CNA: Centrica PLC: Final Results

  CNA: Centrica PLC: Final Results

UK Regulatory Announcement

LONDON

CENTRICA PLC

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2012

OPERATING AND FINANCIAL OVERVIEW

STRONG PERFORMANCE ALLOWS US TO CONTRIBUTE OUR FAIR SHARE

  *Adjusted earnings up 5% to £1,406 million; 27.1 pence adjusted basic
    earnings per share
  *After a warm 2011, cooler weather saw average domestic gas consumption
    increase by 12%
  *Centrica Energy and Direct Energy benefiting from enhanced scale; adjusted
    operating profit in the UK up by 2%, adjusted operating profit from non-UK
    operations up by 78%
  *Adjusted Group tax charge of £1.1 billion, £773 million relating to the
    UK; 44% Group effective tax rate
  *Share repurchase of £500 million announced and full year dividend up 6% to
    16.4 pence per share, benefiting over 700,000 individual shareholders and
    pension funds

REFRESHED STRATEGIC PRIORITIES TO REFLECT CHANGING MARKET CONDITIONS

  *Vision to be the leading integrated energy company, with customers at our
    core
  *New leadership structure, to implement our refreshed strategic priorities:

       *Innovate to drive growth and service excellence
       *Integrate our natural gas business, linked to our core markets
       *Increase our returns through efficiency and continued capital
         discipline

  *Build on our distinctive capabilities downstream, with North America a
    more material part of the Group
  *Optimise and develop our upstream gas portfolio, investing where we see
    attractive value

HELPING OUR CUSTOMERS IN DIFFICULT TIMES

  *Clear and simple bill design and tariffs; helping customers to understand
    why external costs are rising and how to find the best tariff for them,
    with our personalised tariff checker product
  *5 star customer service rating from Consumer Focus
  *400,000 customers to receive £130 Warm Home Discount
  *British Gas residential energy returned to customer account growth in the
    early weeks of 2013, following 1% decline in 2012
  *Added over 200,000 residential customer accounts in Direct Energy;
    innovative offerings and high levels of customer service

SECURING SUSTAINABLE AND AFFORDABLE ENERGY SUPPLIES

  *£2.7 billion invested in 2012
  *Construction of £1.4 billion North Sea Cygnus gas field started, creating
    4,000 UK jobs and producing gas for 1.5 million UK homes
  *First power from Lincs offshore wind farm, will supply electricity for
    200,000 UK homes; first production from three gas fields in last 12
    months; York and Rhyl first gas expected in coming weeks
  *Positive results from exploration drilling at Rodriguez and Whitehaven in
    early 2013, following lower levels of drilling success in 2012
  *Commitments to secure gas and power for the UK totalling more than £50
    billion

“We have taken the lead during 2012 in helping more households save energy and
supporting the people who need the most help. It’s important that Centrica
makes a fair and reasonable return so that we can continue to make our
contribution to society and to invest. Last year we incurred a tax charge of
over £1billion and invested over £2 billion to secure new sources of energy
for the UK, well in excess of our profits.”

Sam Laidlaw
Chief Executive


Unless otherwise stated, all references to operating profit or loss, taxation
and earnings numbers throughout the announcement are adjusted figures, as
reconciled to their statutory equivalents in the Group Financial Review on
pages 9 and 10. Statutory earnings for the year are £1,273 million.

                                                         
FINANCIAL PERFORMANCE
For the year ended 31           2012        2011          ∆
December
Revenue from continuing               £23.9bn         £22.8bn             5%
operations
                                                                          
Adjusted operating profit
British Gas
Residential energy supply             £606m           £544m               11%
Residential services                  £312m           £269m               16%
Business energy supply               £175m          £192m            (9%)
and services
Total British Gas                     £1,093m         £1,005m             9%
Centrica Energy
Gas                                   £919m           £769m               20%
Power                                £311m          £254m            22%
Total Centrica Energy                 £1,230m         £1,023m             20%
Centrica Storage                      £89m            £75m                19%
Direct Energy                        £331m          £312m            6%
Total adjusted operating              £2,743m         £2,415m             14%
profit
                                                                          
Total adjusted taxation               £1,110m         £891m               25%
charge
Total adjusted effective              44%             40%                 4ppt
tax rate
                                                                          
Adjusted earnings                     £1,406m         £1,333m             5%
Adjusted basic earnings               27.1p           25.8p               5%
per share
                                                                          
Full year dividend per                16.4p           15.4p               6%
share
                                                                          
Group capital and               £2,727m     £1,601m       70%
acquisition expenditure

To align with management responsibilities and reporting, the British Gas
Community Energy and British Gas New Energy
businesses have been reallocated from the Residential energy supply segment to
the Business energy supply and services
and Residential services segments respectively. The 2011 comparatives have
been restated accordingly.


KEY OPERATIONAL PERFORMANCE INDICATORS                            
For the year ended 31 December                  2012     2011      ∆
UK residential energy customer accounts          15,656     15,881       (1%)
(period end, ’000)
UK residential services product holdings         8,402      8,484        (1%)
(period end, ’000)
UK business energy supply points (period end,    924        999          (8%)
’000)
                                                                         
Centrica Energy gas production (mmth)            2,441      2,160        13%
Centrica Energy liquids production (mmboe)       16.3       12.5         30%
Centrica Energy total gas and liquids            56.7       48.2         18%
production (mmboe)
Centrica Energy total proven and probable gas    525        410          28%
and liquids reserves (mmboe)
Centrica Energy power generated (TWh)            21.5       26.7         (20%)
                                                                         
Direct Energy residential energy and services    5,856      5,647        4%
accounts (period end, ’000)
Direct Energy business energy supply             51.4       46.4         11%
electricity volumes (TWh)
North America total proven and probable gas      108        109          (1%)
and liquids reserves (mmboe)
                                                                         
Lost time injury frequency rate (per 100,000    0.20     0.25      20%
hours worked)

UK residential services product holdings have been restated to exclude the
water supply pipe product,
which has been incorporated into the plumbing and drains product.


STATUTORY RESULTS

For the year ended 31 December 2012

  *Operating profit from continuing operations: £2,625m (2011: £1,414m)
  *Profit from continuing operations before taxation: £2,442m (2011: £1,268m)
  *Earnings: £1,273m (2011: £421m)
  *Basic earnings per ordinary share: 24.6p (2011: 8.2p)
  *Earnings include £481m of exceptional charges relating to provisions for
    North American wind power purchase agreements, restructuring charges, an
    impairment relating to our decision not to proceed with nuclear new build
    and a restriction on the rate of tax relief on UK oil and gas
    decommissioning costs.

CHAIRMAN’S STATEMENT

REVIEW OF THE YEAR

It is now three years since we defined our strategic objectives to build a
more sustainable, vertically integrated, cost effective and customer focused
business, with meaningful geographic diversity. We were clear that to achieve
this objective we would need to grow British Gas, acquire upstream assets on
value creative terms and expand the scale of our North American activity.

I am pleased to confirm that in 2012 we demonstrated, through strong
operational performance and acquisition, our considerable progress in
achieving these strategic goals.

In the UK the year brought many challenges, with periods of colder weather
compared to the very mild conditions of 2011 contributing to higher energy
bills, and with material changes in the regulatory environment. The management
team dealt with all of the turbulence with great professionalism and
commitment.

British Gas took the lead in simplifying tariffs and implemented changes
consistent with Ofgem’s proposals for retail market reform. In parallel we
continued to innovate with smart metering, to help consumers manage their
energy usage, and to support customers with free insulation to reduce their
consumption.

A relentless focus on cost management helped British Gas implement the lowest
tariff increase of all the major energy suppliers, necessitated by higher
wholesale energy costs, Government driven green energy costs and the
imposition of additional infrastructure charges. Nevertheless, the very real
concerns of hard pressed consumers, fuelled by external commentary, has
impacted public trust in the industry and in British Gas as the nation’s
largest energy supplier in particular.

Centrica is one of the UK’s most important companies, employing around 40,000
people, keeping homes warm and well lit, securing future energy supplies,
innovating and investing and paying substantial amounts of tax to the Treasury
each year. We also have over 700,000 individual shareholders, all of whom
benefit from the dividends the Company pays. Through our larger shareholders,
many of them pension funds, our dividends also feed into the retirement
savings of millions of people. It is important therefore that the Group
continues to grow and invest. The 5% increase in adjusted earnings we achieved
in 2012 enabled us to invest more and to continue to grow our dividend in real
terms. The importance of winning recognition for our contribution to the UK
economy and building public trust continue to be priority items on our agenda.

Upstream we invested around £2 billion in helping secure gas supplies for the
UK. In parallel we achieved first power from our Lincs offshore wind farm and
worked with our partners in extending the life of our existing nuclear fleet.
We took the decision not to participate in new nuclear construction with EDF
due to higher anticipated costs and a lengthened construction schedule. This
will enable us to return some of the capital we had raised for this purpose
through a £500million share repurchase programme.

In North America, a carefully executed strategy of operational efficiencies,
organic growth and customer acquisition helped us to further expand our
business – and we are well on the way to doubling profitability since 2009.
With a change in the centre of gravity in our North American activities we
moved the corporate headquarters from Toronto to Houston and our ambition to
further extend our role in this market remains a strategic priority. The
impact of shale gas in North America cannot be overstated and whilst its
immediate effect has been to lower wholesale gas prices in the US market,
there is no doubt it will influence global energy markets over time.

Our strategic vision is to be the leading integrated energy company, with
customers at our core. The way in which we achieve this must reflect the
changes in markets and sources of supply together with a constant assessment
of costs and return for shareholders.

Our aim in 2013 and beyond will be to focus on three strategic priorities –
innovate to drive growth and service excellence, integrate our natural gas
business, linked to our core markets, and increase our returns through
efficiency and continued capital discipline.

We will achieve these goals by differentiating our UK business through our
systems and innovation to provide a competitive edge and investing upstream
for value, while maintaining our structural hedge. In North America we will
grow our customer base and service business and seek to enhance our midstream
and upstream position by acquisition, when strategic fit and returns are
attractive.

We believe that under the leadership of Sam Laidlaw we have developed a strong
platform on which we can build a rewarding future for both customers and
shareholders. This has been achieved with the considerable commitment of the
management team and the skills and enthusiastic support of colleagues on both
sides of the Atlantic.

The period ahead will bring new challenges. In order to ensure the
organisation of our management team is appropriate for the task ahead, with
effect from 1 July 2013 the Group will migrate from a regional structure to an
international functional structure. Chris Weston will assume responsibility
for downstream operations and Mark Hanafin will assume responsibility for
upstream operations across the Group.

After a successful career spanning 12 years with Centrica, Phil Bentley will
be stepping down from his role as ManagingDirector of British Gas, and Board
member of Centrica, on 30June 2013 and will leave the Company by 31December
2013.

Phil Bentley has made a substantial contribution to the development of the
business, initially as Finance Director and for the last six years as Managing
Director of British Gas.

In his most recent role he has been instrumental in restructuring,
reinvigorating and materially improving the performance of the business by
raising customer service, lowering costs and increasing productivity. As
Chairman, and on behalf of the Board, I thank him for all that he has achieved
and wish him every success for the future.

I am confident that the bench strength we enjoy, the mindset we have, the new
management structure and business model we have created will continue to
deliver strong cashflows, enabling us to invest in customer service, supply
security and shareholder reward.

Sir Roger Carr
Chairman
27 February 2013


CHIEF EXECUTIVE’S REVIEW

STRONG PERFORMANCE IN 2012 ALLOWS US TO CONTRIBUTE OUR FAIR SHARE

Centrica performed well in 2012 in a challenging environment, delivering
year-on-year adjusted earnings growth of 5%. This reflects a combination of
organic growth and enhanced scale from recent acquisitions and investments, in
the UK, Norway and North America, as well as a continued focus on cost
efficiency across the Group. As a result we have been able to grow the full
year dividend by more than the rate of inflation for the 13^th year in
succession, in addition to launching a £500 million share repurchase programme
in early 2013.

Downstream at British Gas, we are facing increased costs in supplying energy,
most of which are external to the Group. In this tough economic climate, we
are committed to doing everything we can to help our customers. We have made
sure that energy choices are simple and transparent, and we lead the way in
standards of customer service, innovation, help for the vulnerable and energy
efficiency. The weak economy continues to have an adverse impact on British
Gas Business. However we were able to deliver strong double-digit profit
growth in British Gas Services, largely through tight cost control coupled
with continuing high standards of service.

Upstream at Centrica Energy, we continue to invest to secure energy supplies
for the UK. We completed three acquisitions of gas and oil assets, delivering
a step change in annual production and strengthening the geographic spread of
our portfolio. In power, our Lincs offshore wind farm has generated first
power and will be fully operational later in 2013. While market conditions
remain challenging for gas-fired plants, the nuclear fleet performed well,
with increased output and seven year life extensions for Hinkley Point B and
Hunterston B. In nuclear new build, while significant progress has been made,
there remains uncertainty about overall project costs and the construction
schedule. These factors, in particular the lengthening time frame for a return
on the capital invested in a project of this scale, has led us to conclude
that participation is not right for Centrica and in February 2013 we announced
our decision not to participate.

In Centrica Storage, we delivered an increase in profit through strong
operational and commercial performance. And in North America, at Direct Energy
we delivered further profit and customer growth in an environment of low gas
prices and we have successfully integrated recent acquisitions into the
business. We continue to see NorthAmerica as an attractive market to deploy
capital, both upstream and downstream, for growth and for value.

We remain on track to deliver our Group-wide £500 million cost reduction
programme, sharpening the business and maintaining our competitive edge. At
the same time we have retained our absolute focus on safety which continues to
be a core priority across all our activities. Our downstream businesses have
continued their significant reduction in accident rates, while our upstream
operations have been implementing more rigorous process safety management
systems. At a Group level we have developed a more comprehensive process to
provide greater assurance of HSE compliance to the Board and Executive. This
strong safety culture is reflected in our performance, with the Lost Time
Injury Frequency Rate (LTIFR) falling by 20%.

Overall, Centrica is delivering consistent earnings growth and it is this
which allows us to make our fair contribution to the economy and society
through investment, employment, tax payments and dividends.

HELPING OUR CUSTOMERS IN DIFFICULT TIMES

Taking the lead in making energy choices simple and transparent

In February 2013, Ofgem announced that it was preparing for final proposals
and a statutory consultation to be published around the end of March 2013 on
its reforms to make the household energy market simpler, clearer and fairer
for consumers. These follow on from initial findings published in March 2011
and updated proposals announced in October 2012. The headline proposals are a
welcome step forward for the industry and will help to improve customer trust,
engagement and understanding. However, it is important that these positive
developments do not have the unintended consequence of restricting choice and
innovation. We have already implemented a number of changes consistent with
the headline proposals, including simplifying our tariff structures and
publishing price comparison information to make it easy for customers to
ensure they are on the most appropriate British Gas tariff for them.

Customer service, cost efficiency and innovation remain at the heart of
everything we do. British Gas operating costs fell year-on-year, but not at
the expense of service, as our Net Promoter Score (NPS) increased once again,
to +30, and we were awarded the top 5 star rating for customer service from
Consumer Focus. Our improved online platform handled 13% more transactions
than in 2011, achieving a better customer experience and lower costs. Our new
‘Remote Heating Control’ product allows customers to monitor and control their
energy use when they are away from the home, and we have now installed over
800,000 smart meters for homes and businesses - substantially more than any
other UK energy supplier.

We also spend more than any other energy supplier on those who are most in
need of support. In 2012, 400,000 of our most vulnerable customers received
the Warm Home Discount, now worth £130 off their annual bill. We are also at
the forefront of measures to help people use less energy, installing
insulation for nearly 700,000 customers during the year.

Despite the squeeze on household budgets, British Gas Services performed well.
We improved retention rates across our product range, demonstrating the value
which customers place on our services. However, in current economic conditions
it is difficult to attract new customers and we also saw a reduction in boiler
installation volumes, down 10% from last year. The economic impact was seen
more clearly in British Gas Business, leading to lower profitability and a
reduction in the number of accounts served in a highly competitive market. We
are therefore taking steps to put this business on a stronger footing for
long-term growth, including introducing new systems to improve levels of
customer service, at lower cost. Over time, we also expect to achieve growth
in business services, particularly through Energy Performance Contracts.

Innovation in North America

In North America, greater competition has been welcomed by regulators and
customers in our core markets, Texas and the US North East. Acquisitions and
organic growth have increased the size of our business and we now have 3.5
million residential energy customer accounts and around 6 million residential
energy and services accounts in total.

We continue to focus on providing attractive and innovative products to our
residential and business customers, building on our Group-wide expertise in
competitive markets. Our prepaid ‘Power to Go’ product in Texas continues to
grow, while in the US North East the introduction of ‘Free Power Saturdays’
has encouraged customers to rephase their electricity use to off-peak times.
We are specifically tailoring offers for small business customers while
continuing to deliver high levels of service. And our energy services business
gives us the ability to differentiate ourselves from our competitors with
additional higher margin propositions.

In Ontario, restrictions on competition continue to make it difficult for us
both to retain customers and attract new ones. We no longer view this business
as core and are managing costs to continue serving our existing customers as
efficiently as possible.

SECURING SUSTAINABLE AND AFFORDABLE ENERGY SUPPLIES

The Group invested £2.7 billion of capital in 2012, helping to secure supplies
for the UK. Around £2 billion of that was invested in North Sea gas and oil
assets, including the completion of three acquisitions. This materially
increased the scale and geographic diversity of the business and Norway is now
a core part of our portfolio, with a number of attractive producing,
development and exploration assets. Over the past three years we have
developed significant capabilities in upstream and midstream, leaving us well
placed for future growth.

We achieved first gas from our Ensign, Seven Seas and Atla development
projects during the year, with first gas expected from York and Rhyl in the
coming weeks. In early 2013, we had positive results from exploration drilling
at Rodriguez and Whitehaven. However we recorded a lower level of drilling
success in 2012 than in previous years, including a development well failure
at Ensign which resulted in a pre-tax write-off of £73 million. Construction
has now begun at the £1.4billion Cygnus project. Cygnus is the largest gas
discovery in the Southern North Sea in the last 25 years and will create 4,000
jobs during the construction phase, predominantly in the UK. At peak
production it will be able to meet the demand of nearly 1.5 million UK homes.

We achieved first power from our 270MW Lincs offshore wind farm in the year.
When fully operational by the second half of 2013 it will be able to meet the
annual demand of more than 200,000 homes. We were also granted planning
consent for 580MW at the Race Bank offshore wind farm project. We are willing
to commit £200 million for the project, and are in discussion with a financial
partner and the Government concerning the economic framework. Investment in
the existing nuclear fleet is ongoing, with the expectation for nuclear plant
life extensions for the AGR fleet now seven years on average, compared to the
five previously assumed. In gas-fired generation, we have recently sanctioned
a turbine blade upgrade at our 1.2GW South Humber power station. We also have
strong capabilities in gas storage, and two potentially attractive projects,
Baird and Caythorpe. However the market remains challenging for new gas
storage projects and we will only invest if the returns are appropriate for
the level of risk undertaken.

However, as with all our investment options, we will only deploy capital where
we see attractive value, aligned to our core competencies. In this context, we
announced in October that we would not proceed with plans to build two
dedicated biomass plants, following recent clarification on the regulatory
framework indicating a Government preference for coal conversion. Earlier this
month, we also announced that we would not participate in the construction of
up to four new nuclear reactors in the UK. While we believe that nuclear power
has an important role to play in the UK’s energy mix, the likely cost and
timescale of this project led us to conclude that it was not in the best
interests of Centrica shareholders for us to participate.

NEW STRATEGIC PRIORITIES TO REFLECT CHANGING MARKET CONDITIONS

World gas markets are evolving and we have to evolve with them. Shale gas in
North America and LNG globally have transformed the landscape. Gas will
continue to play a major role in the UK, both in heating the overwhelming
majority of homes and businesses and as part of a diverse fuel mix for power
generation, with the UK Government’s Electricity Market Reform and Gas
Strategy both indicating a long-term role for gas-fired generation. However,
the sources of UK gas are changing, with North Sea reserves declining and
becoming more expensive to develop. This places more reliance on imported
pipeline gas and particularly LNG, and leaves the UK increasingly exposed to
global gas prices.

At the same time, the nature of low carbon power investments in the UK is
changing, with affordability for consumers increasingly the focus of
attention. Projects are becoming larger in scale, with higher capital costs
and longer construction times, while the fixed price nature of the Contract
for Difference mechanism means that output will no longer act as a hedge
against downstream price volatility.

Against this backdrop, our vision is to be the leading integrated energy
company, with customers at our core. We have refreshed our strategic
priorities to position Centrica to best advantage in this demanding but
exciting new world:

  *Innovate to drive growth and service excellence

       *Lead with great service and efficient operations
       *Enable our customers to control their energy use in a simpler,
         smarter, more efficient way
       *Grow in selected markets, building on our leading capabilities

  *Integrate our natural gas business, linked to our core markets

       *Grow and diversify our E&P portfolio for value
       *Develop our midstream business to integrate along the gas value chain
       *Maintain a low carbon power hedge and invest where we see value

  *Increase our returns through efficiency and continued capital discipline

       *Further develop organisational capability
       *Continuously focus on safety
       *Deliver value to shareholders

These strategic priorities apply across our businesses in the UK, North
America and internationally. In order to reinforce delivery of the priorities
we are moving to an international functional organisation with a new
management structure, aligned to our core competencies downstream and
upstream. And we will do all this with the clear objective of increasing our
returns, through efficiency and continued capital discipline. ChrisWeston
will lead the international downstream business, as we build on our
distinctive capabilities in service, systems, energy services and efficiency,
in the UK and North America. MarkHanafin will lead the international upstream
business as we continue to develop opportunities along the gas value chain and
invest where we see attractive value. Both Chris and Mark have extensive
experience in the UK and NorthAmerica, and are therefore well placed to take
on the task ahead.

Innovate to drive growth and service excellence

Underlying household energy consumption in the UK will continue to fall as
appliances and homes become more efficient. However with the UK increasingly
exposed to global gas prices, and non-commodity costs expected to rise
year-on-year, affordability will remain an important issue. By contrast, the
low gas price environment in North America makes affordability less of an
issue, and favourable market conditions in the United States offer a good
opportunity for growth. On both sides of the Atlantic, the roll-out of smart
meters will give customers a new level of control over their energy use and we
need to be innovative in the way we help them meet their evolving energy
needs.

In the UK, we have developed a leading online platform and leading customer
systems. We will also take advantage of our strong positions in energy
services and smart meters to develop exciting new propositions, with offerings
increasingly tailored to the needs of individual customers. Through relentless
focus on service excellence, innovation and cost efficiency, we aim to
maintain stable margins in residential energy supply, and target continued
expansion in residential services. In business energy we have laid the
groundwork for future growth, although in the near term market conditions
remain challenging.

In North America too, service, innovation and cost efficiency will remain a
core focus. But the continued liberalisation of markets in the United States,
and the undeveloped nature of energy services provision, offer an opportunity
to grow our customer base, both organically and through acquisition. We will
continue to evaluate both bolt-on and larger acquisitions but remain focused
on returns and will only transact where we see value. We will use our UK
expertise and experience to develop our protection plan offerings in North
America and we will increase the level of energy and services bundling over
time. Over the next 3-5 years we are targeting a doubling of profitability in
the North America downstream business, through a combination of organic growth
and acquisitions, with Direct Energy downstream becoming a more material part
of the Group.

Integrate our natural gas business, linked to our core markets

In an increasingly global market, we must secure gas from a wider range of
sources and will consider at which stages of the supply chain we can add
value, expanding the scope of our activities where appropriate. The aim is to
connect sources of energy to our customers, building an integrated
international business focused on the Atlantic basin.

The UK and Norway will remain an important part of our upstream investment and
activity, as we look to maintain an appropriate energy hedge. We will invest
in assets with a link to existing hubs while looking to divest non-core
assets. However, with the development of North Sea fields becoming
increasingly expensive, particularly in the UK, we will refresh our focus on
value. In North America we will consider both conventional and unconventional
assets, and there is also potential for gas exports later in the decade.
Overall, we will invest where we see value across our international portfolio,
delivering annual production in the range 75mmboe to 100mmboe. In addition, we
will look to build on our existing midstream capabilities and positions along
the gas value chain, focusing on asset optimisation and gas contracting with
an emerging LNG presence, provided we can do so in a capital efficient manner.

Our focus in UK power generation will be to preserve our existing power hedge,
investing where we have a competitive advantage and see attractive returns. We
retain a number of offshore wind opportunities, at Race Bank and in the Irish
Sea. However we will only invest for value and will seek to reduce our equity
ownership through partnering where appropriate. We also retain options to
build new CCGTs. However spark spreads remain at historically low levels and
much will depend on the final outcome of Electricity Market Reform and the
implementation of a capacity market in the UK.

Increase our returns through efficiency and continued capital discipline

In 2013, Centrica faces new challenges, including the loss of free carbon
allowances. But we will continue to benefit from our cost reduction programme,
from organic growth and also from the full year impact of acquisitions, both
upstream in gas and oil production and in North America. In this context, it
is vital that we continue to focus on operational efficiency, reducing costs
wherever possible for the benefit of customers and shareholders. All this must
be done without in any way compromising our strong focus on health and safety.

Centrica has a robust balance sheet and generates strong cash flows and we
retain a number of investment opportunities across the Group. This
combination, allied to our expertise and experience both upstream and
downstream, defines Centrica’s core capabilities. However we will maintain
capital discipline, as evidenced by our recently announced £500 million share
repurchase programme, only investing where we see value. Our aim now is to use
those strengths to innovate and grow while adapting to a rapidly evolving
energy world, serving our customers and delivering value to shareholders.

Sam Laidlaw
Chief Executive
27 February 2013


GROUP FINANCIAL REVIEW

Group revenue from continuing operations was up 5% to £23.9 billion (2011:
£22.8 billion). Revenue increased in British Gas due to higher gas consumption
as a result of colder weather and higher retail gas and electricity prices.
Revenue decreased in Centrica Energy, with the impact of lower gas-fired power
generation volumes and reduced midstream activity following the closure of our
German wholesale business in 2011, more than offsetting the impact of higher
gas and liquid volumes. Revenue in Direct Energy was broadly flat, reflecting
higher average customer numbers and increased business energy consumption,
offset by lower wholesale energy prices.

Throughout the Operating Review and Group Financial Review, reference is made
to a number of different profit measures, which are shown in the table below:

                                                   2012                                     2011
                                     Exceptional                                 Exceptional
                       Business      items and         Statutory   Business      items and         Statutory
                                     certain                                     certain
                       performance   re-measurements   result      performance   re-measurements   result
Year ended    Notes  £m           £m               £m         £m           £m               £m        
31 December
Adjusted
operating
profit:
British Gas            1,093                                       1,005
Centrica               1,230                                       1,023
Energy
Centrica               89                                          75
Storage
Direct              331                                    312                                   
Energy
Total
adjusted       5b      2,743                                       2,415
operating
profit
Depreciation
of fair
value
uplifts from   10      (96)                                        (105)
Strategic
Investments,
before tax
Interest and
taxation on
joint         5b     (85)                                   (102)                                 
ventures
and
associates
Group
operating      6       2,562         63                2,625       2,208         (794)             1,414
profit
Net interest           (183)         –                 (183)       (146)         –                 (146)
expense
Taxation      6,7,8  (1,029)      (140)            (1,169)    (810)        (16)             (826)     
Profit from
continuing
operations             1,350         (77)              1,273       1,252         (810)             442
after
taxation
Discontinued        –            –                –          13           (34)             (21)      
operations
Profit for             1,350         (77)              1,273       1,265         (844)             421
the year
Depreciation
of fair
value
uplifts from  10a    56                                     68                           
Strategic
Investments,
after
taxation
Adjusted            1,406                                  1,333                        
earnings
                                                                                                             

Total adjusted operating profit was up 14% to £2,743 million (2011: £2,415
million). In British Gas, profitability increased, with the impact of higher
gas consumption and unit prices more than offsetting increased wholesale
commodity, transportation and environmental costs in residential energy
supply, and cost efficiency measures driving growth in residential services.
In Centrica Energy, higher gas and liquids production resulting from
acquisitions and higher achieved prices led to increased profitability in the
gas segment, while higher nuclear power generation more than offset the impact
of reduced gas-fired power generation volumes in the power segment. In
Centrica Storage, improved seasonal price differentials during the final
quarter of 2011 and first quarter of 2012 led to higher profitability. In
Direct Energy, profitability increased, with growth in services and business
energy supply more than offsetting slightly lower profitability in residential
energy supply, driven by less favourable market conditions in Ontario
partially offset by the impact of recent acquisitions.

Net interest expense was £183 million (2011: £146 million), reflecting £1,196
million net issuance of debt during the year. The tax on adjusted profit from
continuing operations was £1,029 million (2011: £810 million), reflecting a
higher level of operating profit and an increased mix of more heavily taxed
upstream operating profit. After adjusting for the tax impact of depreciation
on the Venture fair value uplift and our share of taxation on joint ventures
and associates, the adjusted tax charge from continuing operations was £1,110
million (2011:£891million) and the resultant adjusted effective tax rate for
the Group was 44% (2011: 40%). An effective tax rate calculation, split UK and
non-UK, is shown in the table below:

                                     2012                         2011
                       UK          Non-UK       Total         UK          Non-UK       Total
                 £m       £m        £m        £m       £m        £m
Adjusted
operating              2,079       664          2,743         2,042       373          2,415
profit
Share of
joint
ventures /             (44)        –            (44)          (58)        –            (58)
associates
interest
Net interest      (79)     (104)     (183)     (71)     (75)      (146)
expense
Adjusted
profit from
continuing        1,956    560       2,516     1,913    298       2,211
operations
before
taxation
Tax on
adjusted
profit from            692         337          1,029         682         128          810
continuing
operations
Tax impact
of
depreciation           40          –            40            37          –            37
on Venture
fair value
uplift
Share of
taxation on
joint             41       –         41        44       –         44
ventures /
associates
Adjusted tax
charge from       773      337       1,110     763      128       891
continuing
operations
Adjusted
effective         40%      60%       44%       40%      43%       40%
tax rate
                                                                                       

Reflecting all of the above, profit from continuing operations after taxation
was up 8% to £1,350 million (2011:£1,252 million) and after adjusting for
fair value uplifts, adjusted earnings increased by 5% to £1,406million (2011:
£1,333 million). Adjusted basic earnings per share ^ (EPS) increased to 27.1
pence (2011:25.8 pence).

The statutory profit for the year was £1,273 million (2011: £421 million). The
reconciling items between profit from business performance and the statutory
profit are related to exceptional items, certain re-measurements and
discontinued operations. The increase compared with 2011 was principally due
to a net gain on certain re-measurements of £404 million (2011: net loss of
£322 million). The Group reported a statutory basic EPS of 24.6 pence (2011:
8.2 pence).

In addition to the interim dividend of 4.62 pence per share, we propose a
final dividend of 11.78 pence, giving a total ordinary dividend of 16.4 pence
for the year (2011: 15.4 pence), an increase of 6%.

Group operating cash flow from continuing operations before movements in
working capital was higher at £3,542 million (2011: £3,065 million),
reflecting the contribution from Centrica Energy acquisitions. After working
capital adjustments, tax, operational interest, and cash flows associated with
exceptional charges and discontinued operations, this stood at £2,820 million
(2011: £2,337 million).

The net cash outflow from investing activities was £2,558 million (2011:
£1,400 million), as described in the business combinations and capital
expenditure section on page 11. The increased outflow reflects the
acquisitions of North Sea gas and oil assets.

The net cash inflow from financing activities was £190 million (2011: outflow
of £907 million). The inflow reflects the net issuance of borrowings during
the year exceeding dividends paid.

Reflecting all of the above, the Group’s net debt at 31 December 2012 was
£4,047 million (2011:£3,292million). To align with management reporting, net
debt has been restated to include mark-to-market values on derivative
financial instruments used to hedge offsetting changes in borrowings.

During the year net assets increased to £5,927 million (31 December 2011:
£5,600 million), reflecting the impact of statutory profit for the year
exceeding dividends paid.

EXCEPTIONAL ITEMS

Exceptional charges from continuing operations of £534 million were included
within Group operating profit during the year (2011: £331 million).

Following a decrease in North American power prices, a charge of £89 million
has been made to reflect the fair value of the obligation to purchase power
above its net realisable value through onerous wind farm power purchase
agreements.

On 4 February 2013, Centrica announced its decision not to proceed with
nuclear new build investment. Accordingly, the Group has recorded an
impairment of £231 million. This amount includes the carrying value of its
investment in NNB Holding Company Limited as well as value attributed to
nuclear new build in the British Energy acquisition.

An exceptional restructuring charge of £214 million was recorded, mainly
relating to staff reductions following the Group-wide cost reduction programme
announced in 2012.

Taxation on the total of these charges generated a credit of £93 million
(2011: £69 million). On 3 July 2012, the UK government substantively enacted
the restriction on the rate of tax relief on oil and gas decommissioning costs
from the current 62% to 50%. An exceptional tax charge of £40 million has been
recognised from revaluing the related deferred tax provisions.

CERTAIN RE-MEASUREMENTS

In our business we enter into a portfolio of forward energy contracts which
include buying substantial quantities of commodity to meet the future needs of
our customers. Primarily because these contracts include terms that permit net
settlement, the rules within IAS39 require the contracts to be fair valued. In
addition, the Group also enters into a range of commodity contracts designed
to secure the value of its underlying production, generation, storage and
transportation assets consistent with an integrated energy business in the UK
and North America. Fair value movements on these commodity derivative
contracts do not reflect the underlying performance of the business because
the contracts are economically related to our upstream assets or downstream
demand in our chosen markets, which are not typically fair valued. Therefore,
these certain re-measurements are reported separately and are subsequently
reflected in business performance when the underlying transaction or asset
impacts profit or loss. The operating profit in the statutory results includes
net gains of £597 million (2011: losses of £463 million) relating to these
re-measurements, of which there are a number of elements. 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. See note 3 for further details.

BUSINESS COMBINATIONS AND CAPITAL EXPENDITURE

On 30 April 2012, the Group completed the acquisitions of certain oil and gas
production and development assets from Statoil and ConocoPhillips for a
combined total cash consideration of £911 million. In addition, total tax
liabilities of £169 million were assumed on completion of the acquisitions.
During the year the Group also completed the acquisition of a portfolio of
producing oil and gas assets from Total for total cash consideration of £133
million. These three acquisitions are included within the Centrica Energy gas
segment.

On 22 August 2012, the Group acquired 100% of the shares of New York based
energy retailers Energetix Inc. and NYSEG Solutions Inc. for total cash
consideration of $121 million (£77 million) including $5 million (£3 million)
of deferred consideration. Goodwill of $43 million (£27 million) arose on the
acquisition. The acquisition is included in the Direct Energy residential
energy supply and business energy supply segments.

Further details on capital expenditure and business combinations are included
in notes 5(e) and 16 respectively.

EVENTS AFTER THE BALANCE SHEET DATE

On 4 February 2013, Centrica announced its decision not to proceed with
nuclear new build investment. Accordingly, the Group has recorded an
impairment of £231 million. The Group also announced on 4 February 2013 its
intention to launch a £500 million share repurchase programme to return
surplus capital to shareholders, which will be conducted over the next 12
months.

Further details on events after the balance sheet are described in note 19.

RISKS AND CAPITAL MANAGEMENT

The Group’s risk management processes are largely unchanged from 31 December
2011. Details of how the Group has managed financial risks such as liquidity
and credit risk are set out in note 4.

Details on the Group’s capital management processes are provided under sources
of finance in note 11.

ACCOUNTING POLICIES

UK listed companies are required to comply with the European regulation to
report consolidated financial statements in conformity with International
Financial Reporting Standards (IFRS) as adopted by the European Union. The
Group’s specific accounting measures, including changes of accounting
presentation and selected key sources of estimation uncertainty, are explained
in note 3.

OPERATING REVIEW

BRITISH GAS

Good performance against a challenging economic backdrop

British Gas performed well in 2012, in a weak economy and with continuing
increases to the cost of supplying energy. This is having a real impact for
both residential and business customers and, against this backdrop, it is
important that we continue to focus on improving customer service and reducing
costs. We also continue to lead the industry in smart metering, energy
efficiency, help for the vulnerable, and in ensuring that our energy
proposition is simple, fair and transparent.

In residential energy supply, we delivered margins in line with our
through-cycle expectations, in a period where all suppliers were faced with
higher wholesale gas prices and higher non-commodity costs, including the cost
of upgrading the UK’s gas and electricity grids and meeting carbon reduction
targets. Weather conditions were cooler than usual, following unusually mild
temperatures in 2011. Average gas consumption was therefore higher compared to
the prior year, partially offset by efficiency measures taken by our
customers, including the take-up of our free insulation offers and the
installation of more efficient central heating systems. As a result of higher
consumption and costs, the average gas and electricity bill increased
year-on-year and was made up as follows:

For a 2012 average gas and electricity bill of £1,188* the costs are:  
External Costs                                                         
Wholesale energy costs                                                 £568
Delivery to your home                                                  £283
Environmental and social policies                                      £112
Taxes                                                                  £72
Our costs                                                              
Operating costs                                                        £104
Our profit                                                             £49

* Based on British Gas 2012 financial results and consumption and is an
average of all payment types/tarriffs/regions.

In residential services, we again delivered double digit profit growth despite
the challenging economic climate, primarily driven by cost efficiencies, while
continued high service levels resulted in strong customer retention. The weak
economy and competitive pressures continue to have an adverse impact on our
business energy supply division, and we are investing in back office systems
to reduce cost and enhance customer service.

The health and safety of our employees and customers remains a core priority.
Our lost time injury frequency rate (LTIFR) was 0.23 per 100,000 hours worked
(2011: 0.29), a 21% reduction over the past year. We are also focused on
maintaining high levels of employee engagement and recognising the commitment
our people make to delivering excellent customer service. This was reflected
in British Gas being nominated in the Sunday Times “Best Big Companies to Work
For” for the fourth year in a row.

Helping our customers in difficult times

In February 2013, Ofgem announced that it was preparing for final proposals
and a statutory consultation to be published around the end of March 2013 on
its reforms to make the household energy market simpler, clearer and fairer
for consumers. These follow on from initial findings published in March 2011
and updated proposals announced in October 2012. The headline proposals are a
welcome step forward for the industry. However it is important that the
proposals on product range, restricting each supplier to four tariff types, do
not restrict customer choice or market innovation. British Gas has already
implemented changes consistent with many of the headline proposals. We have
simplified our tariffs, including a new standing charge and single rate
structure as part of a commitment to phase out two-tier tariffs. We have also
been publishing price comparison information on our annual statements since
March, allowing customers to check whether they are on the most appropriate
British Gas tariff, while we were awarded five stars by Which? in July for
clarity of billing and account management. More recently, we have built the
capability to provide a personalised price comparison on each customer’s bill,
based on their actual consumption.

We continued to deliver high levels of customer service in 2012. In
residential energy, our average call answering and handling times were lower
than in 2011 while the volume of calls received fell and in October, Consumer
Focus awarded us their top 5 star customer service rating. In residential
services, our customer service metrics remained strong, despite higher call
volumes as a result of the colder weather. Meanwhile complaints fell, and
customer churn was at its lowest ever level. The overall British Gas Net
Promoter Score (NPS) increased from +26 to +30.

During 2012 we further developed our online platform. We now have 3.4 million
online registered customers, a 20% increase since last year, and over a third
of all energy bills are now sent electronically. Seven out of ten customer own
meter reads are submitted online and we have over one million accounts on
EnergySmart which helps customers monitor and manage their energy usage. We
have launched leading applications for both Apple and Android smart phones and
have seen more than 650,000 downloads to date. Around a quarter of all website
contacts are now made through mobile devices.

We continue to help our most vulnerable customers and maintain the widest
eligibility criteria among all energy suppliers for the Warm Home Discount,
which helped 400,000 customers during the year. In October, we announced
“Better Homes for Britain”, a five year partnership with Shelter to help one
million British households living in private rental property improve the
standard of their homes. We also lead the industry in energy efficiency. Since
2008, British Gas has installed 1.7 million insulation measures to homes
across the UK through the CERT and CESP programmes. Under these schemes,
British Gas was required to meet a variety of carbon emissions reduction
targets by 31 December 2012. Overall we expect to fulfil our total carbon
saving targets in the first quarter of 2013, although finding customers who
qualify as being in the ‘Super Priority Group’ has proved challenging and this
particular sub-target will not be fully met. However, Ofgem has indicated that
mitigating actions undertaken after 31 December will also be taken into
account when assessing delivery.

Customer accounts stabilised despite competitive market conditions

A slight fall in wholesale electricity prices at the end of 2011 allowed us to
implement a 5% reduction in our standard domestic electricity tariff in
January, re-establishing British Gas as the cheapest major electricity
supplier on average in Britain. However, like the rest of the industry, we are
facing higher external costs. Wholesale gas prices are 13% higher for winter
2012/13 than for winter 2011/12, while the cost of upgrading the UK’s gas and
electricity grids and meeting carbon reduction targets increased by £50 per
customer in 2012. As a result, in October we announced a rise in domestic gas
and electricity prices by an average of 6%, which was implemented in November.

The number of residential energy customer accounts on supply reduced by 1%
during the year, to 15.7 million (2011: 15.9 million). This reflected a short
term increase in customer churn following the implementation of the price
rise, although churn of 9% over the year was at its lowest ever level
reflecting good customer service. Our competitive pricing position has now
improved following the implementation of price rises by all major suppliers
and we have seen a return to growth in the early weeks of 2013. We have 5
million customers enrolled in the Nectar loyalty programme, which reduces our
cost to serve and improves the customer experience by incentivising the use of
our online platform, including the submission of meter reads and payment by
direct debit.

The number of residential services product holdings fell slightly to 8.4
million (2011: 8.5 million), with weak economic conditions making sales of new
contracts challenging. Retention rates improved however, with strong levels of
customer service supporting attractive customer propositions. We decided in
the second half of the year to strengthen our Plumbing and Drains product by
expanding the cover to include the water supply pipe. As a result we are no
longer selling a separate water supply pipe product and our product holdings
have been restated accordingly. The economic environment continued to impact
boiler installation volumes, which fell 10% to 94,000 (2011: 105,000),
although operating profit increased as we focused on reducing our cost base.
We continue to develop new affinity relationships to enable us to offer energy
and services products to a wider customer base. In July, we signed a broad
strategic partnership with the RAC covering a number of areas, including
roadside breakdown, joint procurement and affinity marketing, and the first
sales were made in November. In electric vehicles, we are the preferred
supplier of home charging solutions for five major car manufacturers.

The number of business energy supply points fell by 8% over the year, to
924,000 (2011: 999,000) due to the challenging economic and competitive
environment which is putting pressure on contract renewal rates and margins.
However, we have recently received the letter of intent to award the renewal
of a significant electricity contract from the Government Procurement Service
comprising 70,000 sites for a term of four years. A new management team is in
place and we continue to invest in our back office systems to reduce costs,
sharpen our competitive position and enhance our customer service. In business
services we have made good progress. We have now been selected as preferred
contractor on seven multi-year energy performance contracts with public sector
organisations and have a strong pipeline for the year ahead.

More normal weather and cost reduction programme driving profit growth

After an unseasonally warm 2011, total British Gas gross revenue increased to
£13,857 million (2011:£12,403million) reflecting higher gas sales volumes.
Total British Gas operating profit increased to £1,093million (2011:£1,005
million). We continue to make good progress on our cost reduction programme,
and are on track to deliver £300 million of cost savings across British Gas by
the end of 2013. We are seeing the benefit of previous investment in
industry-leading IT systems and have achieved savings through a range of
initiatives, including a pay freeze for employees and changes to the defined
benefit pension schemes. During 2012, we closed our Southampton call centre,
outsourced a number of roles in British Gas Services and British Gas Business,
reduced IT costs through new working practices, offshored and transitioned to
new data centres and agreed improved commercial terms with suppliers. As a
result, including the impact of investment in growth areas, operating costs
were 1% lower in 2012 than in the prior period, and despite the weak economy
the bad debt charge as a proportion of revenue fell as the benefits of
improved systems and processes were realised.

In residential energy, gross revenue increased to £9,121 million (2011: £7,930
million) reflecting higher consumption and retail tariffs. Average gas
consumption increased by 12%, as the impact of cooler weather conditions than
in an unusually warm 2011 more than offset underlying energy efficiency
reductions. Average electricity consumption was broadly flat compared to 2011.
Residential energy operating profit increased to £606 million (2011: £544
million). Commodity and transportation and distribution costs both increased,
while environmental costs rose by 22% to £732 million (2011: £599 million).
The residential energy operating margin was 6.6% (2011: 6.9%), in line with
our through-cycle expectations.

In residential services, gross revenue increased slightly to £1,674 million
(2011: £1,644 million) with a rise in revenue from insulation jobs more than
offsetting a decline in installations revenue. Operating profit increased by
16% to £312 million (2011: £269 million), while the operating margin increased
to 18.6% (2011: 16.4%) driven by cost efficiencies and an improved
contribution from our new markets activity.

In business energy supply and services, gross revenue increased to £3,062
million (2011: £2,829 million) with operating profit falling by 9% to £175
million (2011: £192 million), reflecting the challenging external environment.
Business services revenue increased by 12% compared to 2011.

Leading the transition to smart connected homes and businesses

We continue to lead the industry in smart metering and have now installed over
800,000 smart meters in homes and businesses. We welcomed the Government’s
confirmation of the standards for the smart meter roll-out and we are the only
supplier currently installing fully compliant Phase 3 meters in customers’
homes. Smart meters are a key enabler for a range of technologies and by going
early on the roll-out we have gained invaluable experience. We are also
starting to see the benefit of smart meters delivering an enhanced customer
experience, including significantly lower contact rates, fewer complaints and
higher retention. We have made a number of investments in smart technology
companies, including AlertMe, which enables a range of home automation
applications and Power Plus Communications, which specialises in smart
applications in complex buildings. During the year we launched our award
winning ‘Remote Heating Control’ product which allows customers to monitor and
control their central heating system via the internet or a smart phone. Around
15,000 customers are now using the product and, as part of a bundle, it is
also driving higher sales conversion of central heating systems. For our smart
meter customers, we also launched the ‘Smart Energy Report’ to provide
visibility of how their energy is being used and to help them reduce their
consumption.

We will continue to lead the transition to smart connected homes and
businesses, offering attractive propositions, which will improve customer
engagement and deliver lower costs for the business.

Innovate to drive growth and service excellence

Performance in 2012 in a challenging economic and competitive environment has
demonstrated that our business model remains sound. In residential energy
supply it will be increasingly important to differentiate our offering through
service excellence and innovation. Our scale and leadership in customer
service, cost efficiency and systems leave us well placed to continue to
deliver a fair level of margin in this business. In residential services, our
focus remains on offering attractive customer propositions and delivering
service excellence, while also working to reduce costs further during 2013. We
expect to deliver continued profit growth in services, although not at the
high levels achieved in 2012. In business energy supply, the environment
remains challenging. We are investing in our back office systems to reduce
costs and improve service and, over time, we expect business services to make
a more material contribution. Looking to the future, smart meters are a key
enabler in the trend towards the ‘smart connected home’. British Gas’
leadership in smart metering and technology will enable us to capitalise on
this trend, deepening customer relationships and differentiating our energy
and services offer to drive long-term growth.

British Gas
                                                            
Total
British                                                   
Gas
For the
year ended    FY        FY        Δ%       H2        H2        Δ%
31               2012         2011                     2012         2011
December
Total
customer
accounts      24,982    25,364    (1.5)    24,982    25,364    (1.5)
(period
end)
('000)
Total
customer
households    11,745    11,997    (2.1)    11,745    11,997    (2.1)
(period
end)
('000)
Joint
product
households    2,149     2,207     (2.6)    2,149     2,207     (2.6)
(period
end)
('000)
Gross
Revenue       13,857    12,403    12       6,650     6,049     10
(£m):
Operating
cost
(excluding    1,418     1,425     (0.5)    707       678       4.3
bad debt)
(£m)
Operating
profit        1,093     1,005     9        530       487       9
(£m)

2011 gross revenue has been restated to reflect the reclassification of the
British Gas New Energy business from Residential energy supply to Residential
services and the reclassification of the British Gas Community Energy business
from Residential energy supply to Business energy supply and services.
Total customer accounts has been restated to exclude the water supply pipe
product, which has been incorporated into the plumbing and drains product.


Residential                                                  
energy supply
For the year          FY           FY                     H2           H2
ended 31           2012      2011     Δ%       2012      2011     Δ%
December
Customer
accounts                                                         
(period end):
  Gas (‘000)        8,905        9,139      (2.6)       8,905        9,139      (2.6)
  Electricity    6,751     6,742    0.1      6,751     6,742    0.1
    (‘000)
  Total          15,656    15,881   (1.4)    15,656    15,881   (1.4)
    (‘000)
Estimated
market share
(%):
    Gas               39.9         41.2       (1.3)       39.9         41.2       (1.3)
                                              ppts                                ppts
  Electricity    25.1      25.2     (0.1)    25.1      25.2     (0.1)
                                              ppts                                ppts
Average
consumption:
    Gas               494          443        12          218          181        20
    (therms)
  Electricity    3,794     3,805    (0.3)    1,875     1,858    0.9
    (kWh)
Total
consumption:
    Gas (mmth)        4,460        4,099      9           1,945        1,669      17
  Electricity    25,683    25,602   0.3      12,696    12,600   0.8
    (GWh)
Gross Revenue
(£m):
    Gas               5,884        4,903      20          2,668        2,248      19
  Electricity    3,237     3,027    7        1,646     1,580    4.2
  Total          9,121     7,930    15       4,314     3,828    13
Transmission
and metering
costs (£m):
    Gas               1,327        1,212      9           676          611        11
  Electricity    915       782      17       477       401      19
  Total          2,242     1,994    12       1,153     1,012    14
Total
environmental      732       599      22       347       347      0.0
costs (£m)
Total social       89        78       14       29        40       (28)
costs (£m)
Operating          606       544      11       261       263      (0.8)
profit (£m)
Operating          6.6       6.9      (0.3)    6.1       6.9      (0.8)
margin (%)                                    ppts                                ppts

2011 gross revenue and operating profit have been restated to reflect the
reclassification of the British Gas New Energy business from Residential
energy supply to Residential services and the reclassification of the British
Gas Community Energy business from Residential energy supply to Business
energy supply and services.
The definition of total environmental costs has been restated and includes
CERT, CESP, ROCs, carbon and FIT costs.


Residential services                                      
For the year ended 31  FY      FY      Δ%      H2      H2      Δ%
December                2012      2011                2012      2011
Customer product
holdings (period                                              
end):
        Central
        heating
    service         4,663     4,696     (0.7)     4,663     4,696     (0.7)
        contracts
        ('000)
        Kitchen
        appliances
        care (no. of    465       476       (2.3)     465       476       (2.3)
        customers)
        ('000)
        Plumbing and
        drains care     1,714     1,728     (0.8)     1,714     1,728     (0.8)
        ('000)
        Home
        electrical      1,444     1,462     (1.2)     1,444     1,462     (1.2)
        care ('000)
        Other
    contracts      116     122     (4.9)   116     122     (4.9)
        ('000)
        Total
    holdings       8,402   8,484   (1.0)   8,402   8,484   (1.0)
        ('000)
Domestic central
heating installations  94      105     (10)    50      51      (2.0)
('000)
Gross Revenue (£m):
        Central
        heating         839       807       4.0       435       411       6
        service
        contracts
        Central
        heating         258       295       (13)      137       144       (4.9)
        installations
    Other          577     542     6       291     278     5
    Total          1,674   1,644   1.8     863     833     3.6
Operating profit (£m)  312     269     16      187     159     18
Operating margin (%)   18.6    16.4    2.2     21.7    19.1    2.6
                                            ppts                          ppts

2011 gross revenue and operating profit have been restated to reflect the
reclassification of the British Gas New Energy business from Residential
energy supply to Residential services.
UK residential product holdings have been restated to exclude the water supply
pipe product, which has been incorporated into the plumbing and drains
product.


Business energy
supply and                                                     
services
For the year              FY           FY                     H2           H2
ended 31             2012      2011     Δ%       2012      2011     Δ%
December
Customer supply
points (period                                                     
end):
  Gas (‘000)            322          363        (11)        322          363        (11)
  Electricity      602       636      (5)      602       636      (5)
    (‘000)
  Total            924       999      (8)      924       999      (8)
    (‘000)
Average
consumption:
    Gas                   2,737        2,629      4.1         1,156        1,130      2.3
    (therms)
  Electricity      27,521    25,732   7        14,014    12,895   9
    (kWh)
Total
consumption:
    Gas (mmth)            940          986        (4.7)       399          413        (3.4)
  Electricity      17,110    16,731   2.3      8,581     8,320    3.1
    (GWh)
Gross Revenue
(£m):
    Gas                   1,014        931        9           443          416        6
    Electricity           1,841        1,713      7           929          866        7
  Business         207       185      12       101       106      (5)
    services
  Total            3,062     2,829    8        1,473     1,388    6
Transmission
and metering
costs (£m):
    Gas                   178          188        (5)         85           94         (10)
  Electricity      409       372      10       212       188      13
  Total            587       560      5        297       282      5
Operating            175       192      (9)      82        65       26
profit (£m)
Operating            5.7       6.8      (1.1)    5.6       4.7      0.9
margin (%)                                        ppts                                ppts

2011 gross revenue and operating profit have been restated to reflect the
reclassification of the British Gas Community Energy business from Residential
energy supply to Business energy supply and services.


CENTRICA ENERGY

A more balanced upstream business

Centrica Energy made significant progress during 2012 on its strategy to
deliver value and growth. In upstream gas and oil, we integrated three North
Sea acquisitions in 2012. This delivered a step change for the business,
increasing production and significantly enhancing the scale and balance of our
portfolio. In power, although the operating environment for gas-fired
generation remains challenging, the business benefitted from strong nuclear
operational performance.

We have achieved a number of key project milestones, bringing reserves into
production and generating first power from our 270MW Lincs offshore wind
project. We have also made important steps to develop future cornerstone
assets, with good progress at the Valemon gas field and the sanctioning of the
£1.4 billion Cygnus gas field, one of the largest remaining development
opportunities in the UK North Sea.

Total Centrica Energy operating profit increased by 20% to £1,230 million
(2011: £1,023 million) with increased profit in both gas and power. This
increase in profit was in part helped by the delivery of a series of cost
initiatives in 2012 and the business is on track to deliver its contribution
of cost savings to Group targets. These savings have not compromised on our
continued focus on health, safety and environmental practices. Centrica Energy
continues to progress its process safety programme, which focuses on the
integrity of operating systems and processes that handle hazardous substances.
We had no significant process safety events in 2012. In terms of environmental
practices, we are committed to operating responsibly and will continue to
engage with stakeholders, to understand and manage the environmental and
social issues associated with new and existing investments.

Increased gas and oil reserves and production

Between November 2011 and February 2012 we announced three North Sea
acquisitions, all of which completed during 2012, for a total of £1.2 billion.
Overall, we added 170 million barrels of oil equivalent (mmboe) of 2P reserves
in the year, as a result of acquisitions, upgrades of existing hubs such as
Rhyl and bringing new projects such as Maria into the development pipeline.
After taking production into account, we ended the year at 525mmboe of 2P
reserves (2011: 410mmboe). Our Norwegian business now forms a significant part
of the portfolio following the acquisitions, accounting for 41% of our
upstream gas and oil reserves, compared to 18% at the end of 2011.

Total production of gas and liquids increased by 18% to 56.7mmboe (2011:
48.2mmboe). Total gas production volumes increased by 13% to 2,441 million
therms (mmth) (2011: 2,160mmth) and total liquids volumes increased by 30% to
16.3mmboe (2011: 12.5mmboe), reflecting the benefit of recent acquisitions. We
now have less reliance on production from Morecambe, which in 2012 contributed
23% of total production (2011:29%) primarily due to increases from the rest
of the portfolio. Performance from South Morecambe improved in the second half
of the year, after we took action to stabilise the quality of gas delivered to
the grid during the field’s maintenance shut-down in the summer. Gas
production volumes from Norway more than trebled to 557mmth (2011: 164mmth)
while liquids volumes increased to 8.9mmboe (2011: 4.7mmboe), reflecting
acquisitions during the year.

In 2013 we will benefit from a full year of production from the acquisitions
made during 2012, and with new fields coming into production offsetting the
natural decline from our existing fields, total production volumes are
expected to increase by a further 15%.

Adding value through gas and oil development, appraisal and exploration

We achieved first gas at Seven Seas and Atla in the second half of the year,
following on from Ensign having delivered first gas in May. At Ensign we have
now also delivered production from the second well, however due to mechanical
issues the initial production rate is below our original expectations. First
gas is expected from York and Rhyl in the coming weeks, with first gas from
Kew scheduled for the fourth quarter of 2013. Good progress continues to be
made on the Statoil-operated Valemon project with the detailed design having
been agreed towards the end of 2012 and fabrication having started early in
2013. The field is on track to produce first gas in the fourth quarter of
2014.

In August we announced that the £1.4 billion Cygnus project, in which we own a
48.75% interest, had been sanctioned. Key contracts have now been placed and
the fabrication of the jacket and platform deck started ahead of schedule. The
development will create around 4,000 jobs, mostly in the UK, and bring 53mmboe
of our reserves into production from late 2015, providing enough gas at peak
production to supply 1.5 million homes.

In Trinidad and Tobago, we made further progress on the Block 22 project with
the award of front end engineering design contracts for upstream and subsea
facilities as well as the contracting of a rig to drill two appraisal wells to
prove up our resource base. We continue to explore development and partnership
options for gas export.

Our appraisal drilling at Rhyl North towards the end of 2012 was successful,
and led to our 2P reserves being revised upwards by 7mmboe to 14mmboe. In
early 2013, exploration drilling at Whitehaven confirmed that the Rhyl
reservoir extends further than originally anticipated, potentially leading to
additional reserve upgrades. Rhyl and Whitehaven will both utilise our
existing Morecambe infrastructure. Appraisal drilling at the non-operated
Maria North well, in which we own a 20% interest, showed potential gross
recoverable reserves of the Maria field towards the upper end of the
70-150mmboe range published following the discovery in 2010. Accordingly we
have revised our 2P reserves up by 10mmboe to 25mmboe. Appraisal drilling at
Bligh and exploration drilling at Cooper both encountered hydrocarbons, but
tight reservoirs meant that commercial flow rates were not achieved. We also
experienced non-operated exploration failures in Trinidad and Tobago. However
in early 2013 drilling at the Rodriguez prospect in Norway was successful,
confirming the presence of gas condensate.

In June, we extended our Memorandum of Understanding (MoU) with Statoil to
collaborate on gas-focused exploration opportunities in Norway and the UK. In
October, the UKCS 27th Round awarded Centrica six licenses covering 13 blocks
and part-blocks. Three of the blocks will be Centrica-operated, two of which
are in the West of Shetland, a new area for the company. Early in 2013 we were
awarded nine blocks in the latest round of licences announced by Norway’s
Energy Ministry. We will be the operator of three of these blocks, which are
close to some of our existing assets. Our exploration record over the last
three years has been good, with a success rate of 40% and a net finding cost
of £3.5 per barrel of oil equivalent (boe).

Higher gas and oil volumes and achieved prices with reduced unit costs

Upstream gas and oil profitability increased by 20% to £919 million (2011:
£769 million), reflecting higher production volumes and higher achieved
prices. The average achieved gas sales price increased by 6% to 54.7pence per
therm (p/th) (2011: 51.6p/th) while the average achieved oil and condensate
price increased by 10% to £62.8 per boe (2011: £57.2/boe). On a per unit of
production basis, depletion, depreciation and amortisation (DDA) costs and
lifting costs both decreased slightly, to £9.8/boe (2011: £10.1/boe) and
£9.7/boe (2011: £9.9/boe) respectively, with recent acquisitions incurring
lower unit lifting costs. Overall production and overhead costs increased by
22% to £1,374 million (2011: £1,127 million) due to the impact of the North
Sea acquisitions, new gas and oil fields coming into production, the expensing
of a £73 million cost relating to the failure of a third development well at
Ensign and inflationary cost increases. In addition we incurred exploration
and appraisal costs of £139 million (2011: £97 million), reflecting a lower
level of drilling success.

Continued strong performance from nuclear; challenging market conditions for
CCGTs

The nuclear fleet recorded strong performance during the year, with our 20%
share of output increasing by 8% to 12.0 terawatt hours (TWh) (2011: 11.2TWh).
This reflects continued investment in the fleet, with no large unplanned
outages during the year, underlining the quality of our original investment in
the nuclear fleet. In addition, plant life extensions to the Hinkley Point B
and Hunterston B nuclear power stations were announced in December, extending
the life of these stations by seven years from 2016 to 2023. The expectation
for nuclear plant life extensions for the AGR fleet in the UK is now for seven
years on average, compared to the five years previously assumed, and this will
deliver additional long-term value.

The market environment remains challenging for gas-fired plant with continued
low market clean spark spreads. Reliability remained high at 97% (2011: 98%),
however generation volumes fell by 40% to 9.0TWh (2011:15.0TWh), with an
average load factor of 26% (2011: 35%). The market conditions led to the
mothballing of our 325MW Kings Lynn power plant at the beginning of the year
and we have now also withdrawn our 229MW Roosecote power station from service.
Our plants at Barry and Brigg continue to operate in the STOR market, with
contracts in place until the end of the first quarter of 2013 while our
Peterborough plant has a contract which will commence in April 2013. Against
this difficult market environment, we have been successful in minimising our
costs and running the plants as efficiently as possible, with high levels of
availability enabling running at peak times. In February 2013, we sanctioned a
turbine blade upgrade at our 1.2GW South Humber power station, which will
improve the efficiency of the plant.

Availability in our wind assets was 88% (2011: 92%), reflecting an outage at
Inner Dowsing in the first quarter, with generated volumes down 11% to 533
gigawatt hours (GWh) (2011: 596 GWh). The load factor was 32% (2011: 36%).

Power profitability increased by 22% to £311 million (2011: £254 million).
Nuclear profitability increased, benefiting from a higher achieved average
price of £49.6/MWh (2011: £48.5/MWh), reflecting some benefit from forward
hedging, as well as the strong operational performance. Wind profitability
also increased, with the sale of 50% of our Round 3 wind farm interest to
Dong, in line with our established business model to partner on offshore wind,
resulting in a net profit of £32 million after taking into account a charge
relating to the refusal of consent at our Docking Shoal project. Our CCGT
fleet made a small loss in 2012, the last year of free carbon allowances,
reflecting the weak market conditions.

Investing for value in power

In offshore wind, our 270MW Lincs project has now generated first power and is
expected to be fully operational in the second half of 2013. We have invested
over £3 million in a new operations base at Grimsby docks to serve Lincs and
other potential Centrica Energy wind farm developments, a substantial
investment in the local area.

We continue to progress towards a final investment decision on the Race Bank
project, which is consented for 580MW. We are willing to commit £200 million
for the project, and are in discussion with a financial partner and the
Government concerning the economic framework. During 2012 we also established
a joint venture with Dong Energy to co-develop the Round 3 Irish Sea wind farm
zone. Formal consultation and a programme of stakeholder engagement was
undertaken throughout the year. A final investment decision is expected on the
first project in 2016, subject to returns being suitably attractive.

In February 2013 we announced that we would not be exercising our option to
participate in UK nuclear new build, taking into account the lengthening time
frame for a return on capital invested in a project of this scale. The
decision follows detailed appraisal of the project, with pre-development
expenditure approaching the agreed £1 billion cap; accordingly Centrica’s
share of project costs have been written off, with the Group recording a total
impairment of £231 million.

We have also decided not to proceed with planning applications to develop
dedicated biomass power stations at Roosecote and Brigg, with recent
clarification on the regulatory framework indicating a preference for
co-firing and coal conversion. As the market becomes increasingly dependent on
fixed price support mechanisms, we will leverage our competencies, investing
only where we see value.

Integrate our natural gas business, linked to our core markets

The gas market is becoming increasingly global. We have made progress in
diversifying our sources of gas, including agreements to import pipeline gas
from Norway and LNG from Qatar through our regasification capacity at the Isle
of Grain. We are looking to secure gas increasingly from a wider range of
sources, expanding the scope of our activities where appropriate. Our aim is
to connect sources of energy to our customers, building an integrated
international business focused on the Atlantic basin.

The UK and Norway will remain an important part of our investment and
activity, as we look to maintain an appropriate energy hedge. We have a number
of large scale projects ongoing, including Cygnus and Valemon, and we retain a
number of attractive potential development opportunities, particularly in
Norway, including at Butch where appraisal drilling is planned in late 2013.
Decisions are targeted during 2013 on further infill drilling opportunities in
the East Irish Sea and North Sea. However, with UK North Sea developments
becoming smaller in scale and relatively more expensive, we will increasingly
look to diversify our production portfolio, linked to our core markets. This
is likely to include further investment in North America, possibly in shale
gas, and there is also the potential for gas exports later in the decade. We
will invest where we see value across our international portfolio, delivering
annual production in the range 75mmboe to 100mmboe. In midstream, we have
significant capabilities and presence in European and North American gas
markets where we have important strategic participation in pipeline capacity,
regasification capacity and gas storage. We will also look to develop our
asset-based midstream trading and optimisation business over time, with an
emerging presence in LNG. However we will invest only where we see value, with
rewards commensurate with the scale of investment and associated risks.

Centrica Energy
                                                            
Total
Centrica                                                 
Energy
For the year      FY         FY                     H2         H2
ended 31        2012     2011      Δ%      2012     2011      Δ%
December
Operating       1,230    1,023     20      548      492       11
profit (£m)
                                                                            
Gas                                                      
For the year      FY         FY                     H2         H2
ended 31        2012     2011      Δ%      2012     2011      Δ%
December
Gas
production
volumes
(mmth)
  Morecambe       740        817          (9)       378        418          (10)
  Other UK
  and             883        933          (5)       403        419          (3.8)
  Netherlands
  Norway          557        164          240       381        82           365
 Trinidad &    261      246       6       131      162       (19)
  Tobago
 Total         2,441    2,160     13      1,293    1,081     20
Oil and
condensate
production
volumes
(mmboe)
  UK and          7.4        7.8          (5)       3.5        3.5          0.0
  Netherlands
 Norway        8.9      4.7       89      5.9      2.1       181
 Total         16.3     12.5      30      9.4      5.6       68
Total
production      56.7     48.2      18      31.0     23.2      34
volumes
(mmboe)
Average gas
sales price       54.7       51.6         6         56.7       52.5         8
(p/therm)
Average oil
and
condensate      62.8     57.2      10      63.4     56.9      11
sales price
(£/boe)
DDA costs         9.8        10.1         (3.0)     10.1       9.5          6
(£/boe)
Lifting costs   9.7      9.9       (2.0)   10.1     10.1      0.0
(£/boe)
Total
production        1,374      1,127        22        803        544          48
and overhead
costs (£m)
Exploration
and appraisal   139      97        43      108      51        112
costs (£m)
Operating       919      769       20      411      355       16
profit (£m)
Estimated net
proven and
probable          2,376      2,019        18        nm         nm           nm
reserves of
gas (BCF)
Estimated net
proven and
probable        129      73        77      nm       nm        nm
reserves of
liquids
(mmboe)
Total net
proven and
probable        525      410       28      nm       nm        nm
reserves
(mmboe)
                                                                            
Power                                                    
For the year      FY         FY                     H2         H2
ended 31        2012     2011      Δ%      2012     2011      Δ%
December
Power
generated
(GWh)
  Gas-fired       8,952      14,973       (40)      4,046      7,542        (46)
  Renewables      533        596          (11)      287        321          (11)
 Nuclear       12,004   11,157    8       6,050    4,966     22
 Total         21,489   26,726    (20)    10,383   12,829    (19)
Achieved
Clean Spark       10.7       10.1         6         11.2       9.3          20
Spread
(£/MWh)
Achieved
power price
(including        105.7      111.2        (4.9)     111.3      124.7        (11)
ROCs) (£/MWh)
- renewables
Achieved
power price     49.6     48.5      2.3     49.8     50.4      (1.2)
(£/MWh) -
nuclear
Operating       311      254       22      137      137       0.0
profit (£m)
                                                                            

CENTRICA STORAGE

Strong performance in a challenging market environment

Centrica Storage performed well in 2012, with strong commercial performance
securing the benefits of higher summer/winter price differentials seen in the
first half of the 2012/13 storage year. The Rough asset achieved reliability
of 92% in the year (2011: 96%), with performance in the first half similar to
that experienced in the first half of 2011 but with the second half impacted
by a small number of production outages. These outages had limited commercial
impact and across the year asset availability was good when required to meet
customer demand.

The high level of stock carry-over into 2012 combined with modest withdrawal
in the first quarter of the year meant that the Net Reservoir Volume (NRV) was
at relatively high levels again going into the 2012 injection season. A strong
injection season over the summer was followed by the final quarter of 2012
experiencing withdrawals more in line with seasonal normal levels. As a result
the NRV level carried into 2013 was above the five year average level but
below the level at the start of 2012.

Health and safety remains one of our core priorities; this relentless focus
has enabled the business to continue its strong record through 2012, with no
Lost Time Incidents recorded for more than three years, corresponding to over
five million man hours of work without an incident.

Forward seasonal spreads have narrowed since the first quarter

The business saw higher summer/winter price differentials in the final quarter
of 2011 and the first quarter of 2012 compared to the first quarter of 2011,
which resulted in an achieved 2012/13 storage year Standard Bundled Unit (SBU)
price of 33.9p (2011/12: 25.2p). However, price differentials subsequently
narrowed, reflecting colder than normal weather in the summer months and an
expectation of LNG availability for the winter. Forward spreads remain
relatively narrow for the 2013/14 storage year, with price volatility
remaining at subdued levels.

Improved operating profit

Gross revenue increased by 10% in 2012 to £202 million (2011: £184 million).
This reflects the higher summer/winter price differentials and benefits from
the high NRV carried into 2012. SBU revenue was 4% higher in 2012 with the
calendar year SBU price increasing to 31.0p (2011: 30.0p). Operating profit
increased by 19% to £89 million (2011: £75 million) benefiting from higher
revenue and strong cost control, partially offset by inflationary pressures
and additional depreciation resulting from previous investment in Rough. From
2013 the business will benefit from additional revenue streams associated with
gas processing and condensate sales at the newly constructed York processing
plant.

Challenging economics for new projects

We retain the option to invest in our Baird and Caythorpe gas storage
projects. However, the continuing relatively low levels of summer/winter price
differentials and reduced price volatility, combined with an uncertain longer
term outlook, mean that market conditions remain challenging for these
opportunities. With the country becoming increasingly dependent on imported
gas we believe that more seasonal storage is required in the UK. However we
will only invest in new projects if the returns are appropriate for the level
of risk undertaken. We may require a support mechanism to underpin the
investment and welcomed the announcement by the Department of Energy & Climate
Change (DECC) in December that it is planning to carry out further
investigation into possible intervention mechanisms to encourage new storage
investment. We look forward to the outcome of this review, with initial
findings expected in the spring of 2013.

Centrica Storage
For the               FY         FY                   H2         H2
year ended       2012    2011    Δ%     2012    2011    Δ%
31 December
Average SBU
price (in        31.0    30.0    3.3    33.9    25.2    35
period)
(pence)
Gross
Revenue
(£m)
  Standard           141        136        3.7       77         58         33
   SBUs
  Other         61      48      27     34      29      17
  Total         202     184     10     111     87      28
Operating        89      75      19     53      36      47
profit (£m)
                                                                            

DIRECT ENERGY

Further profit growth in a low gas price environment

Direct Energy delivered another strong performance in 2012, in a low gas price
environment. Gross revenue decreased by 2% to £6,015 million (2011: £6,117
million) but operating profit increased by 6% to £331 million (2011: £312
million). There was no material impact resulting from currency movements
during the year.

The business has benefited from organic customer growth in the US North East
and the small business customer segment, and from the successful integration
of recent acquisitions. We also continue to drive operational efficiencies
throughout the business, and the move of our North American headquarters to
Houston, combined with overall headcount reductions, has delivered significant
benefits. We will continue to drive efficiencies, with further rationalisation
of IT resources due to be undertaken in 2013. The health and safety of our
employees and customers continues to be our core priority and the LTIFR
reduced by 45%, to 0.11 per 100,000 hours worked (2011: 0.20) and we had no
significant process safety events in 2012.

Benefiting from enhanced scale in residential energy supply

Direct Energy Residential made good progress during the year, with organic
customer growth in the US North East, the successful integration of recent
acquisitions and strong increased customer satisfaction levels across the
business. Overall customer accounts increased to 3.5 million (2011: 3.4
million) despite incurring further customer losses as a result of the
regulatory environment in Ontario. Gross revenue decreased by 2% to £2,357
million (2011: £2,416 million), while operating profit was broadly flat at
£156 million (2011: £161 million) reflecting the decline in the Ontario
business, offset by the positive impacts of customer growth and acquisitions
in the US. We are also seeing the benefits from operational efficiencies and
billing system rationalisation, with increased scale in the US North East.

In the US North East, our business is materially larger following the
integration of Gateway and Vectren Source, both acquired in 2011, and the
acquisition of a further 207,000 residential and 38,000 small business
accounts from New York based energy retailers Energetix and NYSEG Solutions
from Iberdrola USA, completed in August. The business also experienced organic
growth in 2012 due to strong sales performance, despite the expected roll-off
of low margin aggregation customers acquired as part of the Vectren Source
acquisition. We now have 1.4 million customers in the region, up from 1.1
million at the end of 2011.

Our Texas residential business is also benefiting from increased scale,
following the First Choice Power acquisition in 2011. Our prepaid ‘Power to
Go’ product continues to attract customers, as well as being viewed positively
by regulators, who welcome the expansion of choice for all customer groups. In
October, we launched a 100% renewable tariff, providing environmentally
conscious customers with wind power from Texas.

We delivered good sales performance in the US during the year, underpinned by
a continued focus on channel efficiency, while our consolidated billing
platform has helped reduce costs and bad debt. Churn reduction continues to
remain a focus both in Texas and the US North East.

We no longer view our residential energy supply business in Ontario as core,
following the implementation of the Energy Consumer Protection Act (ECPA),
which makes it difficult to sell to new customers or retain existing ones. We
continue to actively manage the decline of our customer base and have more
than halved operating costs since 2010 through aggressive cost management. In
total we lost 95,000 customer accounts in Ontario during 2012 and now have
just over 200,000 customers in the region, around half the amount we had at
the end of 2010. In 2012, Ontario contributed less than 20% of our residential
energy operating profit and this is expected to fall to around 5% in 2013. In
Alberta, profitability rose, with increases in regulated rates leading to
higher churn levels in the low margin regulated business and growth in the
higher margin competitive customer base.

Focus on small businesses leading to volume growth in business energy supply

Direct Energy Business again delivered strong growth in the year, in a highly
competitive market. Electricity volumes rose 11% to 51.4TWh (2011: 46.4TWh),
while gas volumes increased by 11% to 793mmth (2011: 714mmth). Higher volumes
in the small commercial business sector are driving much of the growth, and
profit in this sector nearly doubled in 2012, reflecting strong sales and
scale benefits resulting from recent acquisitions. The larger commercial
segment is increasingly competitive, however our retention rates remain high
in this sector.

Gross revenue in business energy supply decreased by 2% to £2,690 million
(2011: £2,748 million), with the impact of lower commodity prices more than
offsetting volume growth. Operating profit increased to £129 million (2011:
£110 million) while operating margin increased to 4.8% (2011: 4.0%),
reflecting the positive impact of operational efficiencies and a higher
proportion of small business customers.

Strengthening the services platform

Direct Energy Services is performing well, gaining market share in a
challenging economic environment, with many of our competitors experiencing
losses or credit downgrades. Our nationwide on-demand franchise has provided
scale advantages, while the acquisition of Home Warranty of America (HWA),
completed in March, provides the necessary licences to offer protection plan
products across the United States. The number of contract relationships
increased by 5% during 2012, mainly reflecting the HWA acquisition.

Our Canadian business was impacted by warmer than normal weather and
industrial action by a number of our unionised technicians in the first half
of the year. The labour issues have now been resolved, resulting in a
significant improvement to our cost base and more flexible working
arrangements, improving our service to customers.

Continued weak economic conditions, low consumer confidence and a slow housing
market have impacted underlying growth in the US services business, leading to
less lead generation and reduced demand for home services products. However we
continue to focus on delivering high levels of customer satisfaction and our
services Net Promoter Score increased to +61 (2011: +58), helping strong
customer retention.

Gross revenue increased by 2% to £532 million (2011: £520 million) and
operating profit increased to £33 million (2011: £28 million), with
operational efficiencies and cost control driving much of this growth.

Solid upstream and wholesale performance in a low price environment

Direct Energy Upstream continues to face a low wholesale price environment,
although the Henry Hub natural gas price recovered slightly during the second
half of the year from the record low levels seen in the first half. Alberta
gas production volumes fell by 3% to 549mmth (2011: 567mmth), with the
achieved gas price falling to C$3.8/MCF (2011: C$4.6/MCF). The price of
liquids remains relatively high however, and the acquisition of the Carrot
Creek assets, completed in January, meant that oil and liquids production
volumes nearly doubled to 1.1mmboe (2011: 0.7mmboe). We added 10mmboe of
reserves in North America over the year meaning that after taking account of
production, 2P reserves remained broadly flat at 108mmboe (2011: 109mmboe).

Texas power generation volumes increased by 21% to 6,336GWh (2011: 5,247GWh),
with good asset availability and optimisation performance. Texas experienced
more normal weather conditions during the summer months, meaning that spikes
in power prices were less extreme than in the exceptional conditions in 2011.

Overall, upstream and wholesale gross revenue was £436 million (2011: £433
million) while operating profit was flat at £13 million (2011: £13 million).

Well placed to further grow and develop our North American business

We have built a good platform for growth in North America, with strong
capabilities in energy sourcing and supply, risk management, energy services
and upstream gas and power. In 2013 we should continue to benefit from recent
residential acquisitions, with integration now mostly complete, while we have
created a more efficient operating base in both energy and services. Upstream,
natural gas prices continue to be constrained by the impact of shale but
production expansion opportunities are available and we will pursue them if
value can be created.

We continue to look for opportunities to grow our business across North
America. Downstream, we will continue to focus on growing organically, through
churn reduction and differentiation. We will also continue with our successful
bolt-on acquisition strategy, delivering scale and synergies, and will
consider larger opportunities where appropriate. Over the next 3 to 5 years we
are targeting a doubling in profitability of our North America downstream
business through organic growth and acquisition, with Direct Energy downstream
becoming a more material part of the Group. We will also look for
opportunities upstream, with the potential for exports over time. In each
case, we will only invest where we see value and a good fit with our
Group-wide capabilities.

Direct Energy
                                                                 
Total Direct Energy                                          
For the year ended    FY 2012  FY 2011  Δ%      H2 2012  H2 2011  Δ%
31 December
Total residential
energy and services   5,856    5,647    3.7     5,856    5,647    3.7
accounts (period
end) ('000)
Gross revenue (£m)    6,015    6,117    (1.7)   3,096    3,021    2.5
Operating profit      331      312      6       165      138      20
(£m)
                                                                        
Residential energy                                           
supply
For the year ended    FY 2012  FY 2011  Δ%      H2 2012  H2 2011  Δ%
31 December
Customer accounts     3,455    3,364    2.7     3,455    3,364    2.7
(period end) ('000)
Gross revenue (£m)    2,357    2,416    (2.4)   1,147    1,126    1.9
Operating profit      156      161      (3.1)   55       56       (1.8)
(£m)
Operating margin (%)  6.6      6.7      (0.1)   4.8      5.0      (0.2)
                                           ppts                         ppts

Business energy                                              
supply
For the year ended    FY 2012  FY 2011  Δ%      H2 2012  H2 2011  Δ%
31 December
Gas sales (mmth)       793       714       11       372       297       25
Electricity sales      51,378    46,350    11       27,443    24,159    14
(GWh)
Gross revenue (£m)    2,690    2,748    (2.1)   1,394    1,372    1.6
Operating profit      129      110      17      69       52       33
(£m)
Operating margin (%)  4.8      4.0      0.8     4.9      3.8      1.1
                                           ppts                         ppts
                                                                        
Residential and                                              
business services
For the year ended    FY 2012  FY 2011  Δ%      H2 2012  H2 2011  Δ%
31 December
Contract
relationships          2,401     2,283     5        2,401     2,283     5
(period end) ('000)
On demand and
installation jobs      670       703       (5)      316       372       (15)
('000)
Gross revenue (£m)    532      520      2.3     279      271      3.0
Operating profit      33       28       18      22       19       16
(£m)
Operating margin (%)  6.2      5.4      0.8     7.9      7.0      0.9
                                           ppts                         ppts
On demand and installation jobs has been restated to reflect management
reporting.

Upstream and                                                 
wholesale energy
For the year ended    FY 2012  FY 2011  Δ%      H2 2012  H2 2011  Δ%
31 December
Gas production         549       567       (3.2)    270       287       (6)
volumes (mmth)
Oil and liquids
production volumes    1.1      0.7      57      0.5      0.4      25
(mmboe)
Total production      10.1     10.0     1.0     4.9      5.1      (3.9)
volumes (mmboe)
Power generated        6,336     5,247     21       3,016     2,924     3.1
(GWh)
Gross Revenue (£m)    436      433      0.7     276      252      10
Operating profit      13       13       0.0     19       11       73
(£m)
Estimated net proven
and probable           581       603       (3.6)    nm        nm        nm
reserves of gas
(BCF)
Estimated net proven
and probable          11       8        38      nm       nm       nm
reserves of liquids
(mmboe)
Total net proven and
probable reserves     108      109      (0.9)   nm       nm       nm
(mmboe)
                                                                        

Direct Energy with comparator year of 2011 restated to remove effect of foreign
exchange movements
For the year          FY          FY                      H2          H2
ended 31          2012     2011     Δ%       2012     2011     Δ%
December
Revenue (£m)                                                  
  Residential
 energy              2,357       2,425       (2.8)       1,147       1,128       1.7
  supply
  Business
  energy              2,690       2,782       (3.3)       1,394       1,378       1.2
  supply
  Residential
  and                 532         523         1.7         279         272         2.6
  business
  services
  Upstream
 and             436      437      (0.2)    276      252      10
  wholesale
  energy
Direct Energy     6,015    6,167    (2.5)    3,096    3,030    2.2
revenue
Operating
profit (£m)
  Residential
  energy              156         163         (4.3)       55          56          (1.8)
  supply
  Business
  energy              129         111         16          69          52          33
  supply
  Residential
  and                 33          28          18          22          19          16
  business
  services
  Upstream
 and             13       13       0.0      19       11       73
  wholesale
  energy
Direct Energy
operating         331      315      5        165      138      20
profit
2011 figures
restated at
2012 weighted
average
exchange
rate.



Unless otherwise stated, all references to operating profit or loss, taxation
and earnings numbers throughout the announcement are adjusted figures, as
reconciled in the Group Financial Review on page 9 and 10.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the Group Financial Statements in
accordance with applicable law, regulations and accounting standards. In
preparing the Group Financial Statements, the Directors are required to:

  *select suitable accounting policies and then apply them consistently;
  *make judgements and accounting estimates that are reasonable and prudent;
  *state whether IFRSs as adopted by the European Union have been followed,
    subject to any material departures disclosed and explained in the Group
    Financial Statements; and
  *prepare the Group Financial Statements on the going concern basis unless
    it is inappropriate to presume that the Company will continue in business.

Each of the Directors confirm that, to the best of their knowledge:

  *the Group Financial Statements, which have been prepared in accordance
    with IFRSs as adopted by the EU, give a true and fair view of the assets,
    liabilities, financial position and profit of the Group; and
  *the Directors’ Report – Business Review contained in the Annual Report and
    Accounts, from which this narrative is extracted, includes a fair review
    of the development and performance of the business and the position of the
    Group, together with a description of the principal risks and
    uncertainties that it faces.

By order of the Board   
                            
Sam Laidlaw                 Nick Luff
27 February 2013            27 February 2013
Chief Executive             Group Finance Director
                            


GROUP INCOME STATEMENT
Year ended 31     2012                                                         2011
December
                                       Exceptional                           Exceptional  
                                         items and                               items and
                           Business      certain re-    Results    Business      certain  re-   Results
                                                        for                                     for
                           performance   measurements   the year   performance   measurements   the year
                 Notes  £m           £m            £m        £m           £m            £m
                                                                                                
Group revenue      5(a)    23,942       –             23,942     22,824       –             22,824
Cost of sales
before
exceptional
items and
certain                    (18,676)      –              (18,676)   (17,959)      –              (17,959)
re-measurements
Exceptional        6       –             (89)           (89)       –             (221)          (221)
items
Re-measurement
of energy          6       –            603           603        –            (437)         (437)
contracts
Cost of sales           (18,676)     514           (18,162)  (17,959)     (658)         (18,617)
Gross profit               5,266        514           5,780      4,865        (658)         4,207
Operating costs
before                     (2,844)       –              (2,844)    (2,750)       –              (2,750)
exceptional
items
Exceptional        6       –            (445)         (445)      –            (110)         (110)
items
Operating costs            (2,844)       (445)          (3,289)    (2,750)       (110)          (2,860)
Share of
profits/(losses)
in joint
ventures
and associates,
net of interest
and
taxation          6,13   140          (6)           134       93           (26)          67
Group operating    5(b)    2,562        63            2,625      2,208        (794)         1,414
profit
Interest income    7       254           –              254        212           –              212
Interest expense   7       (437)        –             (437)      (358)        –             (358)
Net interest            (183)        –             (183)     (146)        –             (146)
expense
Profit from
continuing
operations
before
taxation                   2,379         63             2,442      2,062         (794)          1,268
Taxation on
profit from
continuing
operations        8      (1,029)      (140)         (1,169)   (810)        (16)          (826)
Profit from
continuing                 1,350        (77)          1,273      1,252        (810)         442
operations after
taxation
Profit from
discontinued       6       –             –              –          13            22             35
operations
Loss on disposal
of discontinued    6,17    –            –             –          –            (56)          (56)
operations
Discontinued            –            –             –         13           (34)          (21)
operations
Profit for the          1,350        (77)          1,273     1,265        (844)         421
year
                                                                                                
Earnings per                                     Pence                              Pence
ordinary share
From continuing
and discontinued
operations:
Basic              10                    24.6                                                   8.2
Diluted            10                    24.4                                                   8.1
From continuing
operations:
Basic              10                    24.6                                                   8.6
Diluted            10                    24.4                                                   8.5
Interim dividend
paid per           9                     4.62                                                   4.29
ordinary share
Final dividend
proposed per      9                  11.78                                             11.11
ordinary share
                                                                                                

The notes on pages 30 to 57 form part of these Financial Statements.

GROUP STATEMENT OF COMPREHENSIVE INCOME
                                                      2012      2011
Year ended 31 December                                £m        £m
Profit for the year                                         1,273         421
Other comprehensive income/(loss):                                   
Transfer of available-for-sale reserve to                   –             23
Income Statement
Gains/(losses) on revaluation of                            7             (4)
available-for-sale securities
Taxation on revaluation of available-for-sale             (2)         (2)
securities
                                                          5           17
Net losses on cash flow hedges                              (27)          (99)
Transferred to income and expense on cash flow              108           42
hedges
Transferred to assets and liabilities on cash               (1)           2
flow hedges
Exchange differences on translation of cash                 1             (3)
flow hedges in foreign operations
Taxation on cash flow hedges                              (20)        23
                                                          61          (35)
Exchange differences on translation of foreign              (44)          (12)
operations
Recycling of foreign exchange loss on disposal            –           (3)
of business
                                                          (44)        (15)
Net actuarial (losses)/gains on defined benefit             (319)         198
pension schemes
Taxation on net actuarial (losses)/gains on               69          (59)
defined benefit pension schemes
                                                            (250)         139
Share of other comprehensive income of joint                32            (25)
ventures and associates, net of taxation
Other comprehensive (loss)/income net of              (196)     81
taxation
Total comprehensive income for the year               1,077     502
                                                                          

<td class="bwsi*Story too large*
GROUP STATEMENT OF CHANGES IN EQUITY
                                               Accumulated              
                                                     other
                  Share       Share       Retained   comprehensive     Other        Total
                  capital     premium     earnings   income/(loss)     equity       equity
                £m        £m        £m        £m              £m        £m
1 January 2011    318         833         4,386      (319)             601          5,819
Total
comprehensive     –           –           421        81                –            502
income
Employee share    1           41          5          –                 10           57
schemes
Dividends         –           –           (762)      –                 –            (762)
Purchase of
non-controlling   –           –           (7)        –                 –            (7)
interest
Taxation          –           –           –          –                 (8)          (8)
Exchange         –         –         –         –               (1)       (1)
adjustments
31 December      319       874       4,043     (238)           602       5,600
2011
Total
comprehensive     –           –           1,273      (196)             –            1,077
income
Employee share    2           55          11         –                 (2)          66
schemes
Dividends         –           –           (816)      –                 –            (816)
Taxation          –           –           –          –                 (1)          (1)
Exchange         –         –         –         –               1         1
adjustments
31 December      321       929       4,511
2012

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