our exit from wind power generation with the disposal of our 50% interest in the Lincs Wind Farm for £214 million. The sale resulted in an exceptional pre-tax profit on disposal of £64 million (post-tax £58 million). In August, we completed the sale of our large combined cycle gas turbines (CCGTs) at Langage and South Humber Bank and the Kings Lynn B CCGT development project for £314 million in total, which resulted in a total pre-tax exceptional profit of £8 million (post-tax £5 million), comprising an impairment write back and a small loss on disposal.

Centrica retains a 20% equity interest in the entity which owns and operates the eight nuclear stations in the UK. Our share of nuclear generation volumes remained high at 12.8TWh, the second highest output achieved since our investment in 2009. However, this was 2% lower than in 2016, reflecting slightly higher unplanned outages.

Central Power Generation adjusted operating profit was £35 million, 53% lower than 2016. This was primarily driven by a lower achieved power price for Nuclear, including the impact of historic hedging, and the impact of our exit from wind power generation. Adjusted operating cash flow was £58 million compared to an outflow of £1 million in 2016, with positive movements in working capital in comparison to 2016, more than offsetting a reduction in Nuclear dividends received.

Business Review (continued)

Exploration & Production

In line with our strategy, we now have a stronger, more sustainable Exploration & Production (E&P) business focused on Europe.

Following the disposal of our assets in Canada and Trinidad and Tobago during the year, on 8 December Spirit Energy was launched, a newly formed entity combining Centrica's E&P business with that of Bayerngas Norge. The transaction creates a leading independent European E&P business with an attractive mix of producing assets and development projects. Centrica owns 69% of the new business, and will consolidate 100% of the financial result.

The sale of our remaining portfolio of gas assets in Trinidad and Tobago was completed in May for \$35 million (£26 million), which resulted in a pre- and post-tax exceptional loss on disposal of £9 million. We announced the disposal of our interest in the joint venture portfolio of assets in Canada in June, and the sale was completed in September for C\$420 million (£255 million), leading to total pre-tax exceptional loss on disposal and impairment charges of £125 million (post-tax £109 million).

Total gas and liquids production of 61.0mmboe was down 14% compared to 2016 principally due to the sale of assets in Canada and Trinidad and Tobago. Production in Europe was down 5%, or 6% when excluding Bayerngas Norge production following the launch of Spirit Energy. This principally reflects lower production from Morecambe due to our decision to undertake onshore and offshore asset integrity works to improve safety, operational efficiency and underpin the residual life of the asset. Excluding Morecambe, the natural decline from the rest of the portfolio was fully offset by the positive impact of a first full year of production from the Cygnus gas field, which came onstream in December 2016 and is performing ahead of expectations.

We continue to focus our investment on the most attractive development options in our portfolio. Drilling operations at the Maria development commenced in the first quarter 2017, with first oil achieved in December, a year ahead of schedule and with total project costs around 20% lower than the business case. Further infill wells were drilled at Statfjord and Kvitebjørn in Norway and Chestnut in the UK. Overall, 2017 capital expenditure was down 15% to £439 million, which reflects the impact of reduced spend on Cygnus.

In 2018, we currently expect Spirit Energy to deliver production in the range 50–55mmboe while progressing several key projects. Fabrication contracts have been awarded and drilling commenced on the Oda project, which remains on target to produce first oil in 2019, while appraisal drilling will commence at the Fogelberg discovery. We also expect that a Field Development Plan for the Nova development, previously named Skarfjell, will be finalised during 2018.

Reflecting the net impact of the Spirit Energy transaction, and reserve additions on a number of fields including Chiswick and Maria not fully offsetting production during the year, Centrica's net share of 2P reserves in Europe, excluding reserves at Rough, fell by 59mmboe to 251mmboe at the end of 2017.

European total lifting and other cash production costs increased by 9% compared to 2016, with the decline in sterling and the impact of Cygnus coming on-stream more than offsetting cost efficiency benefits. Combined with lower

production volumes, this resulted in European unit lifting and other cash production costs increasing by 16%. For the period in which the assets in Canada and Trinidad and Tobago were owned, Americas unit lifting and other cash production costs were 47% higher, principally reflecting the impact of the decline in sterling, higher royalty and pipeline tariffs and the nonrepeat of some one-off savings in 2016.

Adjusted operating profit of £184 million was broadly flat compared to 2016, with higher achieved prices offsetting the impact of lower production, higher cash costs and higher depreciation including that associated with Cygnus production. Adjusted operating cash flow fell 32% to £448 million despite the flat operating profit, reflecting higher decommissioning spend and higher cash taxes due to the phasing of Norwegian payments between years. The business was again free cash flow positive in 2017, generating £298 million when excluding £78 million of cash acquired

through the Spirit Energy transaction. This includes £289 million of disposal proceeds, with adjusted operating cash flow broadly offsetting capital expenditure during the year. We also recognised pre-tax exceptional impairments of £494 million (post-tax £162 million) on certain fields, predominantly due to reduction in price forecasts and changes to expected decommissioning costs following the conclusion of the triennial review, partially offset by the recognition of a PRT deferred tax asset reversing a prior period impairment. In addition, there has been a pre-tax reduction in decommissioning provisions of £86 million (post-tax £51 million) for assets previously impaired through exceptional items.

Centrica Storage

In January 2018, Centrica Storage (CSL) received consent from the Oil and Gas Authority to produce all recoverable gas reserves from the Rough asset which, following the Competition and Markets Authority's final decision to remove CSL from the Undertakings, finalises the change in Rough's status from a storage facility to a producing asset.

In June, CSL announced it had completed and analysed the results of the extensive well testing programme at the Rough gas storage asset, which had commenced in 2015 following the identification of an issue with the integrity of the wells.

CSL also announced that it had completed a review into the feasibility of returning Rough to injection and storage operations. It concluded that due to the high operating pressures involved, and the fact that the wells and facilities are at the end of their design life and had suffered a number of different failure modes while testing, it could not safely return the assets and facilities to injection and storage operations. In addition, an assessment of both the current economics of seasonal storage and the costs involved suggested that it would not be economic to continue to operate Rough as a gas storage asset by refurbishing or rebuilding the facility and replacing the wells.

As a result, CSL made all relevant applications to permanently end Rough's status as a storage facility and to produce all recoverable gas reserves. In December, the Competition and Markets Authority announced its final decision to grant CSL's request to be released from the Rough Undertakings, while in January 2018 the Oil and Gas Authority (OGA) granted its consent for CSL to produce indigenous gas and associated liquids from Rough. Separate to this application, in June, CSL also applied to the OGA to produce up to an initial 30.7bcf of gas in order to reduce pressure on the wells to ensure that risks associated with operating the reservoir are as low as reasonably practical. Consent was granted in September, and 25bcf of gas was sold in 2017, with production continuing into 2018. CSL will now operate Rough as a gas production asset to maximise recovery of the estimated 142bcf of reserves remaining in the field as at the end of 2017. Production in 2018 is currently forecast to be 56bcf.

CSL gross revenue increased by 59% to £148 million, reflecting 2017 production volumes from the Rough asset being materially higher than the 9bcf of cushion gas sold in 2016. This was partially offset by minimal SBU revenue due to the reduced available capacity of the reservoir for the 2016/17 storage year as a result of the well integrity issues and no SBUs being sold for the 2017/18 storage year. With total costs down 9% due to lower fuel gas usage reflecting the reduced operations at Rough and reduced operating costs to reflect the changing status of the asset, CSL recognised an adjusted operating profit of £17 million in 2017 compared to a loss of £52 million in 2016. Adjusted operating cash flow was £61 million, which included working capital inflows resulting from the sale of operational stock, compared to a build-up of stock in 2016, and costs associated with decommissioning the 8A platform, which will continue into 2018.

A pre-tax exceptional charge of £270 million (post-tax £224 million) was recorded in the first half of 2017, following the June 2017 announcement to apply for a production licence and permanently end Rough's status as a storage facility. From 2018, we expect to report both Spirit Energy and CSL in one E&P reporting segment.

Group Financial Review

Group Revenue

£28.0bn ▲3% 2016: £27.1 billion

Adjusted operating profit

£1,252m ▼17% 2016: £1,515 million

Statutory profit attributable to shareholders

£333m ▼80%

2016: £1,672 million

Adjusted basic earnings per share (EPS)

12.6p ▼25% 2016: 16.8p

Final dividend per share

12.0p 0% 2016: 12.0p

Statutory operating profit

£486m ▼80%

2016: £2,486 million

Adjusted effective tax rate 22% ▼3ppt

2016: 25%

Statutory basic earnings per share

6.0p ▼81% 2016: 31.4p

Group revenue

Group revenue increased by £0.9 billion, or 3%, to £28.0 billion (2016: £27.1 billion). Gross revenue in Centrica Consumer fell by £0.6 billion, or 5%, largely reflecting the impact of lower average customer account holdings and lower consumption due to warmer weather over the year. Gross revenue in Centrica Business increased by £1.7 billion, or 13%, reflecting the full-year impact of the Neas Energy acquisition which completed in October 2016 and the impact of foreign exchange movements on North America Business revenue. Revenue from the asset businesses, Exploration & Production (E&P) and Centrica Storage (CSL), was broadly flat overall.

Jeff Bell Group Chief Financial Officer

Operating profit

Throughout this review, reference is made to a number of different profit measures, as shown below.

Total adjusted operating profit reduced 17% to £1,252 million (2016: £1,515 million). Centrica Consumer profit fell 1% with the impact of warmer weather on consumption and lower account holdings in UK Home and North America Home, and an increased operating loss due to growth investment in Connected Home, largely offset by cost efficiencies. Centrica Business profit fell by 67%, largely reflecting the impact of warmer weather and competitive market conditions in our energy supply businesses in UK Business and North America Business, a one-off non-cash charge relating to a reassessment of the historic recognition of unbilled power revenues in North America and lower profit from flexible gas contracts in Energy Marketing and Trading (EM&T). Profit from E&P was broadly flat, with higher achieved prices offsetting lower volumes, while CSL reported an operating profit of £17 million compared to a loss of £52 million in 2016, reflecting higher gas production volumes with Rough having received permission to produce up to 30.7bcf of cushion gas to reduce pressure in the field for safety reasons.

Group finance charge and tax

Net finance costs increased to £344 million (2016: £300 million), predominantly reflecting a lower capitalised interest credit.

Business performance taxation on profit was lower at £191 million (2016: £282 million) and after taking account of tax on joint ventures and associates, the adjusted tax charge was £197 million (2016: £298 million). An adjusted effective tax rate calculation is shown on page 50.

The Group adjusted effective tax rate reduced to 22% (2016: 25%) reflecting the mix of profits between different activities and jurisdictions and the impact of a net uncertain tax provision release of £34 million, a net petroleum revenue tax refund of £34 million and a tax credit of £34 million resulting from the restatement of deferred tax balances following the reduction in the US federal tax rate from 35% to 21%. Adjusting for these impacts and other similar, but individually immaterial items, the Group's underlying adjusted effective tax rate was 40%.

Adjusted operating cash flow £2,069m ▼23% 2016: £2,686 million

Adjusted earnings £698m ▼22%

2016: £895 million

Group net debt £2,596m 25% 2016: £3,473 million

Operating profit

			2017			2016
Year ended 31 December	Business performance £m	Exceptional items and certain re-measurements £m	Statutory result £m	Business performance £m	Exceptional items and certain re-measurements £m	Statutory result £m
Adjusted operating profit/(loss)
UK Home	819			810
Ireland	47			46
North America Home	119			93
Connected Home	(95)			(50)
Centrica Consumer	890			899
UK Business	4			50
North America Business	71			221
Distributed Energy & Power (DE&P)	(53)			(26)
Energy Marketing & Trading (EM&T)	104			161
Central Power Generation (CPG)	35			75
Centrica Business	161			481
Exploration & Production (E&P)	184			187
Centrica Storage (CSL)	17			(52)
Total adjusted operating profit	1,252			1,515
Interest and taxation on joint ventures and associates	(7)			(48)
Group operating profit/(loss)	1,245	(759)	486	1,467	1,019	2,486
Net finance cost	(344)	–	(344)	(300)	–	(300)
Taxation	(191)	352	161	(282)	(242)	(524)
Profit/(loss) for the period	710	(407)	303	885	777	1,662
Less (profit)/loss attributable to non-controlling interests	(12)			10
Adjusted earnings	698			895

Group Financial Review (continued)

Group tax charge

Year ended 31 December	UK £m	Non-UK £m	Spirit Energy UK £m	Spirit Energy Non-UK £m	Spirit Energy Total £m	2017 Group Total £m	UK £m	Non-UK £m	2016 Total £m
Adjusted operating profit	798	278	(103)	279	176	1,252	932	583	1,515
Share of JV/associate interest	(1)	–	–	–	–	(1)	(32)	–	(32)
Net finance cost	(197)	(90)	(37)	(20)	(57)	(344)	(235)	(65)	(300)
Adjusted profit before taxation	600	188	(140)	259	119	907	665	518	1,183
Taxation on profit	62	6	(111)	234	123	191	31	251	282
Share of JV/associate taxation	6	–	–	–	–	6	16	–	16
Adjusted tax charge	68	6	(111)	234	123	197	47	251	298
Adjusted effective tax rate	11%	3%	79%	90%	103%	22%	7%	48%	25%

A breakdown of factors that have affected the adjusted effective tax rate in 2017 is shown in the table below:

		UK		Non-UK		Spirit Energy UK		Spirit Energy Non-UK		Spirit Energy Total		Total
Year ended 31 December	£m	%	£m	%	£m	%	£m	%	£m	%	£m	%
Tax at relevant statutory rate	116	19%	66	35%	(56)	40%	202	78%	146	123%	328	36%
Adjusting items(1)	21	–	(7)	–	3	–	21	–	24	–	38	–
Underlying adjusted effective
tax charge/rate	137	23%	59	31%	(53)	38%	223	86%	170	143%	366	40%
Rate changes	–	–	(34)	–	–	–	–	–	–	–	(34)	–
Provision releases and other	(69)	–	(19)	–	(58)	–	11	–	(47)	–	(135)	–
Adjusted effective tax charge/rate	68	11%	6	3%	(111)	79%	234	90%	123	103%	197	22%

(1) Adjusting items includes non-qualifying depreciation and amortisation, upstream incentives, abandonment relief and any variance to statutory rates.

For the European E&P activities, now included within Spirit Energy, profits were made in Norway but losses were incurred in the UK, where tax relief is given at a lower effective rate than the rate applied in Norway. As a result, the Spirit Energy underlying adjusted effective tax rate was 143%.

The future underlying effective tax rate for Spirit Energy will be dependent on the mix of profits, while the underlying adjusted effective tax rate for UK operations is expected to reduce in future years as the UK corporation tax rate reduces to 17% from 2020. The underlying adjusted effective tax rate for US operations reported within non-UK is also expected to reduce reflecting the reduction in the US federal tax rate to 21%.

Group earnings and dividends

Profit for the year from business performance decreased to £710 million (2016: £885 million) and after adjusting for non-controlling interests, adjusted earnings fell by 22% to £698 million (2016: £895 million). This reflects the lower adjusted operating profit and higher net finance cost, partly offset by the lower tax charge, all as described above. Adjusted basic EPS was 12.6 pence (2016: 16.8 pence) reflecting the lower earnings and a higher number of shares in issue due to the effects of a 7% equity placing in May 2016 and the scrip dividend.

The statutory profit attributable to shareholders for the year was £333 million (2016: £1,672 million). 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 difference compared to 2016 is principally due to a post-tax exceptional charge of £476 million (2016: credit of £27 million) and a lower net gain from certain re-measurements of £69 million (2016: £750 million). The Group reported a statutory basic EPS of 6.0 pence (2016: 31.4 pence).

In addition to the interim dividend of 3.6 pence per share, the proposed final dividend is 8.4 pence, giving a total full year dividend of 12.0 pence (2016: 12.0 pence).

Group cash flow, net debt and balance sheet

Net cash flow from operating activities decreased to £1,840 million (2016: £2,396 million), which predominantly reflects lower EBITDA and net working capital inflows. Adjusted operating cash flow, which is reconciled to net cash flow from operating activities in the table on page 51, was down 23% to £2,069 million.

Net cash inflow from investing activities was £32 million (2016: outflow of £803 million). The change compared to 2016 is predominantly due to proceeds from net disposals in 2017 of £819 million, mainly relating to the Lincs Wind Farm, UK gas fired power stations and Canadian E&P assets. The 2016 comparator included the

acquisitions of ENER-G Cogen and Neas Energy and lower disposal proceeds.

Net cash outflow from financing activities was £1,070 million (2016: £546 million). This predominantly reflects 2016 including an inflow from the issuance of ordinary share capital following the £700 million equity placing. Equity dividends paid were lower in 2017, reflecting a higher scrip take up of the 2016 final dividend payment, financing interest was higher and repayment of borrowings were lower reflecting a lower level of debt maturing in 2017 compared to 2016.

Reflecting all of the above, the Group's net debt as at 31 December 2017 fell to £2,596 million (31 December 2016: £3,473 million), which includes cash collateral posted or received in support of wholesale energy procurement.

Net assets increased by £584 million to £3,428 million (31 December 2016: £2,844 million). Total assets decreased by £1,226 million, with lower non-current assets predominantly reflecting the pre-tax impact of impairments and disposals. Total liabilities decreased by £1,810 million, including the impact of lower decommissioning provisions resulting from the E&P disposals, lower derivative financial instrument balances, and a reduction in the net pension liability from £1,137 million at the end of 2016 to £886 million at the end of 2017.

Operating cash flow

Year ended 31 December	2017 £m	2016 £m
Net cash flow from operating activities	1,840	2,396
Add back/(deduct):
Net margin and cash collateral inflow(1)	(136)	(177)
Payments relating to exceptional charges	176	273
Dividends received from joint ventures and associates	58	117
Defined benefit deficit pension payment	131	77
Adjusted operating cash flow	2,069	2,686

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

2017 Acquisitions and disposals

In line with its strategy to reduce its scale in E&P and Central Power Generation, in February the Group completed the disposal of the Lincs Wind Farm for £214 million and in May completed the disposal of its remaining Trinidad and Tobago gas assets for £26 million. In August, the Group completed the disposal of its UK gas fired power stations at Langage, South Humber Bank and Kings Lynn B, for £314 million and in September, the Group completed the disposal of its 60% interest in its portfolio of Canadian E&P assets for £255 million.

In November, the Group acquired Europe's leading demand response aggregator, REstore, for £62 million. The business brings key capabilities in asset optimisation and demand response aggregation is expected to become a core part of our distributed energy offer to customers. The business will form part of the DE&P business unit.

In December, Spirit Energy was formed, combining the Group's remaining European E&P business with that of Bayerngas Norge AS. The Group owns 69% of the business.

Exceptional items

A net exceptional pre-tax charge of £884 million was recognised in 2017 (2016: £11 million).

The Group recognised net impairments of £408 million on E&P assets. It recognised £494 million of impairments predominantly due to a reduction in price forecasts and changes to decommissioning costs following the conclusion of the triennial review. It also recognised an £86 million write-back of decommissioning provisions for assets previously impaired.

Following the announcement in June 2017 that the Rough facility could not be safely returned to injection and storage operations and CSL would instead apply for a production licence for the remaining cushion gas, a pre-tax impairment charge of £270 million was recorded in the half year results.

The Group recognised a £64 million gain on disposal of the Lincs Wind Farm joint venture and a net gain of £8 million relating to the disposal of its CCGT power stations.

The Group recognised a £9 million loss on disposal of its remaining portfolio of gas assets in Trinidad and Tobago and a total net charge of £125 million relating to the disposal of its Canadian E&P assets.

As a result of the Group's strategic review announced in 2015, the Group incurred a further £144 million of restructuring and business change costs in 2017 in implementing the new organisational model relating principally to redundancy costs, impairment of assets on closure of businesses, transformation spend and consultancy costs, as well as costs associated with setting up the Spirit Energy business and changing the operating model for CSL.

These charges generated a taxation credit of £408 million (2016: £38 million). Total net exceptional charges after taxation were £476 million (2016: credit of £27 million).

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 IAS 39. 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 profit in the statutory results includes a net pre-tax gain of £125 million (2016: £1,030 million) relating to these re-measurements, or £69 million after tax (2016: £750 million). The Group

recognises the realised gains and losses on these contracts in business performance when the underlying transaction occurs. The 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.

Events after the balance sheet

On 15 January 2018, Centrica Storage was granted consent from the Oil and Gas Authority to produce indigenous gas and associated liquids from Rough, confirming transition from a storage operation to one of production on 17 January 2018.

Risk and capital management

The Group's principal risks and uncertainties are set out on pages 52 to 62.

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 (IFRSs) as adopted by the European Union.

Our Principal Risks and Uncertainties

Understanding those Risks that impact our Strategy

The fundamental trends outlined in our strategy on pages 10 and 11, including the decentralisation of energy systems, shift of power to consumers and increasing digitisation, present both opportunities and threats. Identifying and managing these risks is critical to delivering our strategy. The Group Priorities, as laid out below, are the lens through which we assess our risks and drive discussions around the level of risk we need to take and the requirements of our System of Risk Management and Internal Control.

Our Group Priorities

Safety, compliance and conduct

Customer satisfaction and operational excellence

Cash flow growth and strategic momentum

Cost efficiency and simplification

People and building capability

Read more about Our Strategy Pages 10 to 11

Strengthening our System of Risk Management and Internal Control

Following our Strategic Review in 2015, we refreshed our approach to risk management. In 2017 we focused on embedding this improved process aligned with the new operating model to ensure it makes a positive contribution to effective decision-making and business growth, while ensuring we successfully manage risks. In particular, as we have moved into new geographies, we have sought to ensure we are addressing risks associated with operating in those jurisdictions.

Each business unit and Group function is responsible for identifying and assessing its significant risks within the context of our Principal Risks. For each risk, they consider both the potential impact to the Group and the likelihood of occurrence on an inherent and residual basis. The Executive Committee then considers these perspectives alongside broader external and internal factors to create a Group-wide set of prioritised risks.

• We categorise our risks as: – Risk Requiring Standards (RRS): Risk with negative impacts that
• we control through Standards and Management Systems, for example process safety or data security.
• Risk Requiring Judgement (RRJ): Risk that we choose to take in order to execute our business strategy, for example new products or business improvement opportunities.
• External Risk: Risk that requires a focus on scenario and contingency planning with little or no ability to reduce likelihood, for example extreme weather or geopolitical turbulence.

On an annual basis, we evaluate our System of Risk Management and Internal Control, learning from any control incidents that have arisen, to ensure we are mitigating risks in line with our risk appetite.

Our Enterprise Risk Framework is established to focus attention on those risks that enable us to deliver our strategy. It's critical we take an appropriate level of risk within the boundaries we establish through Delegations of Authority and Policies and Standards to manage the downside impact, whilst driving upside returns.

Carolyn Clarke Group Head of Audit,

Risk and Control

Determining the risk we would like to take

The Board approves statements of risk appetite associated with each Group Priority. These statements provide a framework to guide our risk mitigation activities and to drive the appropriate level of risk taking:

• Safety, compliance and conduct: Our appetite for taking risk in this area is as low as reasonably practicable in relation to: ensuring the safety of our people, customers and communities; conducting our business operations in compliance with laws and regulations; and managing our financial reporting risks.
• Customer satisfaction and operational excellence: We have a moderate risk appetite to allow us to pursue innovative opportunities. We are driven to satisfy the changing needs of our customers.
• Cash flow growth and strategic momentum: We have a moderate to high risk appetite for seeking opportunities to deliver cash flow growth and our target return on capital.
• Cost efficiency and simplification: We have a low risk appetite for failing to implement and manage improvements sustainably and in a rigorous and systematic way.
• People and building capability: We accept a moderate level of risk in finding ways to attract, develop and reward people with the diverse capabilities needed to deliver our ambitions. However, we have a low risk appetite for rewarding and retaining people who fail to demonstrate our Values.

Evaluating Risks through our Enterprise Risk Framework

Our Enterprise Risk Framework is designed to enable us to identify, evaluate and mitigate our risks appropriately. It comprises six steps:

1 Identify

• Identify significant risks to achieving business unit and/or function objectives

2 Assess & Analyse

• Assess inherent impact and likelihood using Centrica risk assessment matrix
• Identify risk type (RRS, RRJ or External Risk) and determine target risk rating

Risk Universe and Group risk appetite

Our System of Risk Management and Internal Control

Mitigating risks through the System of Risk Management and Internal Control

Risk management is a key pillar of the overall governance and management framework for the Group. Our System of Risk Management and Internal Control comprises the following elements that are assessed annually for effectiveness:

• What we stand for:
• Our Purpose: We are an energy and services company. Everything we do is focused on satisfying the changing needs of our customers.
• Our Values: The new values were rolled out globally in September 2017 to underpin our strategy and Priorities.
• Our Code: This was launched in early 2018 to replace our Business Principles and provides the foundation for how we operate.
• Our strategic framework:
• Strategy: Set out in July 2015 and aligned throughout the organisation by the five Group Priorities.
• Financial framework: Sets out parameters and targets within which we operate to guide our strategic planning and financial decision-making.
• Enterprise Risk Framework: Incorporates the Principal Risks within the Group Risk Universe, as outlined on pages 55 to 60.
• Our governance:

• Board and Committees: Structured to effectively dispense with required duties and through which our Principal Risks are monitored.

• Legal entities: Subsidiary company legal entities with Boards of Directors required to meet legal and regulatory obligations.

• Delegations of Authority: Accountability is delegated through the organisation to individuals in accordance with risk appetite.
• Executive and Committees: Oversight to ensure appropriate planning and performance management.
• How we are organised and managed:
• Management Systems: The detailed policies, standards and processes establishing the mandatory requirements and which are required for the systematic management of related risks.
• How we provide assurance:
• Functional assurance: Ensuring policies and standards are complied with through monitoring and testing activities performed by individuals who are not directly responsible for the operation of the controls.
• Internal Audit: Providing confidence to the Board, via the Audit Committee, that Centrica has appropriate risk management procedures and effective controls in place.
• External assurance: Auditing of the Group's Annual Report and Accounts prior to reporting, which includes assessment of internal controls relevant to financial reporting.

Functional assurance Internal Audit External assurance

The vision behind our Enterprise Risk Framework was to enable us to operate within an acceptable risk envelope and make risk-informed decisions in pursuit of our strategy. Identification and management of risk is part of the day-to-day responsibility of all our staff and a feature of all our business activities.

Alison Hill

Group Head of Enterprise Risk

Principal Risks

The Group Risk Universe is made up of a holistic framework of Principal Risks, laid out below. The Board makes a robust assessment of these Principal Risks, considering future performance and our ability to deliver the strategy, including solvency and liquidity risks. For each Principal Risk, we discuss the nature of the risk, the risk climate and the impact on our Group Priorities. Each Principal Risk is overseen directly by the Board or one of its Committees, with the Board retaining overall responsibility for risk across the Group.

Risk climate movement against prior year

Risk has decreased in likelihood and/ or impact

	Description	Potential impacts	Mitigation
1	Political and Regulatory Intervention Risk of political or regulatory intervention such as the adoption of blanket price caps in the UK energy supply market, changes to the political or regulatory landscape, or failure to influence that change.	Changes in government and regulatory oversight, specifically relating to the Consumer Divisions markets in the UK and North America, such as the developments in UK market regulation during	• We are active in contributing our views on the development of the markets in which we operate and in discussions with political parties, regulatory authorities and other influencers. • We are committed to an open, transparent and competitive UK energy market that provides choice for consumers. In November, we announced seven unilateral steps we would take and recommended a series of
	External Risk Governance oversight:	2017, could erode our profit margins through price caps, or through additional obligations that increase operating costs.	broader market reforms (as detailed on page 18). • The UK is due to exit the European Union within two years of Article 50 being triggered in March 2017. We have a dedicated Brexit project group which is working to
	Board Risk climate:	The UK's decision to exit the European Union and wider political changes in the markets we operate in present risks relating to changing policies in relation to the energy market change and carbon emissions.	understand and assess the many Brexit-related issues which could impact the Group and our customers. • We accept that we may be the subject of regulatory scrutiny that could result in stakeholder concerns. We
	Priority: Cash flow growth and strategic momentum		co-operate fully with any enquiry or investigation and take measures to react as quickly as possible.
2	Financial Market Risk of financial loss due to our exposure to market movements, including commodity prices, inflation, interest rates and currency fluctuations.	Our exposure to adverse price movements in commodity markets, due to our large upstream and downstream positions, could impact profitability and cash flow generation across the business. Financial market risk is taken on by Energy Marketing & Trading (EM&T) as part of the proprietary trading business. Increased volatility in commodity prices could provide more opportunities but also give rise to higher collateral costs and/or additional credit risk for both EM&T and North America Business.	• We have hedging strategies in place to mitigate exposure to commodity and financial market volatility. • Financial risk is reviewed regularly by the Group Finance Function and the Group Risk, Assurance and Control Committee to assess financial exposures and compliance
	External Risk with elements that are Risks Requiring Judgement		with risk limits. Regular review is also undertaken by the Audit Committee. • As we move into new trading arrangements, including the
	Governance oversight: Board and Audit Committee		continued expansion of our LNG business, we are focused on ensuring that our financial risk policies remain appropriate to the risks we face.
	Risk climate:		• Our business units have risk measures, policies and monitoring commensurate with the activities and risks that they manage, and we invest in our systems to further
	Priority: Cash flow growth and strategic momentum		automate our control environment.

	Description	Potential impacts	Mitigation
3	Health, Safety, Environment and Security (HSES) Risk of failure to protect the health, safety and security of customers, employees and third parties or to take appropriate measures to protect our environment and in response to climate change. Risk Requiring Standards Governance oversight: Board and Safety, Health, Environment, Security and Ethics Committee Risk climate: Priority: Safety, compliance and conduct	Our operations have the potential to result in personal or environmental harm, or operational loss. Significant HSES events could also have regulatory, legal, financial and reputational impacts that would adversely affect some or all of our brands and businesses.	• We undertake regular reviews and have assurance processes in place with reporting to the HSES Committee on a quarterly basis and full discussion of all issues arising. • The HSES management system is used to manage our controls, focusing on areas of concern including process safety, driving and working at heights. • We continue to invest in training to ensure we maintain safe operating practices. During 2017 all senior leaders took part in an HSES leadership event. • Security intelligence and operating procedures, as well as crisis management and business continuity plans, are regularly evaluated and tested. • Significant Centrica representation on Board Committees and establishment of a Shareholder Office to ensure that mitigation of HSES risks remains a priority within the new joint venture organisation, Spirit Energy. • We actively engage with climate change bodies and NGOs to offer our perspective, understand the direction
			of potential future actions, and assess our readiness to manage through change. • A description of how we manage our environmental risk is described on page 36.
4	Strategy Delivery Risk that we do not deliver our strategy due to insufficient capability to execute it in line with plan or failure to adapt quickly enough to respond to changes in the external environment. In our bottom-up process of risk reporting, this is a key area of focus for our business units and functions.	Successful delivery of our strategy requires delivering the energy and services our customers desire in a way that satisfies their needs in a competitive market place. Failure to identify changing trends in customers' needs, adapt to changing market and	• The Board sets and approves the Group's strategy, setting the strategic direction and confirming the strategic choices made by the business. Regular reviews are conducted on changes in market trends and the competitive environment, and the business response. • We have a clear financial framework to ensure capital is allocated in line with the strategy and that balance sheet strength and return on capital boundary conditions are met.
	Risk Requiring Judgement Governance oversight: Board	competitive environments, deliver major transformation programmes to be an efficient supplier, and build the necessary capabilities to compete, have the potential to	• The Board and Executive Committee regularly review the capabilities required to deliver on the strategy and address gaps as they arise.
	Risk climate:	impact our cash flow growth and value creation goals.
	Priority: Cash flow growth and strategic momentum
5	External Market Environment Risk that events in the external market or environment could affect the delivery of our strategy.	We operate in highly competitive and changing markets, where customer behaviour, needs and	• We focus on understanding customer segments and their needs, aiming to design products and offerings that are attractive and competitive. • We are increasing our investment in areas like Connected Home and Distributed Energy & Power that represent
	External Risk	demands are evolving due to digitisation, energy efficiency, climate change, government initiatives, and the general	emerging customer needs and reinforce our existing energy supply and services offerings, putting customers
	Governance oversight: Board	economic outlook. In addition, we are subject to global market volatility in our upstream	more in control of their energy use as described on page 33. • Regular analysis is undertaken of commodity price
	Risk climate:	businesses in commodity markets.	fundamentals and their potential impact on our business plans and forecasts.
	Priority: Cash flow growth and strategic momentum

	Description	Potential impacts	Mitigation
6	Brand, Trust and Reputation Risk that our competitive position is compromised by poor standards of fairness and transparency and by failing to protect our brands. Risk Requiring Judgement Governance oversight: Board Risk climate: Priority: Customer satisfaction and operational excellence	Failure to appropriately manage brand perception, media attention and campaign or pressure groups could have a negative impact on consumer sentiment and contribute to a fall in overall customer numbers. Failure to be fair and transparent in all our operations could cause reputational damage and if standards are particularly low, lead to legal action.	• We regularly monitor and review our level of customer service, aiming to deliver a fair, simplified and transparent offering to all of our consumers. Operational processes are in place to address failure in service and customer complaints. • We engage with NGOs, consumer and customer groups, political parties, regulators, charities and other stakeholders to identify solutions to help reduce bills and improve trust in the industry. • We review and monitor changes in our customer brand position through net promoter score (NPS) and other metrics as described on page 31. • We consider our impact on society as part of being a good corporate citizen. This is set out in the Building strong communities section on pages 37 to 38.
7	Change Management Risk of failure in the identification, alignment and execution of change programmes and business	If change projects are not aligned to strategic objectives or not implemented	• Significant change management programmes are reviewed as a regular aspect of Group and business unit performance reviews, and are regular agenda items of
	restructuring. Risk Requiring Judgement	appropriately, the expected benefits may not be realised. If acquisitions are not integrated effectively the business benefits may not be realised.	Executive Committee meetings. • Change activity is managed through a network of programme offices providing oversight and governance at the appropriate level.
	Governance oversight: Board		• We have dedicated change capability at Group and business unit level to monitor the realisation of benefits, the prioritisation of efforts and to share best practice.
	Risk climate:		• Our people capability is continually reviewed and developed to ensure we have the right skills to deliver our plans. • We have post-merger integration guidelines in place to
	Priority: Cost efficiency and simplification		integrate acquired businesses.
8	Legal, Regulatory and Ethical Standards Compliance Risk of failure to comply with laws and regulations and behave ethically in line with Our Code, resulting in reputational or financial damage. This includes market conduct, customer conduct, data protection and financial crime risk.	Our operations are the subject of intense regulatory focus and we seek to deliver the highest standards in compliance. We recognise that any real or perceived failure to follow Our Code or comply with legal or regulatory obligations would undermine trust in our business. Non-compliance could also result in fines, penalties or other interventions.	• Regulatory compliance monitoring activities are performed by a single Group-wide function to drive consistency and quality. • Control frameworks are in place in the UK and in development in other markets to ensure that the customer experience is delivered in line with our Customer Conduct guidelines. This is managed through a Group-wide practice group.
	Risk Requiring Standards		• The Market Conduct practice group shares best practice with standardised controls and processes and aligns mitigation activities where possible.
	Governance oversight: Board and Safety, Health, Environment, Security and Ethics Committee		• Data is a strategic asset and its protection is a priority under a Steering Group led by the Executive Director, Centrica Consumer. • Our Code was launched globally in January 2018 to
	Risk climate:		underpin the new values introduced in 2017. This sets the standard for behaviour across the Group.
	Priority: Safety, compliance and conduct		• Where we enter new territories via acquisition or organic growth we ensure country risks are identified and managed appropriately, including anti-bribery and corruption risk and compliance with local legislation.

	Description	Potential impacts	Mitigation
9	Asset Development, Availability and Performance Risk that failures in the development or integrity of our investments in operated and non operated assets could compromise performance delivery. Risk Requiring Judgement	Failure to invest in the maintenance and development of our assets could result in significant safety issues or asset underperformance. Operational integrity is critical to our ability to deliver performance in line with the strategic objectives.	• Capital allocation and investment decisions are governed through the Investment Committee, the final decision resting with the Group Chief Executive and/or Board of Directors. • Group-wide minimum standards are applied to all assets, whether operated or non-operated to give confidence in their integrity. • Maintenance activity and improvement programmes are conducted in all asset-based businesses to maximise
	Governance oversight: Board		effectiveness and production levels.
	Risk climate:
	Priority: Customer satisfaction and operational excellence
10	Information Systems and Security Risk of reduced effectiveness, availability, integrity or security of IT systems and data essential for Centrica's operations.	Our substantial customer base and strategic requirement to be at the forefront of technology development, means that it is critical our technology is	• Our information security strategy seeks to integrate information systems, personnel and physical aspects in order to prevent, detect and investigate threats and incidents. • We engage with key technology partners and suppliers,
	Risk Requiring Standards with elements that are Risks Requiring Judgement	robust, our systems are secure and our data protected. Sensitive data faces the threat	to ensure potentially vulnerable systems are identified. • Regular controls testing and security patching around
	Governance oversight: Board and Safety, Health, Environment, Security and Ethics Committee	of misappropriation, leading to potential financial loss and/or reputational damage	our core systems is undertaken and our controls are further tested periodically by outside experts. • Strengthening of the Chief Information Security Officer (CISO) role to oversee the development of standards,
	Risk climate:	to the Group. Failure to deliver IT solutions in support of the prioritised objectives and change programmes in the business would have consequences both for our organisational transformation and in some cases, our compliance obligations.	controls and assurance across the Centrica estate. • We regularly evaluate the adequacy of our infrastructure and IT security controls, undertake employee awareness
	Priority: Safety, compliance and conduct		and training and test our contingency and recovery processes, recognising the evolving nature and pace of the threat landscape. • Established governance bodies to oversee plans to comply with new requirements including the European General Data Protection Regulation (GDPR).
11	Financial Processing and Reporting Risk of errors or losses arising from the processing and reporting of financial transactions for internal and external purposes. This includes potential errors such as the reassessment of unbilled power revenues in our North America Business Unit of £46 million, reported in our November 2017 trading update. Risk Requiring Standards	The increasingly complex financial accounting landscape, including new financial reporting standards, increases the likelihood of errors being made in the application of accounting judgements. The potential for failures in core controls around critical processes increases in a period of significant change.	• Our financial control framework incorporates our financial controls and management self-assessment compliance, with progress being made to improve the use of systems and reduce the reliance on manual controls. • We have implemented a revised balance sheet review and reconciliation procedure to target minimising control gaps arising in our underlying systems and ensure that issues are detected on a timely basis. • We undertake detailed testing and evaluation of the effectiveness of our controls in response to critical financial risks and report to the Financial Risk, Assurance
	Governance oversight: Board	As Finance continues to implement the functional transformation programme, the risk of control degradation could increase and this is an area of significant focus.	and Control Committee quarterly. • Controls improvement is a key objective of the Finance transformation programme, with oversight of delivery of this objective provided by the Audit Committee.
	Risk climate:
	Priority: Safety, compliance and conduct

	Description	Potential impacts	Mitigation
12	Business Planning, Forecasting and Performance Management Risk that plans and forecasts may not be deliverable or may fail to drive efficient and effective performance and the risk of failures in performance reporting. This includes the risk that we do not quickly respond to and reflect performance management issues in any of the business units as and when they arise. Risk Requiring Judgement with elements that are Risks Requiring Standards Governance oversight: Board Risk climate:	We prioritise how we use our resources based on our business plans and forecasts. Failure to accurately plan and forecast, taking into account the changing business environment, could result in sub-optimal decisions and failure to realise anticipated benefits.	• Annual planning processes are subject to scrutiny and challenge with respect to underlying market trends, competitive threats and organisational capability and delivery from the Executive Committee and the Board. • Group Functions have adopted standardised planning processes in support of the business priorities, driving improved integration of plans. • Quarterly performance review meetings involving the Executive Committee enable the review of performance against forecasts, ensuring that mitigating actions or revisions are developed and implemented.
	Priority: Cash flow growth and strategic momentum
13	People Risk that we cannot attract or retain employees to ensure we have the appropriate capabilities to deliver our strategy. There is also the potential risk of industrial action in our Consumer businesses.	In challenging conditions, it is critical that we attract and retain key capabilities across the business. The consequence of not being able to fulfil key roles could have a detrimental	• We continue to evolve a clearly defined people strategy based on culture and engagement, equality and wellbeing, talent development, training and reward and recognition. • We regularly review organisational capability in critical business areas, reward strategies for key skills, talent
	Risk Requiring Judgement with elements that are Risks Requiring Standards	impact on our ability to meet our strategic objectives. The risk of industrial action in our businesses would have a	management and learning and development programmes through external benchmarking. • We conduct an annual survey of employee engagement and take seriously the messages arising with a plan
	Governance oversight: Board	potential impact on customer service levels and retention.	of actions. • The Executive Committee has clear oversight through
	Risk climate:	We require the right behaviours from our leaders and employees to deliver our business strategy in	regular discussions of the people-related challenges inherent in our transformation programme. • We engage with trade unions on restructuring and issues that could impact terms and conditions with clear and
	Priority: People and building capability	accordance with our Values and Our Code.	open processes to promote an environment of trust and honesty. • Our Code was launched in early 2018. This sets the expectations for all employees, replacing the Business Principles.
14	Customer Service Risk of failure to consistently meet the expectations of our customers through the customer lifecycle.	The delivery of high quality customer service is central to our business strategy. With the entry of new competitors	• Customer and Field Operations teams monitor customer service levels, ensuring enquiries are answered in a timescale and manner acceptable to the customer, complaint levels are minimised, and
	Risk Requiring Judgement	to the market, customers are increasingly likely to switch if they face an unacceptable customer experience.	that customer satisfaction is reviewed at all stages of the customer journey. • Leadership teams in our front-line businesses establish
	Governance oversight: Board	Remaining at the forefront of digital developments and innovating to provide choice	accountability for specific aspects of the customer journey and assess performance against agreed metrics weekly.
	Risk climate:	and control for our customers is critical. This risk faces increased scrutiny as political	• Performance parameters are monitored on a weekly basis for all third-party service providers involved in the front-line and back office customer service process.
	Priority: Customer satisfaction and operational excellence	and regulatory attention focuses on introducing competition by applying pressure over pricing strategies.	• Customer service agents are quality assessed for consistency with a rigorous training and performance management programme, and a structured performance management process is in place for field teams. • We operate an environment of continuous improvement, incorporating an accredited programme (STAR), and use root cause analysis of complaint and NPS insight to continuously improve our service delivery.

	Description	Potential impacts	Mitigation
15	Balance Sheet Strength and Credit Position Risk that the balance sheet may not be resilient with implications for our credit rating, liquidity risk and long-term financial obligations. Risk Requiring Judgement Governance oversight: Board and Audit Committee Risk climate: Priority: Cash flow growth and strategic momentum	Failure to operate within the Group's financial framework resulting in risk to maintaining our target credit rating, impacting our access to cost effective capital and trading arrangements. Long-term financial obligations may increase in value due to factors both inside and outside of our control, for example pension schemes, resulting in additional funding required to meet our obligations.	• We assess available resources on a regular basis and this analysis underpins our going concern assumption and viability analysis as described on pages 61 and 62. • Significant committed facilities are maintained with sufficient cash held on deposit to meet working capital fluctuations as they arise. • Counterparty exposures are restricted through a Group Credit Limit policy which is regularly reviewed and adjusted as necessary. • Wholesale credit risks associated with commodity trading and treasury positions are managed in accordance with Group policy. • We consider accounting assumptions impacting on our balance sheet carefully, including decommissioning and impairment, as described as part of the Group Financial Review on pages 48 to 51.
16	Procurement and Supplier Management Risk of failure to source responsibly and to co ordinate and collaborate with supply chain partners to ensure value delivery and continuity. Risk Requiring Judgement with elements that are Risks Requiring Standards Governance oversight: Board Risk climate: Priority: Customer satisfaction and operational excellence	Our business operations rely on products and services provided through third parties, including outsourced activities, infrastructure and operating responsibility for some assets. We rely on these parties to comply not only with contractual terms, but also legal, regulatory and ethical business requirements.	• All suppliers are required to sign up to our 'Ethical Procurement' policies and procedures. • Financial health, risk and anti-bribery and corruption due diligence and monitoring is implemented in supplier selection and contract renewal processes. • Audits are conducted in relation to third-party operation of jointly operated Exploration & Production assets. • We review the ethical conduct of our suppliers including a programme of supplier visits to provide additional assurance over practices employed, including respect for human rights, as part of being a good corporate citizen as laid out on page 38. • Procurement practices have been reviewed across the Group and a global Procurement Policy and Standard was implemented from 1 January 2018.

Viability statement disclosure

In accordance with provision C.2.2 of the 2016 UK Corporate Governance Code, the Directors have assessed the prospects for the Group over a significantly longer time period than the 12 months required in adopting the going concern basis of accounting.

In making this assessment the Directors take into account the liquidity analysis performed in relation to the Group's net debt and available credit facilities, current business performance, the Group annual plan for 2018 and strategic plan for the years beyond this, potential risks and uncertainties in the delivery of the strategic plan through a number of modelled scenarios and available mitigating actions. In conducting this analysis, we model all potential significant scenarios occurring simultaneously from the first year, causing the maximum potential impact on Group debt.

Timeframe

The Board has reviewed the timeframe over which it makes this assessment and continues to believe that three years is the appropriate timeframe to assess viability. This conclusion is reached as a result of:

• alignment with detailed planning undertaken for a period of three years within the strategic planning process, which is used by the Group in assessing business performance and taking strategic decisions;
• the relatively short-term nature of some of our more significant risks, such as the potential for disruption in our customerfacing markets, where we monitor the risks and available mitigations frequently;
• the commodity markets in which the Group operates where transparent and executable pricing is generally only available for a three-year period, allowing market-based information to be used within our forecasts for this period; and
• increasing uncertainty inherent in estimations beyond this period.

In assessing the prospects of the business, the Board must balance the short-term planning horizons in the customer-facing businesses, with the longer-term requirements of our more asset-intensive businesses. Given recent divestments of our largest power generation assets and the divestment of our wind portfolio, our core business is increasingly focused on the energy supply and services markets, which are more short term in orientation and outlook. Whilst we assess viability on a three-year basis, when we consider our strategic risks (as described on pages 55 to 60), we consider possibilities that may occur outside of this time period and any resultant mitigations.

Approach

The Board has outlined the Group strategy in detail on pages 10 to 11. The Group has a strong position in its chosen markets with established brands, a highly skilled customer-facing workforce and reliable operations. The main risks to delivery of the strategy, and our approach to managing these risks, are described in our approach to our Principal Risks on pages 55 to 60. To understand the impact of these risks the Directors perform a robust evaluation, which in turn informs the assessment of viability. In making this assessment, they consider severe, but plausible, impacts where the realisation of risks is more than remote in likelihood. The potential impact is based on known consequences, historical evidence and similar events observed in the market. The liquidity analysis contains assumptions relating to the key drivers of financial performance including customer numbers, fundamental trends in energy and services, commodity prices, efficiency programmes and the shape of the future portfolio.

We also model the impact on liquidity of events such as an inability to access uncommitted financing facilities or a market stress event, such as commodity price volatility or a two-notch credit rating downgrade. Identified risk impacts are then incorporated within scenarios that are modelled, individually and collectively, to assess the impact they have on the available headroom within our ongoing liquidity analysis. The scenarios assessed as being of most significance in making the assessment of viability (and the related primary Principal Risk categories) include:

• the potential for further regulatory or political intervention resulting in a significant impact on our customer margins and our ability to retain customers (Political and Regulatory Intervention; Customer Service; Strategy Delivery; and Brand, Trust and Reputation);
• a sustained significant adverse movement in commodity prices (External Market Environment and Financial Market);
• our inability to respond to disruption from competition in the market and deliver transformation through cost savings and growth in new businesses (Strategy Delivery and Change Management);
• risks associated with keeping our people and our customers safe, incorporating potential adverse consequences of breaches in regulatory compliance obligations and the impact of a loss of containment in our upstream assets (Health, Safety, Environment and Security; and Legal, Regulatory and Ethical Standards Compliance);
• challenges relating to the security of our systems and keeping our data safe, including cyber-security and, in future, a breach of GDPR requirements (Information Systems and Security; and Legal, Regulatory and Ethical Standards Compliance); and
• a significant increase in the obligations of our pension schemes, requiring material, repeated cash injections (Balance Sheet Strength and Credit Position).

Each of the scenarios are considered individually on a gross basis, with the impact of Group-level mitigating actions incorporated following the aggregation of the individual impacts.

These risks are included as sensitivities to our liquidity analysis, and are considered by the Board as part of the approval process for this statement.

Resilience

The sources of funding available to the Group, including undrawn committed credit facilities of £3.5 billion, are set out in the consolidated Financial Statements of the Annual Report and Accounts 2017 (centrica. com/ar17). The Board expects these sources, together with cash flows generated by the Group from its normal operations, to provide adequate levels of funding to support the execution of the Group's plans. Cash flows generated during 2017 are set out in the cash flow statement in the consolidated Financial Statements of the Annual Report and Accounts 2017 (centrica.com/ar17).

We then consider the Group's resilience to risk and our ability to respond to changes in market conditions to identify potential mitigating actions, such as additional restrictions and limits on capital investment, further cost reduction opportunities and the future sustainability of our dividend policy.

Conclusion

The Directors have considered all the above factors in their assessment of viability over the next three years, including the Group's strategic plan, levels of funding, scenario analysis and the principal risks and uncertainties facing the Group. The Directors have also considered the availability of mitigating actions within their control in the event that a number of simultaneous severe but plausible scenarios materialise. Based on the conclusions of this assessment, the Directors confirm that they have a reasonable expectation that no individual scenario identified or combination of identified scenarios, will impact on the Group's ability to continue to operate and meet its liabilities, as they fall due, over a period of at least three years.

The Strategic Report, which has been prepared in accordance with the requirements of the Companies Act 2006, has been approved by the Board and signed on its behalf by:

Grant Dawson

Group General Counsel & Company Secretary 21 February 2018

Governance

Contents

• 64 Board of Directors
• 66 Senior Executives
• 67 Summary Directors' and Corporate Governance Report
• 70 Summary Remuneration Report

Board of Directors

Full biographies can be found at centrica.com/board ^C Chairman

Committee RC Remuneration

Committee

Committee SC Safety, Health, Environment, Security & Ethics Committee

Denotes Committee Chairman

RICK HAYTHORNTHWAITE Chairman

Rick joined the Board as a Non-Executive Director on 14 October 2013. He was appointed Chairman of the Board on 1 January 2014 and is Chairman of the Nominations Committee.

Skills and experience

Rick has a wealth of knowledge in the energy industry and has significant board experience, both as an executive and nonexecutive. He led the rescue of Invensys from 2001 to 2005 and the defence, turnaround and subsequent sale of Blue Circle Industries from 1997 to 2001. He has served on the boards of Network Rail as chairman and Cookson, Lafarge, ICI and Land Securities as a non-executive director.

External appointments

Chairman of the board of MasterCard International, QIO Technologies and Arc International.

IAIN CONN Group Chief Executive

Iain was appointed Group Chief Executive on 1 January 2015 and is Chairman of the Disclosure Committee.

Skills and experience

Iain possesses a deep understanding of the energy sector built up over a lifetime in the industry and has demonstrated strong commitment to customers, safety and technology. Iain was previously BP's chief executive, downstream (BP's refining and marketing division) a position he held for seven years. Iain was a board member of BP for 10 years from 2004 and had previously held a number of senior roles throughout the organisation in trading, exploration and production and the management of corporate functions such as safety, marketing, technology and human resources.

External appointments

Non-executive director of BT Group plc.

JEFF BELL Group Chief Financial Officer

Jeff was appointed Group Chief Financial Officer and joined the Board on 1 August 2015.

Skills and experience

Jeff has a broad range of finance experience. He joined the Group's Direct Energy business in Toronto in 2002 where he held various senior finance positions before moving to Centrica's head office in 2008 to support the Group Chief Executive and to lead the Group Strategy team. In 2011 he was appointed Director of Corporate Finance. Prior to Centrica, Jeff worked in Toronto for both KPMG, where he qualified as a chartered accountant, and the Boston Consulting Group.

MARGHERITA DELLA VALLE Non-Executive Director

Margherita joined the Board on 1 January 2011 and is Chairman of the Audit Committee.

Skills and experience

Margherita brings considerable corporate finance and accounting experience and she has a sound background in marketing. She was chief financial officer of Vodafone's European region from April 2007 to October 2010 and chief financial officer of Vodafone Italy from 2004 to 2007. Previously she worked for Omnitel Pronto Italia and held various consumer marketing positions in business analytics and customer base management before moving into finance.

External appointments

Deputy group chief financial officer of Vodafone Group Plc and a trustee of the Vodafone Foundation.

Joan joined the Board on 11 October 2016.

Skills and experience

Director

Joan is a former executive vice president of Time Warner Cable, as well as chief operating officer Time Warner Cable Media and president, Time Warner Cable Media LLC. Prior to its acquisition by Charter Communications, Time Warner Cable was the second largest cable company in the United States, operating in 29 states and generating over \$23 billion in annual revenue. Joan led one of the company's three operating divisions, doubling revenues and overseeing the company's big data strategy.

External appointments

Director of Airgain, Inc.

MARK HANAFIN Chief Executive Centrica Business

Mark joined the Board on 14 July 2008.

Skills and experience

Mark has senior management experience across the energy value chain from exploration and production to product sales. He has excellent midstream and trading credentials as well as a strong track record in developing supply and marketing businesses. Before joining Centrica, Mark spent 21 years with Royal Dutch Shell.

External appointments

Non-executive director of EDF Energy Nuclear Generation Group Limited (representing Centrica).

STEPHEN HESTER Senior Independent Director

Stephen joined the Board on 1 June 2016 and is the Senior Independent Director.

Skills and experience

Stephen has wide-ranging experience, particularly in customer-facing businesses, together with recognised expertise in transforming business performance. He has a deep knowledge of operating within highly regulated businesses and over 30 years' experience in financial services and FTSE 100 companies. Stephen was previously chief executive officer of Royal Bank of Scotland Group plc where he led their largest ever corporate restructuring and recovery programme.

External appointments

Group chief executive of RSA Insurance Group plc.

MARK HODGES Chief Executive Centrica Consumer

Mark joined the Board on 1 June 2015.

Skills and experience

Mark brings a strong understanding of the UK consumer market and a track record in improving business performance. He is experienced in working in a regulated environment, driving significant improvements in customer service and managing efficiency, 'offer innovation', major IT and change projects. Mark was group chief executive officer of Towergate Partnership. Prior to this he spent over 20 years with Norwich Union and Aviva plc in a variety of finance, planning and strategy roles. He was a member of Aviva's board and executive committee.

External appointments

Director of Energy UK (representing Centrica). CARLOS PASCUAL Non-Executive Director

Carlos joined the Board on 1 January 2015.

Skills and experience

Carlos has held a number of senior positions in the energy industry as well as being a prominent public figure in energy geopolitics and economic and commercial development. Between 2011 and 2014 Carlos established and directed the US State Department's Energy Resource Bureau. Until August 2014 Carlos was special envoy and coordinator for international energy affairs, acting as senior adviser to the US Secretary of State on energy issues. He has also served as US ambassador in Mexico and Ukraine.

External appointments

Non-resident senior fellow at the Centre on Global Energy Policy, Columbia University and senior vice president for global energy at IHS Markit.

STEVE PUSEY Non-Executive Director

Steve joined the Board on 1 April 2015 and is Chairman of the Safety, Health, Environment, Security & Ethics Committee.

Skills and experience

Steve has a wealth of international experience as a senior customer-facing business technology leader. He has a long track record in the telecommunications industry, in both the wireline and wireless sectors, and in business applications and solutions. Steve has worked for Vodafone, Nortel and British Telecom and is a graduate of the Advanced Management Program at Harvard University.

External appointments

Non-executive director of FireEye, Inc.

SCOTT WHEWAY Non-Executive Director

Scott joined the Board on 1 May 2016 and is Chairman of the Remuneration Committee.

Skills and experience

Scott is a senior business leader with a mix of deep retail and consumer expertise. He has considerable knowledge gained in both the retail and insurance sectors, together with a strong understanding of operating within highly regulated businesses. Scott worked in retail for almost 30 years both in the UK and internationally and has over 10 years' experience as a nonexecutive director within the financial services industry.

External appointments

Chairman of AXA UK plc and senior independent director of Santander UK plc.

LESLEY KNOX

Lesley Knox stepped down from the Board on 31 December 2017 having served as a Non-Executive Director since January 2012.

Senior Executives

Full biographies can be found at centrica.com/seniorexecutives DC Disclosure

CHARLES CAMERON Director of Technology & Engineering and Centrica Innovations

Charles was appointed Director of Technology & Engineering on 1 January 2016 and Chairman of Centrica Innovations on 1 May 2017.

Skills and experience

Charles has extensive technology and engineering experience and has held corporate roles in marketing, planning and M&A. Before joining Centrica, he was head of technology, downstream at BP plc and was a member of the downstream executive team.

Prior to his time at BP, Charles spent 23 years with the French Institute of Petroleum and their catalyst, technology licensing and engineering service business, Axens.

Grant was appointed Group General Counsel & Company Secretary in February 1997.

Skills and experience

Grant joined British Gas plc in October 1996 and has been Group General Counsel & Company Secretary of Centrica plc since the demerger of British Gas plc on 17 February 1997. He was called to the Bar in 1982 and has spent most of his career in industry, joining the legal department of Racal Electronics plc in 1984, then STC plc as legal adviser in 1986 until it was taken over in 1991 by Northern Telecom Limited. Between 1991 and 1996, he was the associate general counsel for Nortel in Europe, Africa and the Middle East.

MIKE YOUNG Group Chief Information Officer

Mike was appointed Group Chief Information Officer on 1 November 2016.

Skills and experience

Mike brings a wide range of experience in managing global information systems functions in partnership with customer-facing units and using big data and digital technologies to drive revenue growth and improve the customer experience. Before joining Centrica he was group chief information officer with the media and digital marketing company Dentsu Aegis Network.

JILL SHEDDEN, MBE Group Human Resources Director

Jill was appointed Group Director, Human Resources on 1 July 2011.

Skills and experience

Jill joined British Gas plc as a graduate in 1988 and has since held a wide range of senior HR roles across the Group. Prior to her appointment as Group HR Director Jill was HR Director in British Gas Business, British Gas Energy and Centrica Energy. In 2017 Jill was awarded an MBE for 'services to women and equality' in recognition of her work with, amongst other organisations, the Women's Business Council.

Summary Directors' and Corporate Governance Report

Our Governance Structure

The Board

The Board is responsible for promoting the overall success of the Company. In doing so, it delegates certain responsibilities to Board Committees and executive management. Details of the Board Committees and their activities during the year are set out in the Annual Report and Accounts 2017 (centrica.com/ar17).

The Board delegates authority to the Group Chief Executive for the execution of strategy and the day-to-day management of the Group. The Board oversees, guides and challenges executive management in the execution of these activities.

Read more about Our Strategy and Our Business Model Pages 10 to 11 and 12 to 13.

Matters reserved exclusively for the Board

There are certain key responsibilities that the Board does not delegate and which are reserved for its consideration. The full Schedule of Matters Reserved is available on our website, but key features include:

• the development of strategy and major policies;
• approving the annual operating plan, Financial Statements and major acquisitions and disposals;
• approving interim dividend payments and recommending final dividend payments; and
• the appointment and removal of Directors and the Company Secretary.

Read more at centrica.com/role-of-the-board

Board composition and roles

Chairman	Group Chief Executive	Group Chief Financial Officer	Independent Non Executive Directors	Senior Independent Director	Group Executive Directors
Responsible for the leadership and management of the Board. In doing so, he is responsible for promoting high ethical standards, ensuring the effective contribution of all Directors and, with support from the Group General Counsel & Company Secretary, best practice in corporate governance.	Responsible for the executive leadership and day-to-day management of the Company, to ensure the delivery of the strategy agreed by the Board.	Responsible for providing strategic financial leadership of the Company and day to-day management of the finance function.	Responsible for contributing sound judgement and objectivity to the Board's deliberations and overall decision-making process; providing constructive challenge, and monitoring the Executive Directors' delivery of the strategy within the Board's risk and governance structure.	Acts as a sounding board for the Chairman and serves as a trusted intermediary for the other Directors, as well as shareholders as required.	Responsible for executive leadership and day-to-day management of relevant business units in support of the Group Chief Executive and the delivery of the strategy agreed by the Board.

Committees

The Committee reports are set out in the Annual Report and Accounts 2017 (centrica.com/ar17).

The role and responsibilities of each Committee is set out in its Terms of Reference found on the Company's website.

Read more at centrica.com/board-committees

Summary Directors' and Corporate Governance Report (continued)

Set out below is a summary of the Directors' and Corporate Governance Report from the Annual Report and Accounts 2017. The full report can be found at centrica.com/ar17

UK Corporate Governance Code (the Code) compliance

Effective corporate governance provides an essential foundation for the long-term success of the Company. This report sets out the key elements of Centrica's corporate governance arrangements, including how we have sought to apply the principles and provisions of the Code. The Board confirms that, up to the date of this review, it fully complied with the Code.

The Board further confirms that, through the activities of the Audit and Safety, Health, Environment, Security and Ethics Committees, it has reviewed the effectiveness of the Company's system of risk management and internal controls.

The Code and associated guidance are available on the Financial Reporting Council website at frc.org.uk

Directors

During the year under review the Board comprised 12 Directors, of whom four were Executive and eight, including the Chairman, were Non-Executive. Lesley Knox stepped down from the Board with effect from 31 December 2017. As we announced in February 2017, Scott Wheway succeeded Lesley as Remuneration Committee Chairman in May 2017. While the Company believes strongly in the benefits of regularly refreshing Board membership, it was felt that having appointed five new Non-Executive and three new Executive Directors over the 2015 to 2016 period, no further changes to Board composition were required in 2017.

Further information on the background, experience, current tenure, Committee membership and other appointments of each Director can be found in the individual biographies on pages 64 and 65.

In line with best practice, the roles of our Chairman and Group Chief Executive are separate, formalised in writing and have been approved by the Board. A summary of these and other roles are shown in our governance structure on page 67.

During the year, the Non-Executive Directors, including the Chairman, met frequently without management present. In addition, the Senior Independent Director met with the Non-Executive Directors in the absence of the Chairman to appraise the Chairman's performance.

The Board has agreed that each Director shall stand for reappointment at each Annual General Meeting (AGM). Copies of the Executive Directors' service contracts and letters of appointment for the Non-Executive Directors are available for inspection by shareholders at each AGM and during normal business hours at the Company's registered office.

Board diversity

Centrica recognises the benefits of diversity in all its forms, at Board level and throughout the Group. During 2017, 25% of the Board were women and comprised Directors from the UK, US, Canada and Italy with a wide range of backgrounds and expertise. Centrica supports the recommendations of the Hampton-Alexander Review and is continuing to develop the skills, experience and knowledge of a diverse pipeline of talent. Our Nominations Committee is committed to ensuring and promoting a diverse blend of skills, backgrounds and nationalities on the Board.

Gender

Employee and senior management diversity

Centrica's policies and practices reflect and encourage a culture where decisions are based on individual ability and potential in relation to the needs of the business. We promote equal opportunities and diversity to create an inclusive working environment that attracts and retains the best people and enables everyone in Centrica to fulfil their potential. In 2017, we started to roll-out unconscious bias training as part of a wider effort to remove barriers to employment and ensure all individuals are treated in a non-discriminatory manner at all stages of their employment, including recruitment and selection, promotion and performance management. We are committed to creating an inclusive workplace in which all employees are able to thrive. By delivering on this we are able to:

• attract and retain a diverse range of talent;
• enhance our employer brand;
• create an inclusive environment so that everyone feels safe to bring their whole self to work; and
• ensure people receive career opportunities based on merit so that we have the best talent in the right jobs.

At the senior management level 28%† of our people are female. For other employees that figure is 29%† . Centrica continues to offer a range of initiatives including coaching and mentoring of diverse talent. We also participate in the 30% Club's cross-company, cross-sector mentoring scheme for mid-career women. We are excited to be developing a programme aimed at enabling women to return to the workplace who have been out of work for two years or longer, which will be launched in 2018.

This year we launched a new Disability and Wellbeing Network (DAWN). Alongside our existing networks in the UK (Women, Carers, LGBT) and in the US (Women, LGBT, BOLD (Black Organisation Leadership Development) and HONOR (for Veterans)), this will continue to grow and support our employees. As a mark of Centrica's commitment to diversity and inclusion, we achieved Bronze recognition in the annual Business in the Community benchmarking survey. The Managing Director of Distributed Energy & Power, Jorge Pikunic, was also named among the Top 100 Executives in the Financial Times' 2017 OUTstanding Leading LGBT+ & Ally Executives and LGBT+ Future Leaders lists. This year, for the first time in our history, we celebrated National Inclusion Week bringing together all our diversity groups and acknowledging the benefits of inclusion.

In 2017, we worked toward achieving Disability Confident level 1 status and we are pleased that this has been accredited for 2018.

In addition, we are delighted to be recognised in the 2017 Stonewall Workplace Equality Index, where we were ranked in the 66th percentile.

We support the UK Government's gender pay gap reporting requirement. In the UK our gender pay gap is 12% mean and 30% median(1). The gap is not driven by unequal pay but by the uneven distribution of men and women across the business and the type of roles they do. Like other employers in our sector, we have a greater proportion of men in higher paid, traditionally male-dominated technical roles such as engineering, which form a significant portion of our workforce. By contrast, we have a larger number of women in lower paid, less technical roles such as administration. We are focused on closing the gap by building a gender balanced talent pipeline through initiatives to attract, develop and retain women.

(1) Data based on a 5 April 2017 snapshot of UK employees.

View our Gender Pay Statement centrica.com/genderpay

Breakdown by gender

Senior management 2017	72%† Male	28%† Female
0 20 40	60 80 719	100 278
2016	74% Male	26% Female
0 20 40	60 80 788	100 284
Other employees 2017	71%† Male	29%† Female
0 20 40	60 80 22,349	100 9,246
2016	71% Male	29% Female
0 20 40	60 80 24,782	100 10,009

Board evaluation

In accordance with the Code, Centrica conducts an annual evaluation of Board performance, which is facilitated by an independent third-party at least once every three years.

As reported last year, the results of the 2016 internal evaluation exercise were considered by the Board and Committees in February 2017 and the topics where Directors had indicated a need for further discussion (new growth markets and the competitive landscape) were incorporated into the 2017 Board programme.

The 2017 independent third-party evaluation is being conducted by Independent Audit. This exercise, which was ongoing at the date of this Annual Review, comprised online questionnaires, interviews with all Directors, a review of Board papers and observation of a Board meeting. The results of the evaluation will be reviewed by the Board at its meeting in March 2018 and any findings built into an action plan. The Senior Independent Director, Stephen Hester, conducted the evaluation of the Chairman's performance through a series of individual discussions with Directors and Senior Executives.

Engagement with shareholders

The Board recognises and values the importance of maintaining an effective investor relations and communication programme. The Board is proactive in obtaining an understanding of shareholder views on a number of key matters affecting the Group and receives formal investor feedback regularly.

In 2017, Centrica's shareholder engagement programme included:

• formal presentations for the announcement of the Group's 2016 preliminary results, 2017 interim results and Capital Markets Day;
• meetings between the Group Chief Executive and Group Chief Financial Officer and the Company's major shareholders during the year;
• the Chairman of the Remuneration Committee meeting with a number of the Company's major shareholders during the year to discuss the Company's remuneration arrangements;
• the Chairman and Senior Independent Director meeting with major institutional shareholders in order to gain a first-hand understanding of their concerns and key issues and provide regular updates of these to the Board; and
• a meeting with our largest investors and leading proxy advisers to provide insight into the key focus and considerations of the Board and its Committees and a better understanding of the governance measures operating across the business.

The Company's AGM provides all shareholders with the opportunity to further develop their understanding of the Company. Shareholders can ask questions of the full Board on the matters put to the meeting, including the Annual Report and Accounts 2017 and the running of the Company generally. The Company intends to send the Notice of AGM and any related papers to shareholders at least 20 working days before the meeting. All Directors, including Committee Chairmen, are due to be in attendance at the AGM to take questions.

At the AGM, the Chairman and the Group Chief Executive present a review of the Group's business. A poll is conducted on each resolution at all Company general meetings. All shareholders have the opportunity to cast their votes in respect of proposed resolutions by proxy, either electronically or by post. Following the AGM, the voting results for each resolution are published and are available on our website.

Stephen Hester, the Senior Independent Director, is available to shareholders if they have concerns that contact through the normal channels has failed to resolve.

Our website, centrica.com, contains up-to-date information for shareholders and other interested parties including annual reports, shareholder circulars, share price information, news releases, presentations to the investment community and information on shareholder services.

Summary Remuneration Report

Set out below is a summary of the Remuneration Committee Chairman's annual statement and a summary of the Remuneration Report from the Annual Report and Accounts 2017. The full Report can be found at centrica.com/ar17

In summary

As highlighted elsewhere in this Review, second half performance was weak even though Centrica has made significant progress on many fronts in 2017 whilst facing a number of difficult external pressures. In particular, the Remuneration Committee (Committee) noted that most Group objectives and milestones were achieved including completion of the material divestment programme, strengthening of the balance sheet through net debt reduction to £2.6 billion, cost efficiency targets were exceeded and significant progress was made on safety issues. Despite this, the Committee has a duty to consider these achievements against shareholder experience and give due weight to all of the outcomes in 2017, which have not always reflected the exceptional efforts of Centrica's workforce. In this context we have decided:

• to reduce Annual Incentive Plan (AIP) awards for the Executive Directors (Executives) to zero;
• to reduce the maximum potential Long Term Incentive Plan (LTIP) grant for the 2018/20 cycle from 300% to 250% in recognition of a lower starting share price; and
• to impose a pay freeze on all Executives' salaries, where no pay rise will be granted in 2018.

These were difficult decisions but reflect a determination by the Centrica Board to demonstrate alignment between Centrica and its stakeholders.

We are required to present a new Policy for approval at the 2018 Annual General Meeting (AGM) and have been consulting with our major shareholders on proposed changes. We do not believe that the existing Policy requires wholesale change in structure or overall quantum, however, we have taken the opportunity to further align our Policy with strategy and market best practice. We are proposing to add a total shareholder return (TSR) measure to the LTIP, reduce the non-financial elements of both the AIP and LTIP, further align the AIP financial measures with current business plans and increase shareholding requirements for the Executives to 300% of base salary.

Remuneration outcomes for the year

Centrica's performance in 2017 has been disappointing for shareholders and the Committee has taken measures to ensure that variable remuneration outcomes reflect alignment with the shareholder experience.

The Committee has assessed performance under the AIP for 2017 on a formulaic basis against the original targets set. On this basis the performance achieved was above the threshold level of financial performance for cash flow and strong performance by the management team was reflected in considerable progress made against the strategic objectives in many areas. This would have resulted in an AIP outcome for the Executives in the range between threshold and target.

However, in making its assessment of performance the Committee took into full consideration the overall shareholder experience over the period and, as a result, concluded that irrespective of the formulaic outcome it was not appropriate to make an AIP award to any of the Executives in relation to 2017. The Committee has therefore exercised its discretion to reduce the AIP outcome to zero.

The Committee also needed to assess the vesting outcome for longterm incentive awards that were made in early 2015. The LTIP awards were dependent on adjusted earnings per share (EPS), economic profit (EP), safety performance, employee engagement and customer service delivery as assessed by net promoter scores. Based on performance against these metrics over the three years the LTIP will vest at a level of 26% of the award. The value of the shares initially granted under the 2015 award has fallen and as such represents an outcome of approximately 47% of salary.

Mark Hanafin, the only Executive in employment during the operation of the Policy prior to that approved by shareholders in 2015, was entitled to and received a matching award in relation to the deferral of part of his 2014 annual bonus under the final year of operation of the Deferred and Matching Share Scheme (DMSS). The Committee reviewed the original EP target set in early 2015, which related to the portfolio of business units that Mark was responsible for at that time and, due to significant changes within his portfolio during the performance period and the volatility in commodity prices impacting the Exploration & Production (E&P) business unit, decided that the calculated result when compared to the target, which suggested that the maximum should vest, was no longer a fair measure of performance. Using its discretion and in accordance with the scheme rules, the Committee revised the target upwards and set it on a constant environment basis. The revised threshold and maximum levels were £80 million and £160 million respectively. The result was £129 million and consequently the Committee decided that 81% of the award should vest.

It has been previous practice to agree salary adjustments in April of each year and report them retrospectively in the Remuneration Report. From 2018 it is our intention to report them on a forward looking basis for the year. Accordingly the Remuneration Report in the Annual Report and Accounts 2017 (centrica.com/ar17) details the decisions for both 2017 and 2018.

In 2017, increases in salary not exceeding 2% were awarded to the Executives in line with the wider workforce, save for Jeff Bell who also received a 2.55% progression-related increase. The Committee intentionally set Jeff's salary on appointment to the Board in August 2015 at a level that reflected his experience at that time and on the understanding that it would in future be reviewed. Having made the adjustment in April 2017, the Committee was then satisfied that Jeff's salary appropriately reflected his role and contribution and would not expect such an adjustment to be repeated in the future.

Remuneration in the upcoming year

In 2018, no Executive will receive a salary increase. The Committee has also considered the impact that the current share price could have on the number of shares to be granted under the 2018/20 LTIP cycle. As a result the Committee has decided to reduce the award level for 2018 to 250% of salary in recognition of the current level of Centrica's share price.

Fairness/equal pay

Enhancements to both practice and reporting capability throughout the year have enabled the Committee to review and disclose for the first time an assessment of pay against the relevant functional and geographic market median for all roles across the Group. The median, lower and upper quartile ratio is set out on page 96 of the Annual Report and Accounts 2017 (centrica.com/ar17), along with the equivalent comparison to market median for the Group Chief Executive, and demonstrates a fair and consistent approach to the determination of pay. We have robust processes in place to uphold equal pay. This includes conducting an equal pay audit each year. When comparing pay across equivalent jobs, our gender pay gap is 1% at median with the difference attributed to factors relating to experience. We work hard to be a company where everyone can progress in their careers and achieve their full potential. We know, however, that there is more we can and must do. Further information on pay fairness will be disclosed in March within the Gender Pay Statement.

Remuneration Policy review

As Centrica's Policy was last approved by shareholders in 2015 it will be the subject of a shareholder vote at the AGM in May 2018. During the year the Committee undertook a full review of our existing arrangements. We concluded from this that while our current remuneration structure generally worked well and was largely fit for purpose, there was an opportunity to improve the alignment of executive remuneration with both our strategic goals and the experience and expectations of shareholders. We are committed to ensuring that our revised Policy more closely aligns to our strategy and the delivery of long-term shareholder value through returns and growth whilst also taking into account evolving stakeholder views on executive pay.

Under the AIP, we propose to increase the weighting towards financial performance and move to 75% financial measures and 25% personal objectives (for 2017, the measures were 62.5% cash flow and 37.5% personal objectives). The financial measures will in future be a mix based on Centrica's priorities for the forthcoming year. For 2018 the measures will be adjusted operating cash flow, operating profit and cost efficiency.

For the LTIP, going forward from the 2018/20 cycle, the performance measures will consist of relative TSR with the most significant weighting (33.3%) and cash flow growth (22.2%), EP (22.2%), and non-financial KPIs (22.2%). The Committee believes that this combination creates the right balance between doing the right thing for the business, whilst aligning Executives to the shareholder experience.

For the Group's non-financial KPIs, we are proposing to change from using annual targets aggregated across the LTIP performance period, to three-year targets for improvement. The LTIP targets for awards due to be made in 2018 are set out on page 89 of the Annual Report and Accounts 2017 (centrica.com/ar17).

We continue to be committed to full transparency and disclosure, and in future will disclose all other targets as soon as any commercial sensitivity falls away, and at the latest at the end of the performance period.

We are also proposing the following changes to the Policy to reflect evolving market practice:

• an increase in the shareholding requirement for Executives from 200% to 300% of base salary, with a condition to retain 75% of vested incentive shares (post-tax) until the requirement has been met;
• the introduction of a post-cessation shareholding requirement of 50% of the shareholding requirement (or full actual holding if lower) applicable for 24 months post-cessation;
• the simplification of our bonus deferral to three-year cliff vesting (rather than phased vesting); and
• a reduction in the maximum pension salary supplement available to newly recruited Executives to 25% of salary (currently 30% of salary for the Group Chief Executive and 25% of salary for other Executives).

We have come to these decisions on our Policy following extensive consultation with our largest shareholders. I would like to thank them for their time and constructive input to our deliberations. Our inclusion of TSR within the long-term metrics reflects the feedback we received from the majority of our shareholders on the importance they placed on the inclusion of output measures within the LTIP.

Conclusion

Overall, 2017 has been a challenging year for Centrica as a business and our shareholders. The Committee remains dedicated to ensuring that remuneration arrangements recognise the strong performance of the business whilst remaining appropriate in the context of shareholder experience. The Committee believes that the decisions made over the year in designing the new Policy, exercising discretion in relation to the AIP, and the discretion relating to the final DMSS vesting and 2018 LTIP grant, allow us to achieve this aim and align pay and performance effectively. The Committee is dedicated to an open and transparent dialogue with our investors and therefore I welcome views on any part of our remuneration arrangements.

Scott Wheway

Remuneration Committee Chairman

Remuneration Summary for 2017

Notwithstanding the formulaic result in the short-term incentive outcome chart below, the Committee exercised its discretion and reduced all Executive bonuses to zero.

Short-term incentive outcome (Annual Incentive Plan)

Long-term incentive outcome (Long Term Incentive Plan)

Adjusted earnings per share (EPS)	Iain Conn	25%	37.5%		37.5%
Maximum
Achieved
Not achieved		25% 7%	30.5%	18.75%	18.75%
	Jeff Bell	25%	37.5%		37.5%
Economic profit (EP)
Maximum
Achieved
Not achieved		25% 7%	30.5%	18.75%	18.75%
	Mark Hanafin	25%	37.5%		37.5%
Non-financial KPIs
Maximum
Achieved
Not achieved		25% 7%	30.5%	18.75%	18.75%
	Mark Hodges	25%	37.5%		37.5%
		25% 7%	30.5%	18.75%	18.75%

2017 cash flow distribution to stakeholders

The Committee monitors the relationship between the Directors' total remuneration and cash outflows to other stakeholders. As demonstrated by the chart below, the Directors' aggregate total remuneration for the year equates to 0.09% (2016: 0.08%) of the Group's operating cash flow.

Summary of Policy changes

Centrica's Remuneration Policy (the Policy) will be the subject of a shareholder vote at the AGM in May 2018. Set out below is a summary of the proposed Policy changes. The full Policy is set out on pages 90 to 97 of the Annual Report and Accounts 2017 and at centrica.com/ar17

• No material changes to remuneration structure or incentive quantum;
• increase in the weighting of financial performance in the Annual Incentive Plan (AIP) (to 75% financial, 25% personal objectives);
• inclusion of total shareholder return (TSR) as a financial performance measure in the Long Term Incentive Plan (LTIP);
• increase in the shareholding requirement for Executives from 200% to 300% of salary;
• introduction of a post-cessation shareholding of 50% of requirement for 24 months; and
• reduction in the maximum pension salary supplement for newly recruited Executive Directors to 25% of salary.

Incentive measures

Summary Directors' Annual Remuneration Report

Directors' remuneration in 2017

The Remuneration Report on pages 82 to 89 of the Annual Report and Accounts 2017 (centrica.com/ar17) sets out information on the remuneration of the Directors for the financial year ended 31 December 2017.

Single figure for total remuneration (audited)

	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016
												Recruit ment
											Recruit	award				Total
	Salary/	Salary/	Bonus	Bonus	Bonus	Bonus	Benefits	Benefi s(1)	LTIPs (2)(3)		ment	(restated) (4)	Pension			(restated)(4)
£000	fees	fees	(cash)	(cash)	(deferred)	(deferred)	(1)			LTIPs	award			(5)(6) Pension	Total
Executives
Iain Conn	936	925	–	759	–	759	30	29	447	–	–	1,291	281	277	1,694	4,040
Jeff Bell	569	550	–	424	–	424	27	26	266	–	–	–	105	140	967	1,564
Mark Hanafin(3)	634	625	–	481	–	481	25	25	873	–	–	–	262	267	1,794	1,879
Mark Hodges	634	625	–	544	–	544	34	82	302	–	–	–	159	156	1,129	1,951
Total															5,584	9,434

(1) Taxable benefits include car allowance, health and medical benefits and financial planning advice. Non-taxable benefits include matching shares received under the Share Incentive Plan (SIP). Benefits paid to Mark Hodges in 2016 include relocation support paid in line with Centrica's relocation policy.

(2) LTIPs include the estimated value of the LTIP awards granted in 2015 and due to vest in May 2018 (August 2018 in respect of Jeff Bell), relating to the three-year performance period ending in 2017. Details of the performance outcomes are set out on pages 85 to 86 of the Annual Report and Accounts 2017 and at centrica.com/ar17. The estimated value of dividend equivalent shares has been included and the share price used to value the awards is 159.17 pence (the average share price from 1 October to 31 December 2017).

(3) For Mark Hanafin, as set out below, LTIPs also include the estimated value of the final DMSS matching award granted in 2015 (under the previously approved policy) and due to vest in April 2018. As detailed on page 70, 81% of the DMSS matching award will vest. The estimated value of dividend equivalents has been included and the share price used to value the award is 159.17 pence (the average share price from 1 October to 31 December 2017).

£000	2017 LTIP		2017 DMSS 2017 Total LTIPs
Mark Hanafin – breakdown of LTIPs	302	571	873

(4) The value of the recruitment award shares vesting in April 2017 has been recalculated based on the share price on the date of vest which was 215.5 pence. The previous disclosure in the 2016 single figure table used an estimated share price. Iain Conn's total remuneration for 2016 has therefore been restated to include the amended value of this award.

(5) Notional contributions to the Centrica Unapproved Pension Scheme defined contribution section (CUPS DC) for Jeff Bell and Mark Hanafin have been included in this table as if CUPS DC was a cash balance scheme. This includes a deduction in respect of an allowance for CPI inflation on the opening balances of 0.9% in 2017 (no allowance was applicable in 2016).

(6) Iain Conn and Mark Hodges are entitled to receive a salary supplement of 30% and 25% of base salary respectively.

Single figure for total remuneration (audited)

	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016
£000	Salary/ fees	Salary/ fees	Bonus (cash)	Bonus (cash)	Bonus (deferred)	Bonus	(deferred) Benefits Benefi s LTIPs LTIPs				Recruit ment award	Recruit ment	award Pension	Pension	Total	Total
Non-Executives
Rick Haythornthwaite	495	495	–	–	–	–	–	–	–	–	–	–	–	–	495	495
Margherita Della Valle	98	98	–	–	–	–	–	–	–	–	–	–	–	–	98	98
Joan Gillman	73	16	–	–	–	–	–	–	–	–	–	–	–	–	73	16
Stephen Hester	93	47	–	–	–	–	–	–	–	–	–	–	–	–	93	47
Lesley Knox	80	93	–	–	–	–	–	–	–	–	–	–	–	–	80	93
Mike Linn(1)	–	28	–	–	–	–	–	–	–	–	–	–	–	–	–	28
Ian Meakins(2)	–	70	–	–	–	–	–	–	–	–	–	–	–	–	–	70
Carlos Pascual	73	73	–	–	–	–	–	–	–	–	–	–	–	–	73	73
Steve Pusey	93	87	–	–	–	–	–	–	–	–	–	–	–	–	93	87
Scott Wheway	85	48	–	–	–	–	–	–	–	–	–	–	–	–	85	48
Total															1,090	1,055

(1) Mike Linn resigned as a Non-Executive Director on 18 April 2016.

(2) Ian Meakins resigned as a Non-Executive Director on 1 October 2016.

Financial Statements

Contents

• 76 Independent Auditor's Statement
• 77 Summary Financial Statements

Independent Auditor's Statement

to the shareholders of Centrica plc

We have examined the Summary Financial Statements contained within the Annual Review for the year ended 31 December 2017 which comprise the Summary Group Income Statement, Summary Group Balance Sheet, Summary Group Statement of Changes in Equity, the Summary Group Cash Flow Statement, and the table of the single total figure for Directors' remuneration contained within the Summary Remuneration Report.

This report is made solely to the Company's shareholders, as a body, in accordance with the terms of our letter of engagement with the Company dated 20 March 2017. Our work has been undertaken so that we might state to the Company's shareholders those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's shareholders as a body, for our audit work, for this report, for our Audit Report, or for the opinions we have formed.

Respective responsibilities of Directors and Auditor The Directors are responsible for preparing the Annual Review

(which includes the Summary Financial Statements and the supplementary material which includes the table of the single total figure for Directors' remuneration) in accordance with applicable United Kingdom law.

Our responsibility is to report to you our opinion on the consistency of the Summary Financial Statements contained within the Annual Review with the full annual Financial Statements and our opinion on the consistency of the table of the single total figure for Directors' remuneration contained within the Summary Remuneration Report with that table in the Directors' Remuneration Report.

We also read the other information contained in the Annual Review, and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Summary Financial Statements.

We conducted our work in accordance with Bulletin 2008/3 issued by the Auditing Practices Board. Our report on the Company's full annual Financial Statements describes the basis of our audit opinion on those Financial Statements, the Directors' Remuneration Report, the Strategic Report and the Directors' Report.

Opinion

In our opinion, the Summary Financial Statements contained within the Annual Review are consistent with the full annual Financial Statements for the year ended 31 December 2017 and the table of the single total figure for Directors' remuneration contained within the Summary Remuneration Report is consistent with that table in the full Directors' Remuneration Report. We have not considered the effects of any events between the date on which we signed our report on the full annual Financial Statements on 21 February 2018 and the date of this statement.

Deloitte LLP

Statutory Auditor London, United Kingdom

21 March 2018

Summary Financial Statements

Set out below is a summary of the Financial Statements from the Annual Report and Accounts 2017. The full report can be found at centrica.com

SUMMARY GROUP INCOME STATEMENT

			2017			2016
	Business	Exceptional items and certain	Results for	Business	Exceptional items and certain	Results for
	performance	re-measurements	the year	performance	re-measurements	the year
Year ended 31 December	£m	£m	£m	£m	£m	£m
Group revenue	28,023	–	28,023	27,102	–	27,102
Cost of sales before exceptional items and
certain re-measurements	(23,981)	–	(23,981)	(22,711)	–	(22,711)
Re-measurement of certain energy contracts	–	153	153	–	1,058	1,058
Gross profit	4,042	153	4,195	4,391	1,058	5,449
Operating costs before exceptional items	(2,848)	–	(2,848)	(3,054)	–	(3,054)
Exceptional items – net impairment of retained assets	–	(678)	(678)	–	(71)	(71)
Exceptional items – net (loss)/gain on disposal (i)	–	(62)	(62)	–	157	157
Exceptional items – restructuring and business
change costs	–	(144)	(144)	–	(228)	(228)
Exceptional items – other	–	–	–	–	131	131
Share of profits/(losses) of joint ventures and
associates, net of interest and taxation	51	(28)	23	130	(28)	102
Group operating profit/(loss)	1,245	(759)	486	1,467	1,019	2,486
Net finance cost	(344)	–	(344)	(300)	–	(300)
Profit/(loss) before taxation	901	(759)	142	1,167	1,019	2,186
Taxation on profit/(loss)	(191)	352	161	(282)	(242)	(524)
Profit/(loss) for the year	710	(407)	303	885	777	1,662
Attributable to:
Owners of the parent	698	(365)	333	895	777	1,672
Non-controlling interests	12	(42)	(30)	(10)	–	(10)
Earnings per ordinary share			Pence			Pence
Basic			6.0			31.4
Diluted			6.0			31.2
Interim dividend paid per ordinary share			3.60			3.60
Final dividend proposed per
ordinary share			8.40			8.40
			2017			2016
						(restated) (ii)

Year ended 31 December £000 £000 Directors' remuneration 6,674 10,489

(i) Gains and losses on disposal include any impairments and write-backs associated with the assets disposed of upon classification as held for sale.

(ii) 2016 comparatives for Directors' remuneration have been restated. Further detail is provided in the Summary Remuneration Report on page 74.

Summary Financial Statements (continued)

SUMMARY GROUP BALANCE SHEET

	31 December	31 December
	2017	2016
	£m	£m
Non-current assets	11,506	12,601
Current assets	9,162	9,055
Assets of disposal groups classified as held for sale	–	238
Current liabilities	(7,452)	(7,835)
Non-current liabilities	(9,788)	(11,173)
Liabilities of disposal groups classified as held for sale	–	(42)
Net assets	3,428	2,844
Total shareholders' equity and non-controlling interests	3,428	2,844

SUMMARY GROUP STATEMENT OF CHANGES IN EQUITY

	2017	2016
	£m	£m
1 January	2,844	1,342
Profit for the year	333	1,672
Other comprehensive income/(loss)	104	(385)
	3,281	2,629
Employee share schemes	35	33
Issue of share capital	–	694
Dividends (net of scrip dividends)	(463)	(526)
Acquisition of business	24	–
Non-controlling interests	551	14
31 December	3,428	2,844

SUMMARY GROUP CASH FLOW STATEMENT

	2017	2016
Year ended 31 December	£m	£m
Cash generated from operations	2,118	2,875
Taxation and other operating cash flows	(278)	(479)
Net cash flow from operating activities	1,840	2,396
Net cash flow from investing activities	32	(803)
Net cash flow from financing activities	(1,070)	(546)
Net increase in cash and cash equivalents	802	1,047
Cash and cash equivalents including overdrafts at 1 January	1,960	860
Effect of foreign exchange rate changes	(25)	53
Cash and cash equivalents including overdrafts at 31 December	2,737	1,960

The Summary Financial Statements on pages 77 to 78 were approved and authorised for issue by the Board of Directors on 21 February 2018 and were signed below on its behalf by:

Iain Conn Jeff Bell

Group Chief Executive Group Chief Financial Officer

Shareholder Information

General enquiries

Centrica's share register is administered and maintained by Equiniti, our Registrar, whom you can contact directly if you have any questions about your shareholding which are not answered here or on our website. You can contact Equiniti using the following details:

Address: Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA United Kingdom

Telephone: 0371 384 2985*

Outside the UK: +44 (0)121 415 7061

Textphone: 0371 384 2255*

Outside the UK: +44 (0)121 415 7028

Contact: help.shareview.co.uk

Website: equiniti.com

* Calls to an 03 number cost no more than a national rate call to an 01 or 02 number. Lines open 8.30 am to 5.30 pm, Monday to Friday (UK time), excluding public holidays in England and Wales.

When contacting Equiniti or registering via shareview.co.uk, you should have your shareholder reference number at hand. This can be found on your share certificate, dividend confirmation or any other correspondence you have received from Equiniti.

If you hold less than 2,500 shares you will be able to change your registered address or set up a dividend mandate instruction over the phone, however, for security reasons, if you hold more than 2,500 shares, you will need to put this in writing to Equiniti.

Together with Equiniti, we have introduced an electronic queries service to enable our shareholders to manage their investment at a convenient time. Details of this service can be found at shareview.co.uk

American Depositary Receipt (ADR)

We have an ADR programme, trading under the symbol CPYYY. Centrica's ratio is one ADR being equivalent to four ordinary shares. Further information is available on our website or please contact:

Address: BNY Mellon Shareowner Services, PO Box 505000, Louisville, KY 40233-5000, USA

Email: shrrelations@cpshareownerservices.com

Website: mybnymdr.com

Telephone: +1 888 269 2377 (toll-free in the US)

Outside the US: +1 201 680 6825

Manage your shares online

We actively encourage our shareholders to receive communications via email and view documents electronically via our website, centrica.com. Receiving communications and Company documents electronically saves your Company money and reduces our environmental impact. If you sign up for electronic communications, you will receive an email to notify you that new shareholder documents are available to view online, including the Annual Report and Accounts and Annual Review, on the day they are published. You will also receive alerts to let you know that you can cast your Annual General Meeting (AGM) vote online. You can manage your shareholding online by registering at shareview.co.uk, a free online platform provided by Equiniti, which allows you to:

• view information about your shareholding;
• have your dividend paid into your bank account;
• update your personal details; and
• appoint a proxy for the AGM.

Centrica FlexiShare

FlexiShare is an easy way to hold Centrica shares without a share certificate. Your shares are held by a nominee company, Equiniti Financial Services Limited. However, you are able to attend and vote at general meetings as if the shares were held in your own name. Holding your shares in this way is free and gives you:

• low cost share dealing rates (full details of which are available on centrica.com, together with dealing charges);
• quicker settlement periods for buying and selling shares; and
• no paper share certificates to lose.

Centrica.com

The Shareholder Centre on our website contains a wide range of information including a dedicated investors section where you can find further information about shareholder services including:

• share price information;
• dividend history;
• ownership profile;
• the Scrip Dividend Programme;
• telephone and internet share dealing;
• downloadable shareholder forms; and
• taxation.

This Annual Report and Accounts can also be viewed online by visiting centrica.com/ar17

Dividends

Centrica dividends can be paid directly into your bank or building society account instead of being despatched to you by cheque. More information about the benefits of having dividends paid directly into your bank or building society account, and the mandate form to set this up, can be found in the Investors section of our website.

If you do not have a UK bank or building society account, Equiniti is able to pay dividends in local currencies in over 90 countries. For a small fee, you could have your dividends converted from sterling and paid into your designated bank account, usually within five days of the dividend being paid.

ShareGift

If you have a small number of shares and the dealing costs or the minimum fee make it uneconomical to sell them, it is possible to donate them to ShareGift, a registered charity, who provide a free service to enable you to dispose charitably of such shares. More information on this service can be found at sharegift.org or by calling +44 (0)20 7930 3737.

2018 calendar

10 May 2018	Ex-dividend date for 2017 final dividend
11 May 2018	Record date for 2017 final dividend
14 May 2018	Trading Update AGM
17 May 2018	Scrip reference share price set
7 June 2018	Deadline for the receipt of scrip election forms from shareholders
28 June 2018	Payment date for 2017 final dividend
31 July 2018	Half-year results announcement
11 October 2018	Ex-dividend date for 2018 interim dividend
12 October 2018	Record date for 2018 interim dividend
17 October 2018	Scrip reference share price set
1 November 2018	Deadline for the receipt of scrip election forms from shareholders
22 November 2018	Payment date for 2018 interim dividend

Glossary

\$	Refers to US dollars unless specified otherwise
2P reserves	Proven and probable reserves
AGR	Advanced gas-cooled reactor
AIP	Annual Incentive Plan
AOCF	Adjusted operating cash flow
bbl	Barrels of oil
bcf	Billion cubic feet
BSUoS	Balancing services use of system
CCGT	Combined cycle gas turbine
CGU	Cash generating unit
CHP	Combined heat and power
CO2e	Universal unit of measurement of the global warming potential (GWP) of greenhouse gases (GHG) expressed in terms of the GWP of one unit of CO2e (carbon dioxide equivalent)
CPI	Consumer Price Index
CSS	Consolidated Segmental Statement
CUPS DB	Centrica Unfunded Pension Scheme defined benefit
CUPS DC	Centrica Unfunded Pension Scheme defined contribution
Data analytics	The process of examining data sets to draw conclusions and insights about the information they contain
DEEPAC	Direct Energy Employee Political Action Committee
EBITDA	Earnings before interest, tax, depreciation and amortisation
EBT	Employee Benefit Trust
ECO	Energy Company Obligation
EP	Economic profit
EPS	Earnings per share
EU ETS	European Union Emissions Trading Scheme
FCA	Financial Conduct Authority
FFS	Fixed-fee service
FIT	Feed-in tariff
FRS	Financial Reporting Standards
FVLCD	Fair value less costs of disposal
gCO2/kWh	Grammes of carbon dioxide per kilowatt hour
GDPR	General Data Protection Regulation
GW	Gigawatt
GWh	Gigawatt hours
HVAC	Heating, ventilation and air conditioning
IAS	International Accounting Standards
IFRS	International Financial Reporting Standards
IPIECA	International Petroleum Industry Environmental Conservation Association
ISA	International Standards in Auditing
KPI	Key performance indicators
kW	Kilowatt
kWh	Kilowatt hour
LNG	Liquefied natural gas
LTIFR	Lost time injury frequency rate
Machine	Artificial intelligence (AI) that provides computers with the ability
learning	to learn, without being programmed

mmboe Million barrels of oil equivalent mmth Million therms mtCO2e Million tonnes of carbon dioxide equivalent MW Megawatt MWh Megawatt hour MWp Megawatt peak NBV Net book value NGO Non-governmental organisation NLF Nuclear Liabilities Fund nm Not measured NPS Net promoter score OECD Organisation for Economic Cooperation and Development OTC Over the counter PAC Political Action Committee PIE Pensions increase exchange PPA Power purchase agreement PP&E Property, plant and equipment ppt Percentage point PRA Prudential Regulation Authority Process safety the environment, or asset damage from major incidents such as fires, explosions and accidental releases of hazardous substances PRT Petroleum Revenue Tax PWR Pressurised water reactor QPI Qatar Petroleum International RBD Reconciliation by difference ROACE Return on average capital employed ROC Renewable Obligation Certificate RPI Retail Price Index RRJ Risk Requiring Judgement RRS Risk Requiring Standards SBR Supplementary Balancing Reserve SBU Standard bundled unit SHESEC Safety, Health, Environment, Security and Ethics Committee STOR Short Term Operating Reserve SVT Standard variable tariff tCO2e Tonnes of carbon dioxide equivalent the Code The UK Corporate Governance Code set of principles and provisions issued by the Financial Reporting Council TRIFR Total Recordable Injury Frequency Rate TSR Total shareholder return TWh Terawatt hour VAT Value added tax VIU Value in use WBCSD World Business Council for Sustainable Development WRI World Resources Institute
	Process safety is concerned with the prevention of harm to people and

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Disclaimer

This Annual Review does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Centrica shares or other securities.

This Annual Review contains certain forward-looking statements with respect to the financial condition, results, operations and businesses of Centrica plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts.

Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser.

CENTRICA PLC

Registered office: Millstream Maidenhead Road Windsor Berkshire SL4 5GD

Company registered in England and Wales No. 3033654

centrica.com