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CNA: Centrica plc: Half-yearly Report



  CNA: Centrica plc: Half-yearly Report

UK Regulatory Announcement

LONDON

CENTRICA PLC

INTERIM RESULTS FOR THE PERIOD ENDED 30 JUNE 2013

OPERATING AND FINANCIAL OVERVIEW

ROBUST FINANCIAL PERFORMANCE

  * Adjusted earnings up 2% to £767 million; 14.8 pence adjusted basic
    earnings per share
  * Total adjusted tax charge rises 21% to £690 million; effective tax rate of
    47%, up from 43%
  * British Gas Residential operating profit marginally higher than in 2012,
    with significantly higher environmental and commodity costs offsetting the
    impact of increased consumption due to prolonged cold weather
  * Full year British Gas Residential operating profit expected to be broadly
    in line with 2012
  * Challenging market conditions in UK business energy; implementing new
    systems to help improve service and reduce costs
  * Direct Energy benefiting from enhanced scale downstream, offsetting
    pressure on margins from rising commodity prices
  * Higher international upstream gas and oil production and profitability;
    continued good nuclear performance; UK gas-fired generation loss making in
    weak market conditions

INVESTING FOR GROWTH, ENERGY SECURITY AND JOBS

  * Acquisition of Energy Marketing business of Hess Corporation makes Direct
    Energy the largest B2B gas supplier in the Eastern US
  * Agreement with Cheniere to export LNG from the US; 20 year £10 billion
    contract, taking our total supply commitment to around £60 billion
  * Announced £650 million Canadian gas asset acquisition, in partnership with
    Qatar Petroleum International
  * Acquired 25% stake in Bowland shale exploration licence, a potentially
    important source of gas for the UK
  * Organic investment of over £700 million in the first six months of 2013
  * First gas from York development in Southern North Sea and Rhyl project in
    East Irish Sea
  * 1,000 apprentices currently in training with British Gas; 200 new
    apprenticeships announced in June

DELIVERING FOR OUR CUSTOMERS

  * 56,000 British Gas residential energy accounts added, reflecting
    competitive pricing and innovative products
  * ‘Tariff Check’ launched, proactively helping British Gas customers to
    choose the best deal for them
  * Over 500,000 vulnerable and elderly customers received £130 Warm Home
    Discount last winter
  * Over 1 million smart meters installed in UK homes and businesses
  * Launching ‘Free Electricity Saturdays’ in Texas; Bounce Energy acquisition
    enhances online capabilities

DELIVERING FOR OUR SHAREHOLDERS

  * All cash interim dividend up 6% to 4.92 pence per share, representing 30%
    of the prior year’s dividend, in line with established practice
  * Over £240 million of shares bought back to date under £500 million share
    repurchase programme

“With our customers using more gas to stay warm during the unusually cold
winter, we’re doing everything we can to help them keep their energy costs
under control and make bills simpler and clearer. We are also delivering for
our shareholders, enabling us to continue to grow the business and invest to
secure energy supplies for the future.”

Sam Laidlaw
Chief Executive
 

FINANCIAL PERFORMANCE AND KPIS

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 6 and 7. Statutory earnings for the period are £819 million.

FINANCIAL PERFORMANCE

For the period ended 30 June          2013          2012                 ∆
                                                    (restated)
Revenue from continuing               £13.7bn       £12.0bn              14%
operations
                                                                          
Adjusted operating profit
International Downstream
British Gas
Residential energy supply             £356m         £345m                3%
Residential services                  £135m         £125m                8%
Business energy supply and            £78m          £93m                 (16%)
services
Total British Gas                     £569m         £563m                1%
Direct Energy
Residential energy supply             £99m          £101m                (2%)
Business energy supply                £53m          £43m                 23%
Residential and business              £13m          £11m                 18%
services
Total Direct Energy                   £165m         £155m                6%
International Upstream
International gas                     £683m         £519m                32%
UK power                              £119m         £174m                (32%)
Total Centrica Energy                 £802m         £693m                16%
Centrica Storage                      £47m          £36m                 31%
Total adjusted operating profit       £1,583m       £1,447m              9%
                                                                          
Total adjusted taxation charge        £690m         £568m                21%
Total adjusted effective tax          47%           43%                  4ppt
rate
                                                                          
Adjusted earnings                     £767m         £753m                2%
Adjusted basic earnings per           14.8p         14.6p                1%
share
Interim dividend per share            4.92p         4.62p                6%
                                                                          
Group capital and acquisition         £755m         £1,525m              (50%)
expenditure

The Group has applied IAS19 (revised) pensions accounting. As a result, 2012
net finance costs, taxation, earnings and earnings per share have been
restated.
To reflect a new organisational structure, the North American upstream gas
business and North American power and midstream and trading businesses have
been reallocated from Direct Energy upstream and wholesale to Centrica Energy
International gas and Direct Energy business energy supply respectively.
 

KEY OPERATIONAL PERFORMANCE INDICATORS

For the period ended:                        30 Jun 2013   31 Dec 2012   ∆
British Gas residential energy customer      15,674        15,618        0%
accounts (period end, ’000)^1
British Gas services product holdings        8,347         8,402         (1%)
(period end, ’000)
British Gas business energy supply points    912           924           (1%)
(period end, ’000)
Direct Energy residential energy and         5,838         5,856         (0%)
services accounts (period end, ’000)
                                                                          
For the period ended 30 June                 2013          2012          ∆
Direct Energy business energy supply         28.0          23.9          17%
electricity volumes (TWh)
                                                                          
International Upstream gas production        1,696         1,427         19%
(mmth)
International Upstream liquids production    9.8           7.5           31%
(mmboe)
International Upstream total gas and         37.6          30.9          22%
liquids production (mmboe)
UK power generated (TWh)                     10.6          11.1          (5%)
                                                                          
Lost time injury frequency rate (per         0.16          0.24          (33%)
100,000 hours worked)

1. British Gas residential energy customer accounts as at 31 Dec 2012 have
been restated to exclude 38,000
accounts subsequently reclassified as dormant.
 

STATUTORY RESULTS

For the period ended 30 June 2013

  * Operating profit from continuing operations: £1,590m (2012: £1,767m)
  * Profit from continuing operations before taxation: £1,487m (2012: £1,665m)
  * Earnings: £819m (2012: £976m)
  * Basic earnings per ordinary share: 15.8p (2012: 18.9p)

PERFORMANCE OVERVIEW

Remaining competitive by sharpening the business and making the right
investment choices

Centrica delivered a strong operational performance in the first half.
Downstream, we continued to add residential customer accounts, while taking
the lead in innovation, simplicity and transparency to help customers take
control of their energy requirements. Upstream, our assets performed well,
particularly during the prolonged cold weather experienced in the UK this
winter, helping to deliver the energy the country needed. Helping our
customers to keep their homes warm and well-lit is a core responsibility,
alongside our wider contribution through the investments we make, the jobs we
provide and the taxes we pay.

In the UK, affordability remains a key issue for customers and energy
suppliers, as well as for the Government and Regulators. As a result of the
cold weather, residential gas consumption in the first half was substantially
higher than last year, more than offsetting the underlying efficiency savings
delivered through insulation and more efficient boilers. In addition, the unit
cost of gas and electricity was higher in the period compared to 2012 and the
cost of delivering environmental obligations is increasing substantially.

Improving transparency is a core requirement for the industry, helping
consumers understand their bill and empowering them to choose the best deal
for them. We continue to make good progress in simplifying our energy
offering, and have already implemented many of the recommendations set out by
Ofgem in their Retail Market Review. We already publish a breakdown of costs
on all our bills and have introduced a standing charge and single unit tariff
structure, while our unique ‘Tariff Check’, where we contact customers every
six months, enables them to check that they are on the most appropriate tariff
for them. We currently have five tariffs and expect to move down to four, in
line with the Ofgem recommendations, by the end of the year. And for business
customers, in July we announced that we would be the first energy supplier to
commit to ending auto-rollover contracts, an important step in building trust
and ensuring our customers have a transparent choice of products.

We continue to make substantial investments across the Group, organically and
through acquisition. Upstream, we are delivering increased gas and oil
production across our international portfolio, benefiting from the full effect
of acquisitions in the North Sea, and bringing new projects on stream. In
offshore wind, we are on track to complete full commissioning of the £1
billion Lincs offshore wind farm later this year. Downstream, we are
benefiting from enhanced scale in North America following the successful
integration of our recent NYSEG Solutions and Energetix acquisition, while the
recent acquisition of Bounce Energy adds further customers and a leading
internet-based platform. British Gas and Direct Energy both continue to invest
in innovative solutions to help our customers manage their energy
requirements.

In February, recognising the increasingly international nature of worldwide
gas markets, we set out our 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 have already made good progress towards these objectives:

  * Our new management structure is in place, under the leadership of Chris
    Weston for International Downstream and Mark Hanafin for
    International Upstream, both supported by strong teams on each side of the
    Atlantic.
  * Our 20 year North American LNG gas export contract with Cheniere, the
    announcement of the acquisition of further upstream assets in North
    America in partnership with Qatar Petroleum International (QPI), and the
    acquisition of a stake in the licence for UK gas from shale in the Bowland
    Basin all help to secure potentially important sources of gas for the long
    term.
  * Downstream in North America, the acquisition of the Energy Marketing
    business of Hess Corporation makes Direct Energy the largest business gas
    supplier in the Eastern US, and strengthens our position along the gas
    value chain.
  * We have made good progress in delivering organic projects, such as the
    York and Rhyl gas fields and the Lincs offshore wind farm, and we retain
    investment options across the Group, in upstream gas and oil, in power
    generation and in gas storage.
  * We have now bought back over £240 million of shares to date under our £500
    million share repurchase programme, a core indicator of financial
    discipline when set alongside our investment programme – returning surplus
    capital where appropriate.

Our vision is to be the leading integrated energy company, with customers at
its core. We will seek to maintain our competitive edge, continually
sharpening the business and making the right investment choices – for the
benefit of customers and investors. Health and safety remains a key priority
and our lost time injury frequency rate reduced by 33% in the first half of
the year.

OPERATIONAL PERFORMANCE

Innovate to drive growth and service excellence in International Downstream

In the UK, British Gas Residential performed well in the first half. We
increased our residential energy customer base, adding 56,000 accounts,
reflecting the combination of a competitive pricing position and our leading
digital platform.

Against a backdrop of sustained cold weather, average residential gas
consumption was up 13% compared to last year and significantly above seasonal
normal levels, while commodity costs experienced short term volatility as a
result of the increased demand. The business is also facing substantially
higher costs for environmental obligations and network charges. We are working
with local authorities to meet our responsibilities under the new ECO
programme, although it is clear that the costs associated with the programme
will be significantly higher than those under previous environmental
initiatives, reflecting the challenging targets set.

We announced in May that, recognising the economic pressures facing many of
our customers and the impact of the cold weather in the first half, any
benefit arising from increased consumption would be used to maintain our price
competitiveness. In this context, we have absorbed the significant increase in
environmental costs during the period. Full year profitability of the
residential energy supply business is expected to be in line with 2012.

In British Gas Services, we were able to respond well to record numbers of
callouts for boiler breakdowns during the cold weather, although this has
resulted in some additional costs. With economic conditions making the sale of
new products difficult, retention rates remain high, underlining the value our
customers place on the service. We continue to focus on delivering cost
savings, and expect to deliver revenue growth through the targeting of
under-served segments, such as the private rental sector, and through affinity
partnerships.

In British Gas Business, the economic backdrop remains challenging. We have
now commenced the implementation of a new billing system, which is proceeding
to plan and is due to be completed in the first half of 2014. As a result, we
expect to deliver improved service at reduced cost, delivering growth over
time, with B2B services playing an increasingly important role.

In North America, Direct Energy is benefiting from enhanced scale due to
organic growth and acquisitions in the US, and from the move to our new
centralised headquarters in Houston. In Direct Energy Residential, we
experienced the continued decline of our Ontario customer base, as expected,
due to the challenging regulatory environment. However, we continue to deliver
profit growth in the US North East, as we benefit from organic growth and the
full year effect of the NYSEG Solutions and Energetix acquisition. In Direct
Energy Business we are achieving higher volumes, reflecting strong sales
activity in the prior year. Rising gas and power prices in North America have
led to some narrowing of margins in both residential and business energy
supply, but over time this should benefit our upstream activities.

Innovation is central to our activities both in the UK and North America,
enabling customers to take better control of their energy requirements and
offering attractive propositions. We will seek to build on our leading
positions in smart and digital and the recent acquisition of Bounce Energy
will allow us to further develop our online capabilities in North America. We
will look to share our experience across the business to drive growth and
improve retention, maximising the benefit of our combined energy and services
offerings in each market over time.

Good operational performance and disciplined investment in International
Upstream

Operational performance from our international gas and oil portfolio has been
strong in the year to date, and we are on track to deliver a production
increase of nearly 20% for the full year. This includes the impact of
production from the York and Rhyl fields, which both delivered first gas in
the first quarter, and 100% of the production from the acquisition of a
package of Canadian gas assets from Suncor, which is due to be completed
around the beginning of September.

In UK power generation, nuclear output was once again good, following on from
a strong performance in 2012. However the environment for gas-fired generation
remains extremely challenging, with the combination of a well-supplied market
and relatively cheap coal and carbon resulting in our gas-fired power fleet
being loss making. The business also faced the impact of the loss of free
carbon allocations, accounting for much of the decrease in profitability
compared to the prior year.

In UK storage, Rough performed very well during periods of sustained
withdrawal resulting from the unusually cold weather, although market
conditions are challenging, with lower seasonal spreads expected to affect the
profitability of the business in the second half of 2013.

In the first half of the year, Centrica invested over £750 million - around
£500 million of which was in North Sea gas and oil projects - and we have now
fully commissioned 55 out of 75 turbines at our 270MW Lincs offshore wind
farm. For the full year, we expect to invest £1.5 billion organically across
the Group, including around £1 billion in upstream projects such as Cygnus,
Valemon, York and Kew. These investments are important for the UK, helping to
secure long term supplies of gas for our customers and providing jobs. We also
continue to look for opportunities to invest outside the UK where we see
value, as evidenced by the Suncor transaction.

In June, the Government announced proposals for market capacity payments and
for investment in renewables as part of its review of Electricity Market
Reform. We welcomed the announcement that a capacity mechanism would be
introduced, with the first auction expected in 2014. The proposals also
included the draft Contract for Difference strike prices, applicable to
renewable power generation including offshore wind projects and we are
awaiting the final outcome of the consultation to determine the implications
for our Race Bank offshore wind farm project. We also retain the option to
build further offshore wind projects, in partnership with DONG, in the Round 3
Irish Sea zone, and have options for new build gas-fired generation, including
consent to build a 1GW CCGT plant on our existing site at Kings Lynn, subject
to appropriate returns on these projects. In gas storage, we have two
potentially attractive projects, Baird and Caythorpe, although under current
market conditions a support mechanism is likely to be required to underpin
investment in new storage facilities.

Maintaining capital discipline is a core priority. All our investments are
benchmarked against returns to shareholders, and we will return surplus cash
flow to shareholders where appropriate, as evidenced by our current share
repurchase programme. We have also continued to grow the dividend, increasing
it in real terms each year and paying it all in cash. The Board is proposing
an interim dividend of 4.92 pence per share, to be paid on 13 November 2013 to
shareholders on the register on 27 September 2013, in line with our
established practice of paying an interim dividend of 30% of the prior year
full year dividend.

Outlook

Overall the business performed well in the first half of 2013, with earnings
up slightly on the same period in 2012, and subject to weather conditions,
commodity prices and asset performance, we remain on track to deliver earnings
growth in line with expectations for the full year.

Further out, we expect continued organic profit growth in North America and in
UK home services, while we will continue to benefit from the integration of
previous acquisitions. Weak spark spreads will continue to make our UK
gas-fired power stations loss making, and reduced seasonal gas price spreads
will impact the profitability of our UK gas storage activities. However across
the Group we continue to focus on delivering further improvement in service
levels, developing our industry leading propositions and digital platform, and
maintaining tight cost control.

We have a strong balance sheet and a range of investment options. However we
will maintain capital discipline, only investing where we see appropriate
returns - further strengthening the business for the benefit of customers and
shareholders alike.

GROUP FINANCIAL REVIEW

Group revenue was up 14% to £13.7 billion (2012: £12.0 billion). Revenue
increased in British Gas due to higher gas consumption as a result of the
sustained cold weather and the impact on retail prices of higher wholesale gas
and electricity prices. Revenue increased in Centrica Energy, with higher
achieved gas prices and higher gas and liquids production volumes given the
full period impact of North Sea asset purchases completed in 2012. Revenue
increased in Direct Energy, as a result of higher average customer numbers
during the period, increased business gas and power consumption and rising gas
and power 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:

                                                                                                               
                                                       2013                                        2012
                                                                                                   (restated)
                                     Exceptional                                 Exceptional
                       Business      items and         Statutory   Business      items and         Statutory
                                     certain                                     certain
                       performance   re-measurements   result      performance   re-measurements   result
Period ended   Notes   £m            £m                £m          £m            £m                £m
30 June
Adjusted
operating
profit:
British Gas            569                                         563
Direct                 165                                         155
Energy
Centrica               802                                         693
Energy
Centrica               47                                          36                               
Storage
Total
adjusted       5b      1,583                                       1,447
operating
profit
Depreciation
of fair
value
uplifts from    
Strategic
Investments,   3,
before tax     5b,     (51)                                        (52)
               10
Interest and
taxation on
joint
ventures and   5b      (47)                                        (49)                             
associates
Group
operating      6       1,485         105               1,590       1,346         421               1,767
profit
Net finance    7       (103)         -                 (103)       (102)         –                 (102)
cost
Taxation       6, 8    (649)         (19)              (668)       (521)         (168)             (689)
Profit for             733           86                819         723           253               976
the period
Depreciation
of fair
value
uplifts from
Strategic
Investments,
after          10      34                                          30                               
taxation
Adjusted               767                                         753                              
earnings

The Group has applied IAS19 (revised) pensions accounting. As a result, 2012
net finance costs, taxation, earnings and earnings per
share have been restated.
To reflect a new organisational structure, the North American upstream gas
business has been reallocated from Direct Energy to
Centrica Energy.
 

Total adjusted operating profit was up 9% to £1,583 million (2012: £1,447
million). In British Gas, profits were marginally higher. In residential
energy supply, increased wholesale commodity, transportation and environmental
costs broadly offset the impact of higher gas consumption and unit prices.
Cost efficiency measures drove profit growth in residential services, while
challenging market conditions led to a reduction in business energy supply and
services profit.

In Centrica Energy, gas profitability increased due to higher gas and liquids
production and achieved prices more than offsetting increased unit costs in
the gas segment. Profits decreased in the power segment as a result of the
loss of free carbon emissions allowances and lower gas-fired volumes
reflecting low market spark spreads. In Centrica Storage, profits increased,
as the business benefited from a higher 2012/13 Standard Bundled Unit (SBU)
price for the first four months of the year. In Direct Energy profits
increased by 6%, with revenue growth partially offset by increased commodity
costs.

Net finance cost was broadly flat at £103 million (2012: £102 million). The
taxation charge was £649 million (2012: £521 million), reflecting the higher
level of operating profit and an increased proportion of more heavily taxed
upstream gas operating profit, particularly from Norwegian assets. The
adjusted tax charge was £690 million (2012: £568 million) and the resultant
adjusted effective tax rate for the Group was 47% (2012: 43%). An effective
tax rate calculation, split UK and non-UK, is shown in the table below.

Reflecting all of the above, profit after taxation was up 1% to £733 million
(2012: £723 million), and after adjusting for fair value uplifts, adjusted
earnings increased by 2% to £767 million (2012: £753 million). Adjusted basic
earnings per share (EPS) increased to 14.8 pence (2012: 14.6 pence).

                                                                              
                                            2013                       2012
                           UK      Non-UK   Total     UK      Non-UK   Total
Period ended 30 June       £m      £m       £m        £m      £m       £m
Adjusted operating         1,140   443      1,583     1,159   288      1,447
profit
Share of joint
ventures /                 (23)    -        (23)      (24)    -        (24)
associates interest
Net finance cost           (61)    (42)     (103)     (51)    (51)     (102)
Adjusted profit from
continuing                 1,056   401      1,457     1,084   237      1,321
operations before
taxation
Tax on adjusted
profit from                376     273      649       386     135      521
continuing
operations
Tax impact of
depreciation on            15      2        17        20      2        22
Venture fair value
uplift
Share of taxation on
joint ventures /           24      -        24        25      -        25
associates
Adjusted tax charge
from continuing            415     275      690       431     137      568
operations
Adjusted effective         39%     69%      47%       40%     58%      43%
tax rate
                                                                              

The statutory profit for the period was £819 million (2012: £976 million). The
reconciling items between profit from business performance and the statutory
profit are related to certain re-measurements and for 2012 a net £66 million
charge relating to exceptional items. Statutory basic EPS decreased to 15.8
pence (2012: 18.9 pence).

An interim dividend of 4.92 pence per share (2012: 4.62 pence per share) will
be paid on 13 November 2013 to shareholders on the register on 27 September
2013, in line with our established practice of paying an interim dividend of
30% of the prior year’s full year dividend.

Group operating cash flow before movements in working capital was higher at
£2,058 million (2012: £1,681 million), reflecting the contribution from the
2012 Centrica Energy acquisitions. After working capital adjustments, tax,
operational interest, and cash flows associated with exceptional charges, this
stood at £1,411 million (2012: £1,032 million).

The net cash outflow from investing activities was £647 million (2012: £1,443
million), as described in the business combinations and capital expenditure
section below. The decreased outflow reflects lower levels of acquisition
activity during the first half of 2013 compared to 2012 when the Group
acquired North Sea gas and oil assets from Statoil and ConocoPhillips.

The net cash outflow from financing activities was £897 million (2012: inflow
of £888 million). The outflow reflects interest paid, dividends paid and
shares bought under the share repurchase scheme announced in February 2013.
The 2012 inflow reflects the issue of bonds and commercial paper.

Reflecting all of the above, the Group’s net debt at 30 June 2013 was £4,251
million (31 December 2012: £4,047 million; 30 June 2012 £4,341 million).

During the period net assets decreased to £5,864 million (31 December 2012:
£5,927 million), primarily reflecting the impact of shares repurchased more
than offsetting retained earnings for the period.

EXCEPTIONAL ITEMS

No exceptional charges were incurred during the period. In the first half of
2012, a £90 million exceptional restructuring charge was recorded (with a
related tax credit of £24 million), mainly relating to staff reductions
following the Group-wide cost reduction programme announced in 2012.

CERTAIN RE-MEASUREMENTS

As an integrated energy business the Group enters into a number of forward
energy trades to protect and optimise the value of its underlying production,
generation, storage and transportation assets (and similar capacity or
off-take contracts), as well as to meet the future needs of our customers
(downstream demand). A number of these arrangements are considered to be
derivative financial instruments and are required to be fair valued under
IAS39. The Group has shown the fair value adjustments on these commodity
derivative trades separately as certain re-measurements, as they do not
reflect the underlying performance of the business because they are
economically related to our upstream assets, capacity/off-take contracts or
downstream demand, which are typically not fair valued. The operating profit
in the statutory results includes net gains of £105 million (2012: £511
million) relating to these re-measurements. The Group recognises the realised
gains and losses on these contracts in business performance when the
underlying transaction occurs. The profits arising from the physical purchase
and sale of commodities during the period, 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

No material business combinations were completed by the Group during the
period.

On 15 April 2013, Centrica announced that it had agreed to form a partnership
with Qatar Petroleum International and jointly acquire a package of producing
conventional natural gas and crude oil assets and associated infrastructure
located in the Western Canadian Sedimentary Basin from Suncor Energy for
C$1 billion (£650 million). Centrica will own a 60% share in the partnership
and operate the assets. The transaction is expected to complete around the
beginning of September.

On 13 June 2013, the Group acquired a 25% interest in the Bowland exploration
licence in Lancashire from Cuadrilla Resources Ltd and AJ Lucas Group Ltd for
£44 million. The Group will also pay future exploration and appraisal costs of
up to £56 million.

Further details on capital expenditure, business combinations and asset
purchases, and disposals are included in notes 5(d), 15 and 16 respectively.

EVENTS AFTER THE BALANCE SHEET DATE

On 12 July 2013, Direct Energy announced it had agreed to acquire the
Texas-based electricity retailer Bounce Energy for $46 million (£30 million),
plus working capital.

On 30 July 2013, the Group announced it had agreed to acquire the New
Jersey-based Energy Marketing business of Hess Corporation for $731 million
(£478 million) in cash plus net working capital, estimated at approximately
$300 million. The transaction is subject to regulatory approval and is
expected to close later in 2013.

On 2 July 2013, the UK Government substantively enacted the Finance Act 2013
which included reductions in the main UK corporation tax rate to 20% by 1
April 2015. The impact of the rate changes to taxation balances as at 30 June
2013 is estimated to be a reduction to net deferred taxation liabilities of
£57 million.

Full details of all events after the balance sheet date are provided in note
20.

PRINCIPAL RISKS AND UNCERTAINTIES

The Group’s principal risks and uncertainties are largely unchanged from those
set out in its 2012 Annual Report and Accounts. Details of how the Group has
managed financial risks such as liquidity and credit risk are set out in note
4.

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.

The Group has now applied the standard IAS19 (revised): ‘Employee Benefits’
retrospectively in accordance with the transition provisions of that standard.
Further details are provided in note 3.

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 6 and 7.

OPERATING REVIEW

INTERNATIONAL DOWNSTREAM

Against a backdrop of sustained cold weather and periods of higher commodity
prices in the UK, and rising gas and power prices in North America, our
international downstream businesses performed well in the first half of 2013.
We have also made progress in delivering against our strategic priority –
innovate to drive growth and service excellence – with customer growth and
further development of our industry leading digital platforms. The new
management structure is now in place, under the leadership of Chris Weston as
Managing Director of our International Downstream business.

In the UK, our residential energy supply business delivered operating profit
marginally higher than the first half of last year, with the impact of higher
gas consumption as a result of the cold weather broadly offset by higher
commodity prices, network charges and environmental costs, with the Energy
Company Obligation (ECO) programme having commenced in January. A competitive
pricing position, record levels of customer retention and the expansion of new
sales channels, combined with our industry leading online platform, also led
to customer account growth. Our UK business energy supply and services
division continues to be impacted by challenging market conditions and a weak
economy. The economy also continues to have an impact on our residential
services business, however strong retention rates and a continued focus on
costs meant that the business delivered profit growth in the period.

In North America, rising gas and power prices should benefit our upstream
activities over time, but have led to some narrowing of margins in Direct
Energy’s residential and business energy supply divisions. However we are
benefiting from organic profit growth in the US North East and the impact of
previous acquisitions, while business supply volumes also increased compared
to 2012. We have also seen material improvements in the new housing market in
the US, leading to higher revenues and profit in our services residential new
construction division. The acquisitions of Bounce Energy and the Energy
Marketing business of Hess Corporation, both announced in July, represent
further steps towards our aim of doubling the profitability of our North
American downstream business.

The health and safety of our employees and customers remains a core priority.
The lost time injury frequency rate (LTIFR) over the last 12 months was 0.16
per 100,000 hours worked in British Gas (2012: 0.28) and 0.12 per 100,000
hours worked in Direct Energy (2012: 0.16).

British Gas

Higher consumption and environmental costs, account growth in residential
energy supply

Average residential gas consumption was 13% higher than in the first six
months of 2012 as a result of the unusually cold weather, with average
residential electricity consumption up 1%. However the business also incurred
additional costs relating to higher commodity prices and network charges, and
the ECO programme. As a result, profitability in the first half of the year
was only marginally up compared to the same period in 2012, with profitability
for the full year expected to be in line with last year.

The number of customer accounts on supply increased by 56,000 in the first
half of 2013, with record low levels of churn reflecting a competitive pricing
position. The migration of our residential customers onto a new Customer
Relationship Management (CRM) system is progressing well and is expected to be
complete by early 2014. The new system has already led to a reduced call
handling time and will deliver cost efficiencies and enable a more integrated
customer experience.

We have also seen the benefit of our investment in an industry leading digital
platform. A third of our customers are registered online, and we now receive
more customer contact through digital channels than by any other method. A
third of all digital contact is made either through our top rated ‘App’ or our
mobile optimised website, compared to 6% only two years ago. We also have over
5 million customers enrolled in the Nectar programme which incentivises the
use of self-serve.

In June, following an extensive period of consultation, Ofgem announced its
final Retail Market Review recommendations. These are broadly consistent with
previous draft proposals and are a welcome step forward to help make the
household energy market simpler, fairer and more transparent for consumers.
During the first half of the year, we introduced our unique ‘Tariff Check’,
which enables customers to check that they are on the most appropriate tariff
for them and is delivering increased customer engagement. We have already
adopted a standing charge and single unit tariff structure for new customers
and have reduced our number of tariffs to five, with plans to move down to
four, plus our smart meter enabled time of use tariffs, in the second half of
the year.

We continue to help our most vulnerable customers and maintain the widest
eligibility criteria among all energy suppliers for the £130 Warm Home
Discount, which benefited over 500,000 customers during last winter. In the
first half of 2013 we installed 102,000 insulation measures in customers’
homes, over a third of whom were elderly, disabled or most in need. We are
also investing in jobs, with 1,000 apprentices currently in training, and in
February we announced the launch of ‘Transform’, a three year programme to
train over 1,400 young people aged 17 to 25 and equip them with valuable
sustainability skills needed in the ‘green economy’. The programme has been
developed in partnership with Accenture and the environmental behaviour change
charity, Global Action Plan. In May, we were awarded ‘Business of the Year’ at
the Third Sector business charity awards in recognition of our work with Great
Ormond Street Hospital, Shelter, the British Gas Energy Trust and local
charities.

We have now completed all work under the CERT programme and expect to complete
all work under the CESP programme in the next few weeks, although we did not
achieve the target completion date of December 2012 for both schemes. We have
delivered 102 million tonnes of carbon savings over the life of these
programmes. We expect our obligations under ECO, which replaced CERT and CESP
from January, to cost around £1.4 billion until the end of the programme in
March 2015, substantially higher than CERT and CESP. During the first half of
the year we recognised charges of £300 million, having signed agreements with
local communities, and are actively seeking further agreements. We have
secured contracts with over 40 local authorities and housing associations,
including a landmark agreement with Plymouth Community Homes which will result
in insulation for nearly 70% of its housing stock.

We have now installed over one million smart meters for homes and businesses
across the UK. 600,000 of these have been for residential customers,
representing 67% of all UK residential smart meters installed to date. We are
now rolling out ‘SMETS1’ compliant meters and expect to be the first company
to install residential smart meters for prepayment customers. 35,000 customers
are now receiving the ‘Smart Energy Report’, providing visibility of their
energy usage, and we have also recently launched an innovative time of use
tariff exclusively for smart meter customers. Early indications on the
customer experience of smart meters is very positive, with call volumes and
complaints from customers with smart meters 25% and 40% lower respectively
than from standard meter customers, and churn rates substantially lower.

We welcomed the recent announcement from DECC which provided further clarity
on the smart meter roll-out, including the extension of the mandate to 2020.
This, together with the guaranteed enrolment of ‘SMETS1’ compliant meters
installed during foundation and the requirement not to replace a smart meter
with a standard one further enhances our position as the industry leader on
smart.

Strong retention and cost focus in residential services

British Gas Services delivered good operational performance in the first half
of the year, during periods of unusually cold weather. In the first six months
of 2013 we responded to 1.6 million boiler breakdowns, 134,000 more than in
the same period in 2012. Despite this increased workload, service delivery
remains robust, with the average speed to answer improving, and our Net
Promoter Score remaining high. The additional jobs resulted in incremental
costs, however first half profitability was higher than in 2012, reflecting
the benefit of cost savings delivered last year.

The number of customer accounts fell slightly in the first half of 2013.
Customer retention remained strong, with customers recognising the value of
services products during the sustained periods of cold weather, however the
sale of new products remains challenging in the weak economic environment. The
weak economy also continues to impact the central heating installations
business, although sales and installations were both up slightly in the first
half of the year, in part reflecting our leadership position on the ‘Green
Deal’. Our digital platform is becoming increasingly important for the
services business, with digital sales now forming the largest proportion of
our total sales.

During the first half we launched a number of new services propositions, with
packages tailored specifically for landlords and tenants. We also launched
British Gas branded home insurance in partnership with AXA, and have entered
into a new partnership agreement with Nationwide’s ‘buy-to-let’ mortgage arm,
The Mortgage Works, for an exclusive product trial in the Landlord market. We
continue to look for opportunities to develop innovative products such as our
‘Remote Heating Control’ product, with 27,000 sales of the product made to
date and the recent upgrade receiving positive reviews.

Challenging market conditions for business energy supply and services

Market conditions remain challenging for British Gas Business. A tough
economic and competitive environment is putting pressure on margins, while the
number of supply points has reduced slightly, by 12,000, since the start of
the year. Operating profit for the first six months was 16% lower than for the
same period in 2012, with full year profitability also expected to be lower.

A new management team and structure is now in place, and we have started the
implementation of a new billing and CRM system, with customer migration
expected to be completed in the first half of 2014. The new system leverages
previous investment in residential platforms and will result in improved
customer service, at lower cost, which will help to offset the margin
pressures. We also announced in July that we would be the first energy
supplier to commit to ending auto-rollover contracts, ensuring our customers
have a transparent choice of products. We continue to develop our business
services proposition and have secured two major new contracts with Cornwall
Council and a consortium of eight local authorities in the North East of
England, Warm Up North. We have also now signed and commenced work on eight
energy performance contracts. Business services revenue increased by 4% in the
first six months compared to the same period last year, while the secured
pipeline of future work grew by more than 25%.

The new billing system and the development of our business services offering
will, in time, provide a platform for sustainable growth, with improved
service levels and additional products expected to lead to better retention
levels and a broader customer relationship.

Stable operating profit in British Gas

Total British Gas gross revenue increased to £7,912 million
(2012: £7,207 million) reflecting higher retail gas sales volumes as a result
of the cold weather and higher retail gas and electricity prices. Total
British Gas operating profit was broadly flat at £569 million (2012: £563
million). We are on track to deliver £300 million of cost savings across
British Gas by the end of 2013, with the full year impact of 2012 initiatives
coming through this year, and further savings being delivered through
procurement, IT and operational efficiencies. As a result, including the
impact of investment in growth areas, operating costs were broadly flat
compared to the prior period in the first six months, while the bad debt
charge as a proportion of revenue held steady, reflecting previous investment
in systems and a more proactive approach to helping our customers manage their
debt.

In residential energy supply, gross revenue increased to £5,486 million (2012:
£4,807 million) reflecting higher consumption and retail tariffs. Average gas
consumption increased by 13%, reflecting the unusually cold weather, and
average electricity consumption increased by 1%. Despite the higher revenue,
residential energy supply operating profit was only marginally higher at £356
million (2012: £345 million) as operating margin decreased to 6.5% (2012:
7.2%). The increase in revenue was broadly offset by increased commodity and
transportation and distribution costs, and environmental costs which rose by
37% reflecting the impact of ECO and higher renewable obligations.

In residential services, gross revenue was broadly flat at £805 million (2012:
£811 million). Operating profit increased by 8% to £135 million (2012: £125
million) with the operating margin increasing to 16.8% (2012: 15.4%),
primarily reflecting the impact of cost initiatives.

In business energy supply and services, gross revenue increased to £1,621
million (2012: £1,589 million) with operating profit falling by 16% to £78
million (2012: £93 million), reflecting the challenging market and economic
environment.

Total British Gas                                                      
For the period ended 30       H1 2013       H1 2012       Δ%          FY 2012
June
Total customer accounts       24,933        25,176        (1.0)       24,944
(period end) ('000)
Total customer
households (period end)       11,334        11,526        (1.7)       11,379
('000)
Joint product
households (period end)       2,364         2,423         (2.4)       2,393
('000)
Gross Revenue (£m)            7,912         7,207         10          13,857
Operating cost
(excluding bad debt)          688           681           1.0         1,353
(£m)
Operating profit (£m)         569           563           1.1         1,093

H1 2012 residential services customer product holdings have been restated to
exclude the Water Supply Pipe product, which has been incorporated into the
Plumbing and Drains product.
H1 2012 and FY 2012 residential energy supply customer accounts have been
restated to exclude 30,000 and 38,000 accounts respectively, subsequently
reclassified as dormant.
H1 2012 and FY 2012 operating costs have been restated to reflect the
reallocation of certain costs from operating costs to cost of sales.
H1 2012 and FY 2012 total customer households and joint product households
have been restated to reflect a revised alignment of products to households
following the implementation of a new customer database.
 

Residential energy                                                     
supply
For the period ended         H1 2013       H1 2012       Δ%           FY 2012
30 June
Customer accounts                                                    
(period end):
     Gas ('000)              8,846         9,004         (1.8)        8,872
     Electricity             6,828         6,781         0.7          6,746
     ('000)
     Total ('000)            15,674        15,785        (0.7)        15,618
Estimated market share
(%):
     Gas                     39.3          40.8          (1.5)        39.9
                                                         ppts
     Electricity             25.3          25.5          (0.2)        25.1
                                                         ppts
Average consumption
per account:
     Gas (therms)            311           276           13           494
     Electricity (kWh)       1,936         1,919         0.9          3,794
Total consumption:
     Gas (mmth)              2,763         2,515         10           4,460
     Electricity (GWh)       13,146        12,987        1.2          25,683
Gross Revenue (£m):
     Gas                     3,726         3,216         16           5,884
     Electricity             1,760         1,591         11           3,237
     Total                   5,486         4,807         14           9,121
Transmission and
metering costs (£m):
     Gas                     680           651           4.5          1,327
     Electricity             495           438           13           915
     Total                   1,175         1,089         8            2,242
Total environmental          529           385           37           732
costs (£m)
Total social costs           51            60            (15)         89
(£m)
Operating profit (£m)        356           345           3.2          606
Operating margin (%)         6.5           7.2           (0.7)        6.6
                                                         ppts

Total environmental costs include ECO, CERT, CESP, renewable obligations,
carbon, FIT, and LCNF costs. H1 2012 figures have been restated accordingly.
H1 2012 and FY 2012 residential energy supply customer accounts have been
restated to exclude 30,000 and 38,000 accounts respectively, subsequently
reclassified as dormant.
 

Residential services                                                   
For the period ended 30 June     H1 2013     H1 2012     Δ%           FY 2012
Customer product holdings                                            
(period end):
  Central heating service        4,617       4,662       (1.0)        4,663
  contracts ('000)
  Kitchen appliances care        460         470         (2.1)        465
  (no. of customers) ('000)
  Plumbing and drains care       1,711       1,715       (0.2)        1,714
  ('000)
  Home electrical care           1,445       1,451       (0.4)        1,444
  ('000)
  Other contracts ('000)         114         119         (4.2)        116
  Total holdings ('000)          8,347       8,417       (0.8)        8,402
Domestic central heating         46          44          4.5          94
installations ('000)
Gross Revenue (£m):
  Central heating service        411         404         1.7          839
  contracts
  Central heating                121         121         0.0          258
  installations
  Other                          273         286         (4.5)        577
  Total                          805         811         (0.7)        1,674
Operating profit (£m)            135         125         8            312
Operating margin (%)             16.8        15.4        1.4 ppts     18.6

H1 2012 residential services customer 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 period ended         H1 2013       H1 2012       Δ%          FY 2012
30 June
Customer supply points                                              
(period end):
     Gas ('000)              317           343           (8)         322
     Electricity             595           631           (6)         602
     ('000)
     Total ('000)            912           974           (6)         924
Average consumption
per account:
     Gas (therms)            1,480         1,581         (6)         2,737
     Electricity (kWh)       14,651        13,507        8           27,521
Total consumption:
     Gas (mmth)              472           541           (13)        940
     Electricity (GWh)       8,756         8,529         2.7         17,110
Gross Revenue (£m):
     Gas                     531           571           (7)         1,014
     Electricity             980           912           7           1,841
     Business services       110           106           3.8         207
     Total                   1,621         1,589         2.0         3,062
Transmission and
metering costs (£m):
     Gas                     79            93            (15)        178
     Electricity             225           197           14          409
     Total                   304           290           4.8         587
Operating profit (£m)        78            93            (16)        175
Operating margin (%)         4.8           5.9           (1.1)       5.7
                                                         ppts
                                                                              

Direct Energy

The North American energy retail businesses delivered good operational
performance in the first half of the year, against a backdrop of rising gas
and power prices, resulting in some narrowing of margins. Total revenue
increased to £3,191 million (2012: £2,763 million), reflecting volume growth
and higher wholesale prices, while operating profit increased by 6% to £165
million (2012: £155 million), in part reflecting a continued focus on cost
reduction initiatives.

Narrowing of margins offsetting US North East growth in residential energy
supply

Operating profit for Direct Energy Residential in the first six months of the
year was broadly flat compared to the same period last year, reflecting
improved volumes in the US North East and Alberta, offset by some narrowing of
margins in the Texas market and the continued decline of the Ontario customer
base as a result of the Energy Consumer Protection Act (ECPA). Subject to
normal weather conditions in the second half, profitability for the full year
is expected to increase compared to 2012, reflecting a continued focus on
sales efficiency and churn reduction, and further operational cost management
and consolidation.

The number of residential energy accounts reduced slightly over the first six
months, to 3.4 million, with customer losses in part reflecting the decline in
Ontario and a highly competitive sales environment. The Ontario energy supply
business is no longer core to our operations, and for the full year we expect
it to contribute only 5% of total residential energy supply operating profit,
compared to 20% in 2012. We also saw a small drop in our regulated customer
base in Alberta, which was partially offset by growth in our higher margin
competitive customer base in the region as customers moved to more
competitively priced retail products. This resulted in higher profitability
overall in Alberta.

In the US North East, the number of accounts was broadly flat in the first
half, with improved retention rates. We are experiencing some margin
compression in a competitive sales environment, however we are also benefiting
from cost efficiencies and the acquisition last year of Energetix and NYSEG
Solutions, with the integration of the acquired customers onto our systems now
complete.

In Texas, churn levels also improved, reflecting further improved levels of
customer service, although rising power prices have impacted margins. We are
also in the process of launching our ‘Free Electricity Saturdays’ product in
Texas, following the success of a similar product in the US North East. In
July, we announced that we had reached an agreement to acquire the independent
Texas-based electricity retailer, Bounce Energy, for $46 million (£30
million). The acquisition will add 80,000 accounts to our Texas customer base,
and provides a leading internet-based digital and e-commerce platform for
marketing innovative products and online account management. Over time, this
leading digital platform should aid residential customer growth in all our
core regions, in both energy and services.

Gross revenue in residential energy supply was up 8% to £1,308 million (2012:
£1,210 million). Operating profit was £99 million (2012: £101 million) and
operating margin decreased to 7.6% (2012: 8.3%), reflecting the impact of
narrowing margins.

Further volume growth in business energy supply, offset by a narrowing of
margins

In Direct Energy business, total electricity and total gas volumes both
increased by 17% in the first half of 2013 compared to the first half of 2012,
reflecting good sales performance in 2012. However the market is increasingly
competitive in the large commercial segment, while the rising wholesale gas
and power prices have put some pressure on margins. Sales were also lower due
to customers delaying purchasing decisions. In the small business segment
churn levels have improved and we continue to gain market share in this key
growth market.

In July we announced that we had agreed to acquire the New Jersey-based Energy
Marketing business of Hess Corporation for $731 million (£478 million). Hess’
Energy Marketing business is one of the largest B2B energy suppliers in the US
North East and following completion of the transaction, Direct Energy will
become the largest business gas supplier on the East Coast of the US and the
second largest business electricity supplier in the competitive US retail
markets. The acquisition builds on Direct Energy’s existing capabilities and
further integrates these activities along the gas value chain, linking gas
supply from producers and other market participants through secured transport
and storage capacity to the gas and power customer base.

The business energy supply division now includes power generation and
midstream activities. Power generation volumes from our equity owned
facilities in Texas were down compared to the same period last year,
reflecting longer planned maintenance outages and lower off-peak power prices,
limiting overnight generation. Gross revenue in business energy supply
increased by 24% to £1,609 million (2012: £1,300 million), reflecting volume
growth and the impact of higher wholesale commodity prices on retail prices.
Operating profit increased by 23% to £53 million (2012: £43 million), with the
operating margin flat at 3.3% (2012: 3.3%).

Contract growth in residential and business services

Direct Energy Services continued to gain market share in the first half of
2013, with the number of accounts increasing by 40,000 since the start of the
year. This in part reflects progress made on the development of our protection
plan offering, following the acquisition of Home Warranty of America in 2012,
and we now have nearly 100,000 whole-home warranty plans, up from 70,000 at
the time of the acquisition. We are also leveraging a more diverse sales
channel mix and franchisee expansion, as well as entering new geographic
markets.

Improved optimism in the US economy has seen a revival in new housing starts,
which are up almost 20% compared to the same period last year and we have
expanded our share of this market, with sales in our residential new
construction business up 27% compared to 2012. We have also increased our
number of franchise territories by 8%, adding 43 in the first half of 2013. We
continue to focus on building greater scale in our Direct Energy Residential
footprint, which over time should further enhance cross-sell activities.

Direct Energy Services continued to deliver high levels of customer service,
with NPS remaining high at 60. Gross revenue in residential and business
services increased by 8% to £274 million (2012: £253 million), while operating
profit increased to £13 million (2012: £11 million), reflecting revenue growth
and cost control.

Total Direct Energy                                                     
For the period              H1 2013        H1 2012        Δ%           FY 2012
ended 30 June
Total residential
energy and services         5,838          5,630          3.7          5,856
accounts (period
end) ('000)
Gross revenue (£m)          3,191          2,763          15           5,684
Operating profit            165            155            6            310
(£m)
To align with a new organisational structure, the North American Upstream Gas
business is now reported in Centrica Energy and the North American Power and
Midstream & Trading businesses are now reported in Direct Energy Business
energy supply. Prior period comparatives have been restated accordingly.
                                                                     
Residential energy                                                      
supply
For the period              H1 2013        H1 2012        Δ%           FY 2012
ended 30 June
Customer accounts           3,397          3,240          4.8          3,455
(period end) ('000)
Gross revenue (£m)          1,308          1,210          8            2,357
Operating profit            99             101            (2.0)        156
(£m)
Operating margin            7.6            8.3            (0.7)        6.6
(%)                                                       ppts
                                                                        
Business energy                                                         
supply
For the period              H1 2013        H1 2012        Δ%           FY 2012
ended 30 June
Gas sales (mmth)            494            421            17           793
Electricity sales           27,999         23,935         17           51,378
(GWh)
Gross revenue (£m)          1,609          1,300          24           2,795
Operating profit            53             43             23           121
(£m)
Operating margin            3.3            3.3            0.0          4.3
(%)                                                       ppts
                                                                        
Residential and                                                         
business services
For the period              H1 2013        H1 2012        Δ%           FY 2012
ended 30 June
Contract
relationships               2,441          2,390          2.1          2,401
(period end) ('000)
On demand and
installation jobs           350            310            12.9         670
('000)
Gross revenue (£m)          274            253            8            532
Operating profit            13             11             18           33
(£m)
Operating margin            4.7            4.3            0.4          6.2
(%)                                                       ppts
H1 2012 On demand and installation jobs have been restated to reflect
management reporting.
 

Direct Energy with H1 2012 restated to remove effect of foreign exchange
movements
For the period                               H1 2013       H1 2012       Δ%
ended 30 June
Gross revenue                                                           
(£m)
                     Residential             1,308         1,228         7
                     energy supply
                     Business energy         1,609         1,395         15
                     supply
                     Residential and         274           258           6
                     business services
Direct Energy                                3,191         2,881         11
gross revenue
Operating profit
(£m)
                     Residential             99            102           (2.9)
                     energy supply
                     Business energy         53            44            20
                     supply
                     Residential and         13            12            8
                     business services
Direct Energy                                165           158           4.4
operating profit
2012 figures restated at 2013 weighted average exchange rate.
 

INTERNATIONAL UPSTREAM

Delivering on our refreshed strategic priorities

International Upstream performed well in the first half of the year, with
strong gas and oil production and good nuclear generation, together with good
operational performance from our gas-fired power stations. We now operate our
gas and oil business across our international portfolio, under the leadership
of Mark Hanafin, enabling us to maximise the opportunities within the existing
portfolio and to direct capital where we see the most attractive value. We
have made significant progress towards our refreshed strategic priority - to
integrate our natural gas business, linked to our core markets - having
announced three key transactions: the North American LNG export agreement with
Cheniere; the acquisition of a package of producing conventional gas and oil
assets in Alberta from Suncor; and the acquisition of a 25% interest in the
Bowland shale exploration license from Cuadrilla Resources and AJ Lucas.

International Upstream operating profit for the first six months of the year
increased by 16% to £802 million (2012: £693 million), with gas operating
profit increasing, reflecting higher production volumes and achieved prices,
and power profit decreasing, predominantly reflecting the loss of free carbon
allowances and continued low market clean spark spreads. Health and Safety
remains one of our core priorities and we had no significant process safety
events in the first half of 2013, while the LTIFR over the past 12 months fell
to 0.18 (2012: 0.21).

Increased gas and oil production

Total gas and liquids production for the first six months of the year was
consistently good, increasing by 22% to 37.6mmboe (2012: 30.9mmboe). Total gas
production volumes increased by 19% to 1,696 million therms (mmth)
(2012: 1,427mmth) and total liquids volumes increased by 31% to 9.8mmboe
(2012: 7.5mmboe). This predominantly reflected the benefit of three North Sea
acquisitions completed in 2012. We delivered first production from our York
and Rhyl fields in the first quarter, and we are now also seeing production
from our Ensign and Seven Seas fields which came on-stream in 2012, albeit at
lower flow rates than originally expected.

Production from the acquisitions has been in line with our investment case and
as a result, production from our Norwegian assets more than doubled in the
first six months of the year. Production from Norway contributed 33% of the
total in the first half of the year, compared to 19% in 2012. We are now less
reliant on Morecambe, with production from the East Irish Sea contributing 16%
of the total in the first half, compared to 20% in 2012. Total North America
production declined by 10% to 4.7mmboe in the first six months of 2013
(2012: 5.2mmboe) as we delayed drilling in the low gas price environment.

The low gas price makes acquisitions in North America relatively attractive
compared to the UK, where costs are increasing. In April we announced the
acquisition of a package of producing conventional gas and crude oil assets in
the Western Canadian Sedimentary Basin from Suncor for C$1 billion (£650
million), in partnership with QPI. The acquisition will be made through a
newly formed partnership owned by Centrica (60%) and QPI (40%), and is the
first transaction made under the Memorandum of Understanding signed between
the two parties in 2011. The assets acquired include proven and probable (2P)
reserves of 978 billion cubic feet equivalent (bcfe) and are expected to
produce around 15mmboe in 2013. We expect to fully consolidate the results
from the assets, and taking into account 100% of production and an expected
completion date around the beginning of September, total gas and liquids
volumes from our international portfolio are expected to increase by nearly
20% in 2013, compared to 2012.

Grow and diversify our E&P portfolio for value

We are progressing our development projects towards production. Having
achieved first gas at York and Rhyl in the first quarter of the year, we have
brought a second well at York into production and a further well is currently
being drilled. In the Greater Markham hub, first gas from Kew is scheduled by
the end of 2013, subject to rig availability, and we have now approved the
development of a sidetrack well at Grove, which is expected to produce first
gas in 2014. The Statoil-operated Valemon project is proceeding as planned,
while Cygnus remains on track to bring 53mmboe of reserves into production by
the end of 2015. On our Block 22 project in Trinidad and Tobago we are
currently drilling two wells to firm up the resource base, while reviewing
development and partnership options for gas export.

In exploration and appraisal, drilling at the Rodriguez well in Norway in
January confirmed the presence of gas condensate, while drilling at Whitehaven
in the East Irish Sea in February confirmed a satellite field adjacent to the
Rhyl reservoir. In June, Centrica Energy was awarded a 50% operating share in
the Scarecrow prospect, its first licence in the Barents Sea, in the 22^nd
round of licences announced by Norway’s Energy Ministry.

In June we announced that we had acquired a 25% interest in the Bowland shale
exploration license in Lancashire from Cuadrilla Resources and AJ Lucas for
£44 million. This provides an attractive opportunity to explore the potential
for natural gas from shale in the UK, while utilising our expertise as a
responsible operator and developer of UK gas resources. We welcomed the
Government’s announcement in July concerning tax allowances relating to shale
gas, although much remains to be done to determine its commercial viability in
the UK.

Develop our midstream business to integrate along the gas value chain

Our midstream business made further progress in the first half of the year,
linking our positions along the gas value chain in our core markets of the UK,
Europe and North America. In March, we announced a 20 year agreement with
Cheniere to purchase 91,250,000 mmbtu (89 billion cubic feet) per annum of
liquefied natural gas (LNG) volumes for export from the Sabine Pass
liquefaction plant in Louisiana in the United States. The project remains
subject to regulatory approvals being achieved for the fifth train, including
Federal Energy Regulatory Commission clearance. In early April the export
licence application was filed with the US Department of Energy, with a target
date for first commercial delivery of September 2018. The contract marks an
important step in delivering our new strategy, as we look to link our
positions across the gas value chain and invest in new sources of gas on both
sides of the Atlantic, where we see attractive opportunities.

Higher gas and liquids volumes and achieved prices more than offsetting higher
costs

International gas profitability increased by 32% to £683 million for the first
six months of the year (2012: £519 million), reflecting higher production
volumes and higher achieved prices. The average achieved gas sales price,
including production from North America, increased by 19% to 55.7 pence per
therm (p/th) (2012: 46.9p/th) while the average achieved oil and condensate
price increased by 5% to £63.7 per boe (2012: £60.5/boe). On a per unit of
production basis, depletion, depreciation and amortisation (DDA) costs
increased by 32% in the period to £11.9/boe (2012: £9.0/boe), reflecting a
move in production mix towards more recently developed higher cost fields.
Unit lifting and other cash production costs increased by 12% to £12.2/boe
(2012: £10.9/boe), due to the timing of maintenance shut downs, a move in
production mix towards higher cost fields and industry cost inflation.

Maintain a low carbon power hedge and invest where we see value

Our 20 per cent equity share of the output from the nuclear fleet for the
first six months was 5.8 terawatt hours (TWh) (2012: 6.0TWh), reflecting more
planned outages during the period and a number of small unplanned losses
towards the end of the period. The average achieved nuclear price in the first
half of 2013 was £52.1/MWh (2012: 49.2/MWh), reflecting the increase in the
baseload power market price and the impact of hedging.

The market environment remains challenging for gas-fired plant, with continued
low market clean spark spreads. Gas-fired generation volumes fell by 8% in the
first six months of this year to 4.5TWh (2012: 4.9TWh), with the average load
factor falling slightly to 27% (2012: 28%). Against this challenging
environment, reliability remained high for our gas-fired fleet, at 99% (2012:
97%), enabling running at peak times, while we have been successful in
minimising our costs and running the plants as efficiently as possible. Our
gas-fired stations at Barry, Brigg and Peterborough have been awarded
contracts by the National Grid as part of its Short Term Operating Reserve
(STOR) market, all running until the end of the first quarter of 2015, with
Brigg awarded a two-year contract, Peterborough awarded a ‘follow-on’ contract
when the current arrangement finishes in 2014 and Barry awarded a one-year
contract starting in April 2014.

Availability of our wind assets for the first six months of 2013 was 84%
(2012: 84%), with generated volumes up 18% to 290 gigawatt hours (GWh) (2012:
246 GWh) and a load factor of 33% (2012: 29%), reflecting output from the
Lincs wind farm, where we have now fully commissioned 55 out of 75 turbines.
Lincs is expected to become fully operational during the second half of the
year.

Power profitability decreased by 32% to £119 million (2012: £174 million)
predominantly reflecting losses from our CCGT fleet, following the loss of
free carbon allowances and continuing weak market conditions. Nuclear
profitability increased slightly, with a higher achieved average sales price
offsetting slightly lower production and higher costs.

Offshore wind and CCGT investment options retained

In February this year 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. We
also took the decision to dispose of our stake in the Braes of Doune onshore
wind farm in June, realising a £29 million profit on disposal. However we
retain a number of investment options in offshore wind and in CCGTs. In June,
the Government announced further details of the draft Contract for Difference
strike prices applicable to renewable power generation, including offshore
wind projects. We are awaiting the final outcome of the consultation, to
determine the implications for our Race Bank offshore wind farm. We also have
a joint venture partnership with Dong, to co-develop the Round 3 Irish wind
farm zone. A final investment decision is not expected on the first Round 3
project until at least 2016.

In February we sanctioned a further turbine blade upgrade at our 1.2GW South
Humber CCGT power station, which will improve the efficiency of the plant and
this work will be undertaken in 2014. We welcomed the DECC announcement that a
capacity mechanism would be introduced, with the first auction expected in
2014. We have consent for 1GW of new build CCGT at our existing site at Kings
Lynn and we are also exploring the option to repower the existing plant.

Total Centrica Energy                                                
For the period ended 30 June      H1 2013     H1 2012     Δ%        FY 2012
Operating profit (£m)             802         693         16        1,251
                                                                  
International Gas                                                    
For the period ended 30 June      H1 2013     H1 2012     Δ%        FY 2012
Gas production volumes (mmth)
      East Irish Sea              344         362         (5)       740
      Other UK and Netherlands    541         480         13        883
      Norway                      436         176         148       557
      North America               252         279         (10)      549
      Trinidad & Tobago           123         130         (5)       261
      Total                       1,696       1,427       19        2,990
Liquids production volumes
(mmboe)
      UK and Netherlands          3.5         3.9         (10)      7.4
      Norway                      5.8         3.0         93        8.9
      North America               0.5         0.6         (17)      1.1
      Total                       9.8         7.5         31        17.4
Total gas and liquids             37.6        30.9        22        66.8
production volumes (mmboe)
Average gas sales price           55.7        46.9        19        49.0
(p/therm)
Average liquids sales price       63.7        60.5        5         61.7
(£/boe)
DDA costs (£/boe)                 11.9        9.0         32        9.3
Lifting and other cash            12.2        10.9        12        12.4
production costs (£/boe)
Exploration and appraisal         47          33          42        143
costs (£m)
Operating profit (£m)             683         519         32        940
To align with a new organisational structure, the North American Upstream
Gas business is now reported in Centrica Energy. Prior period comparatives
have been restated accordingly.
Lifting and other cash production costs include all cash costs except
exploration and appraisal costs and the impact of underlift/overlift. Prior
period comparatives have been restated accordingly.
                                                                              
UK Power                                                             
For the period ended 30 June      H1 2013     H1 2012     Δ%        FY 2012
Power generated (GWh)
      Gas-fired                   4,531       4,906       (8)       8,952
      Renewables                  290         246         18        533
      Nuclear                     5,763       5,954       (3.2)     12,004
      Total                       10,584      11,106      (4.7)     21,489
Achieved Clean Spark Spread       10.0        10.3        (2.9)     10.7
(£/MWh)
Achieved power price
(including ROCs) (£/MWh) -        104.3       99.2        5         105.7
renewables
Achieved power price (£/MWh) -    52.1        49.2        6         49.6
nuclear
Operating profit (£m)
      Gas-fired                   (64)        (4)         nm        (4)
      Renewables                  36          45          (20)      58
      Nuclear                     122         118         3.4       237
      Midsteam and trading        25          15          67        20
Power operating profit            119         174         (32)      311
                                                                              

CENTRICA STORAGE

Strong operational performance during a period of record withdrawal volumes

Centrica Storage performed very well in the first half of the year, with the
Rough asset making an important contribution to the UK’s security of supply
during a sustained period of cold weather that continued into March and April.
Operating performance was strong, with Rough achieving reliability of 97% over
the first half (2012: 95%).

The high demand for withdrawals due to the protracted winter in the UK
resulted in the Net Reservoir Volume (NRV) reaching record low levels in
April. As temperatures returned to normal in mid-April, customers switched to
injection and we experienced record injection rates during the second half of
April. However NRV levels were still below the five year average at the end of
June.

Health and safety remains a core priority and Centrica Storage continues to
progress its process safety programme. We recorded our first lost time
incident in more than three years in March, and have reinforced our drive for
continuous improvement in health and safety across the business.

Forward seasonal spreads remain narrow

In April, Centrica Storage announced that it had sold all SBUs for the 2013/14
storage year at an average price of 23.3p, compared to 33.9p for 2012/13. This
reflects the relatively low summer/winter price differentials seen over the
previous 12 months.

Operating profit expected to be weighted towards the first half

Gross revenue increased by 18% in the first half of 2013 to £107 million
(2012: £91 million). This reflects an increase in the average SBU price over
the period to 30.3p (2012: 28.1p), the impact of the additional revenue
arising following the commissioning of the York gas processing terminal and
strong optimisation performance. This was partially offset by volume related
costs driven by the high levels of drawdown and costs associated with the York
terminal. As a result, operating profit for the first half increased by 31% to
£47 million (2012: £36 million). Profitability in the second half of 2013 is
expected to reduce materially reflecting the lower 2013/14 achieved SBU price,
and for the full year operating profit is expected to be lower than 2012. In
this challenging economic environment we remain focused on operating
efficiencies whilst continuing to invest to ensure the safe on-going operation
of Rough.

Challenging conditions for new projects

We retain options to invest in two gas storage projects, Baird and Caythorpe.
Continued low levels of summer/winter price differentials, combined with an
uncertain longer term outlook, mean that market conditions remain challenging
for these opportunities. As with all our investment options, we will only
invest where we see appropriate returns that reflect the level of risk
undertaken and our Baird project in particular may require a support mechanism
to underpin investment. We are currently awaiting the results of DECC’s review
into possible intervention mechanisms to encourage new storage investment.

Total Centrica Storage                                                  
For the period ended 30           H1 2013       H1 2012       Δ%       FY 2012
June
Average SBU price (in             30.3          28.1          8        31.0
period) (pence)
Gross Revenue (£m)
      Standard SBUs               69            64            8        141
      Other                       38            27            41       61
      Total                       107           91            18       202
Operating profit (£m)             47            36            31       89
                                                                        
                                                                        

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the Interim Results for the six
month period ended 30 June 2013 in accordance with applicable law, regulations
and accounting standards. In preparing the condensed interim Financial
Statements, the Directors are responsible for ensuring that they give a true
and fair view of the state of affairs of the Group at the end of the period
and the income or loss of the Group for that period.

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

  * An indication of the important events that have occurred during the first
    six months and their impact on the condensed interim Financial Statements,
    and a description of the principal risks and uncertainties for the
    remaining six months of the financial year; and
  * Material related party transactions in the first six months of the year
    and any material changes in the related party transactions described in
    the last annual report.

The Directors of Centrica plc are listed in the Group’s 2012 Annual Report and
Accounts. A list of current Directors is maintained on the Centrica plc
website which can be found at www.centrica.com.

By order of the Board        
                               
Sam Laidlaw                   Nick Luff
31 July 2013                  31 July 2013
Chief Executive               Group Finance Director
                               

INDEPENDENT REVIEW REPORT TO CENTRICA PLC

Introduction

We have been engaged by the company to review the condensed interim Financial
Statements in the Interim Results for the six months ended 30 June 2013, which
comprise the Group Income Statement, Group Statement of Comprehensive Income,
Group Statement of Changes in Equity, Group Balance Sheet, Group Cash Flow
Statement and related notes. We have read the other information contained in
the Interim Results and considered whether it contains any apparent
misstatements or material inconsistencies with the information in the
condensed set of Financial Statements.

Directors’ responsibilities

The Interim Results are the responsibility of, and have been approved by, the
Directors. The Directors are responsible for preparing the Interim Results in
accordance with the Disclosure and Transparency Rules of the United Kingdom's
Financial Conduct Authority.

As disclosed in note 2, the annual Financial Statements of the Group are
prepared in accordance with IFRSs as adopted by the European Union. The
condensed set of Financial Statements included in the Interim Results has been
prepared in accordance with International Accounting Standard 34, "Interim
Financial Reporting", as adopted by the European Union.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed
set of Financial Statements in the Interim Results based on our review. This
report, including the conclusion, has been prepared for and only for the
company for the purpose of the Disclosure and Transparency Rules of the
Financial Conduct Authority and for no other purpose. We do not, in producing
this report, accept or assume responsibility for any other purpose or to any
other person to whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.

Scope of review

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

Conclusion

Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of Financial Statements in the Interim Results
for the six months ended 30 June 2013 are not prepared, in all material
respects, in accordance with International Accounting Standard 34 as adopted
by the European Union and the Disclosure and Transparency Rules of the United
Kingdom's Financial Conduct Authority.

PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
31 July 2013
 

Notes    
        The maintenance and integrity of the Centrica plc website is the
        responsibility of the Directors; the work carried out by the auditors
(i)     does not involve consideration of these matters and, accordingly, the
        auditors accept no responsibility for any changes that may have
        occurred to the Financial Statements since they were initially
        presented on the website.
        Legislation in the United Kingdom governing the preparation and
(ii)    dissemination of financial information may differ from legislation in
        other jurisdictions.
         

GROUP INCOME STATEMENT

                                                                                                       
                                                                                                      2012
Six months ended                                           2013                                      
30 June                                                                                               (restated)
                                                                                                      (i)
                                         Exceptional                                Exceptional
                           Business      items and         Results    Business      items and         Results
                                         certain           for                      certain           for
                           performance   re-measurements   the        performance   re-measurements   the period
                                                           period
                   Notes   £m            £m                £m         £m            £m                £m
                                                                                                       
Group revenue      5(a)    13,651        –                 13,651     11,977        –                 11,977
Cost of sales
before
exceptional
items
and certain
re-measurements            (10,886)      –                 (10,886)   (9,445)       –                 (9,445)
^(i)
Re-measurement
of energy          6(b)    –             104               104        –             513               513
contracts
Cost of sales              (10,886)      104               (10,782)   (9,445)       513               (8,932)
Gross profit               2,765         104               2,869      2,532         513               3,045
Operating costs
before                     (1,332)       –                 (1,332)    (1,244)       –                 (1,244)
exceptional
items ^(i)
Exceptional        6(a)    –             –                 –          –             (90)              (90)
items
Operating costs            (1,332)       –                 (1,332)    (1,244)       (90)              (1,334)
Share of
profits/(losses)
in joint
ventures
and associates,    6(b),
net of interest    13(a)   52            1                 53         58            (2)               56
and taxation
Group operating    5(b)    1,485         105               1,590      1,346         421               1,767
profit
Investment         7       26            –                 26         31            –                 31
income ^(i)
Financing costs    7       (129)         –                 (129)      (133)         –                 (133)
^(i)
Net finance cost           (103)         –                 (103)      (102)         –                 (102)
Profit before              1,382         105               1,487      1,244         421               1,665
taxation
Taxation           8       (649)         (19)              (668)      (521)         (168)             (689)
Profit for the             733           86                819        723           253               976
period
                                                                                                       
Earnings per                                               Pence                                      Pence
ordinary share
Basic ^(i)         10                                      15.8                                       18.9
Diluted ^(i)       10                                      15.7                                       18.8
Interim dividend
proposed/paid      9                                       4.92                                       4.62
per
ordinary share
Prior period
final dividend     9                                       11.78                                      11.11
paid per
ordinary share
(i) See notes 3a) and 3b).
The notes on pages 27 to 43 form part of these condensed interim Financial Statements.
 

GROUP STATEMENT OF COMPREHENSIVE INCOME

                                                                 
Six months ended 30 June                            2013        2012
                                                                (restated) (i)
                                                    £m          £m
Profit for the period ^(i)                          819         976
Other comprehensive (loss)/income
Items that will be or have been                                  
recycled to the Group Income Statement:
Gains on revaluation of                             –           2
available-for-sale securities
Taxation on revaluation of                          –           4
available-for-sale securities
                                                    –           6
Gains/(losses) on cash flow hedges                  2           (2)
Transferred to income and expense on                12          42
cash flow hedges
Transferred to assets and liabilities               (1)         1
on cash flow hedges
Exchange differences on cash flow                   1           6
hedges
Taxation on cash flow hedges                        (4)         (12)
                                                    10          35
Exchange differences on translation of              42          (39)
foreign operations
Share of other comprehensive
income/(loss) of joint ventures and                 12          (7)
associates, net of taxation
                                                    64          (5)
Items that will not be recycled to the                           
Group Income Statement:
Net actuarial (losses)/gains on defined             (198)       47
benefit pension schemes ^(i)
Taxation on net actuarial
(losses)/gains on defined benefit                   48          (10)
pension schemes
                                                    (150)       37
Share of other comprehensive loss of
joint ventures and associates, net of               (15)        (17)
taxation
Other comprehensive (loss)/income, net              (101)       15
of taxation
Total comprehensive income for the                  718         991
period
(i) See notes 3a) and 3b).
The notes on pages 27 to 43 form part of these condensed interim Financial
Statements.
 

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
2013 (as        321       929       4,511      (434)           600      5,927
previously
reported)
Effect of
adoption of
IAS 19          –         –         (325)      325             –        –
(revised
2011) ^(i)
1 January
2013            321       929       4,186      (109)           600      5,927
(restated)
Total
comprehensive   –         –         819        (101)           –        718
income
Employee        –         2         (6)        –               35       31
share schemes
Purchase of
treasury        –         –         –          –               (213)    (213)
shares
Dividends       –         –         (611)      –               –        (611)
Taxation        –         –         –          –               14       14
Exchange        –         –         –          –               (2)      (2)
adjustments
30 June 2013    321       931       4,388      (210)           434      5,864
                                                                         
                                               Accumulated
                                               other
                Share     Share     Retained   comprehensive   Other    Total
                capital   premium   earnings   income/(loss)   equity   equity
                £m        £m        £m         £m              £m       £m
1 January
2012 (as        319       874       4,043      (238)           602      5,600
previously
reported)
Effect of
adoption of
IAS 19          –         –         (297)      297             –        –
(revised
2011) ^(i)
1 January
2012            319       874       3,746      59              602      5,600
(restated)
Total
comprehensive   –         –         976        15              –        991
income
Employee        1         44        13         –               (19)     39
share schemes
Dividends       –         –         (576)      –               –        (576)
Taxation        –         –         –          –               5        5
Exchange        –         –         –          –               1        1
adjustments
30 June 2012    320       918       4,159      74              589      6,060
(restated)
(i) See note 3a).
The notes on pages 27 to 43 form part of these condensed interim Financial
Statements.
 

GROUP BALANCE SHEET

                                                                 
                                               30 June          31 December
                                               2013             2012
                                                                (restated) (i)
                                 Notes         £m               £m
Non-current assets
Goodwill                                       2,603            2,543
Other intangible assets                        1,723            1,579
Property, plant and                            7,934            7,965
equipment
Interests in joint ventures                    2,673            2,721
and associates
Deferred tax assets                            212              183
Trade and other receivables                    60               55
Derivative financial                           246              313
instruments
Securities                       11(a)         200              199
Retirement benefit assets        14(c)         171              254
                                               15,822           15,812
Current assets
Inventories                                    421              545
Current tax assets                             56               54
Trade and other receivables                    4,442            4,335
Derivative financial                           292              268
instruments
Securities                       11(a)         11               7
Cash and cash equivalents        11(a)         800              931
                                               6,022            6,140
Total assets                                   21,844           21,952
Current liabilities
Trade and other payables                       (4,267)          (4,545)
Current tax liabilities                        (605)            (594)
Bank overdrafts, loans and       11            (674)            (566)
other borrowings ^(i)
Derivative financial                           (474)            (615)
instruments
Provisions for other                           (223)            (266)
liabilities and charges
                                               (6,243)          (6,586)
Net current liabilities                        (221)            (446)
Non-current liabilities
Trade and other payables                       (127)            (26)
Bank overdrafts, loans and       11            (4,728)          (4,762)
other borrowings ^(i)
Derivative financial                           (302)            (327)
instruments
Deferred tax liabilities                       (1,882)          (1,678)
Provisions for other                           (2,456)          (2,480)
liabilities and charges
Retirement benefit               14(c)         (242)            (166)
obligations
                                               (9,737)          (9,439)
Net assets                                     5,864            5,927
                                                                 
Equity
Share capital                                  321              321
Share premium                                  931              929
Retained earnings ^(i)                         4,388            4,186
Accumulated other                              (210)            (109)
comprehensive loss ^(i)
Other equity                                   434              600
Total equity                                   5,864            5,927
(i) See notes 3a) and 3b).
The notes on pages 27 to 43 form part of these condensed
interim Financial Statements.
                                                                 

GROUP CASH FLOW STATEMENT

                                                                      
                                                             2013    2012
Six months ended 30 June                             Notes   £m      £m
Cash generated from operations                       12      1,944   1,480
Income taxes paid                                            (286)   (181)
Petroleum revenue tax paid                                   (115)   (102)
Interest received                                            –       2
Payments relating to exceptional charges                     (132)   (167)
Net cash flow from operating activities                      1,411   1,032
Purchase of businesses net of cash and cash                  (2)     (74)
equivalents acquired
Sale of businesses net of cash and cash                      5       27
equivalents disposed of
Purchase of intangible assets                        5(d)    (174)   (291)
Purchase of property, plant and equipment            5(d)    (615)   (1,109)
Disposal of property, plant and equipment and                6       5
intangible assets
Investments in joint ventures and associates                 (34)    (120)
Dividends received from joint ventures and                   103     37
associates
Repayments of loans to, and disposal of                      59      36
investments in, joint ventures and associates
Interest received                                            11      21
(Purchase)/sale of securities                        11(a)   (6)     25
Net cash flow from investing activities                      (647)   (1,443)
Issue of ordinary share capital                              2       23
Purchase of treasury shares                          10      (203)   –
Sale/(purchase) of own shares                                7       (7)
Financing interest paid                                      (116)   (74)
Cash inflow from additional debt                     11(a)   72      1,533
Cash outflow from payment of capital element of      11(a)   (15)    (14)
finance leases
Cash outflow from repayment of other debt            11(a)   (37)    (15)
Net cash flow from increase in debt                          20      1,504
Realised net foreign exchange gain on cash                   –       13
settlement of derivative contracts
Equity dividends paid                                        (607)   (571)
Net cash flow from financing activities                      (897)   888
Net (decrease)/increase in cash and cash                     (133)   477
equivalents
Cash and cash equivalents at 1 January                       931     479
Effect of foreign exchange rate changes                      2       (2)
Cash and cash equivalents at 30 June                         800     954
Included in the following lines of the Balance
Sheet:
Cash and cash equivalents                            11(a)   800     995
Bank overdrafts, loans and other borrowings                  –       (41)
                                                             800     954
The notes on pages 27 to 43 form part of these condensed interim Financial
Statements.
                                                                              

NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS

1. General information

Centrica plc is a Company domiciled and incorporated in the UK. The address of
the registered office is Millstream, Maidenhead Road, Windsor, Berkshire, SL4
5GD. The Company has its listing on the London Stock Exchange.

These condensed interim Financial Statements for the six months ended 30 June
2013 were authorised for issue in accordance with a resolution of the Board of
Directors on 31 July 2013. These condensed interim Financial Statements do not
comprise statutory accounts within the meaning of Section 434 of the Companies
Act 2006. Statutory accounts for the year ended 31 December 2012 were approved
by the Board of Directors on 27 February 2013 and delivered to the Registrar
of Companies. The report of the auditors on those accounts was unqualified,
did not contain an emphasis of matter paragraph and did not contain any
statement under Section 498 of the Companies Act 2006. The financial
information contained in these condensed interim Financial Statements is
unaudited. The Group Income Statement, Group Statement of Comprehensive
Income, Group Statement of Changes in Equity and Group Cash Flow Statement for
the interim period to 30 June 2013, and the Group Balance Sheet as at 30 June
2013 and related notes have been reviewed by the auditors and their report to
the Company is set out on page 21.

2. Basis of preparation

These condensed interim Financial Statements for the six months ended 30 June
2013 have been prepared in accordance with the Disclosure and Transparency
Rules of the Financial Conduct Authority and with IAS 34: ‘Interim financial
reporting’, as adopted by the European Union. These condensed interim
Financial Statements should be read in conjunction with the annual Financial
Statements for the year ended 31 December 2012, which have been prepared in
accordance with International Financial Reporting Standards as adopted by the
European Union.

Preparation of interim statements requires management to make judgements,
estimates and assumptions that affect the application of policies and reported
amounts of assets and liabilities, income and expense. Actual amounts may
differ from these estimates. In preparing these condensed interim Financial
Statements, the significant judgements, estimates and assumptions made by
management in applying the Group’s accounting policies were the same as those
applied in the annual Financial Statements for the year ended 31 December
2012.

After making enquiries, the Board has a reasonable expectation that the Group
has adequate resources to continue in operational existence for the
foreseeable future. For this reason, the Board continues to adopt the going
concern basis in preparing the condensed interim Financial Statements. Further
details of the Group’s liquidity position and going concern review are
provided in note 4 of these condensed interim Financial Statements.

3. Accounting policies

The accounting policies applied in these condensed interim Financial
Statements are consistent with those of the annual Financial Statements for
the year ended 31 December 2012, as described in those annual Financial
Statements, with the exception of standards, amendments and interpretations
effective in 2013 and other presentational changes as detailed below. Taxes on
income in the interim period are accrued using tax rates that would be
applicable to expected total annual earnings for each relevant source of
income.

(a) Standards, amendments and interpretations effective in 2013

(i) IAS 19 (revised)

IAS 19 (revised): ‘Employee benefits’  amends the accounting for employee
benefits. The Group has applied the standard retrospectively in accordance
with the transition provisions and the comparatives have been restated
accordingly. The impact on the Group has been as follows:

  * The standard replaces the interest cost on the defined benefit obligation
    and the expected return on plan assets with a net interest cost, based on
    the net defined benefit asset or liability and the discount rate, measured
    at the beginning of the year. This has increased the income statement
    charge with an equal and offsetting movement in other comprehensive income
    (actuarial gains and losses).
  * Investment income has been reduced by £23 million for the six months ended
    30 June 2013, reduced by £14 million for the six months ended 30 June 2012
    and reduced by £26 million for the year ended 31 December 2012.
  * Profit after tax has been reduced by £18 million for the six months ended
    30 June 2013, reduced by £14 million for the six months ended 30 June 2012
    and reduced by £28 million for the year ended 31 December 2012.
  * As at 1 January 2012 and 1 January 2013, retained earnings have been
    reduced by £297million and £325 million respectively. The actuarial gains
    and losses reserve increased by the same amounts to reflect the
    retrospective application.
  * Basic and diluted earnings per share (‘EPS’) have been reduced by 0.4
    pence for the six months ended 30 June 2013 and by 0.2 pence for the six
    months ended 30 June 2012. For the year ended 31 December 2012 the effect
    was a reduction of 0.6 pence on basic and 0.5 pence on diluted EPS. The
    effect on adjusted basic and adjusted diluted EPS was to reduce EPS by 0.4
    pence for the six months ended 30 June 2013 and by 0.2 pence for the six
    months ended 30 June 2012. For the year ended 31 December 2012 the effect
    was a reduction of 0.5 pence on adjusted basic and 0.6 pence on adjusted
    diluted EPS.

(ii) Amendment to IAS 1

‘Amendment to IAS 1: Presentation of financial statements - Presentation of
items of other comprehensive income’. The Group has applied this amendment
retrospectively and the comparatives have been represented accordingly. Within
the Group statement of comprehensive income, items are now separated into
‘Items that will be or have been recycled to the Group Income Statement’ and
‘Items that will not be recycled to the Group Income Statement’.

(iii) IFRS 10, 11 and 12

IFRS 10: ‘Consolidated financial statements’, IFRS 11: ‘Joint arrangements’,
IFRS 12: ‘Disclosures of interests in other entities’, and subsequent
revisions to IAS 27: ‘Separate financial statements’ and IAS 28: ‘Investments
in associates and joint ventures’ are new and revised standards that are
mandatory for adoption in 2014 for EU endorsed IFRS reporters. The Group has
not yet adopted these standards in these interim statements but is continuing
to assess the impact and whether it will early adopt in the full year
financial statements for 2013.

(iv) IFRS 13

IFRS 13: ‘Fair value measurement’ has measurement and disclosure requirements
that are applicable for the December 2013 year-end onwards. The Group has
included the IFRS 13 (and IFRS 7) disclosures required by IAS 34 para 16a(j)
in note 4.

There are no other IFRSs or IFRIC interpretations that are effective for the
first time for the current financial period that have had a material impact on
the Group.

(b) Other presentational changes

(i) Presentation of sales commissions and prepayment customer vending fees

Where there is a specific link to revenue generation, the Group has
reclassified sales commissions paid to brokers or agents (or similar
arrangements) and prepayment customer vending fees, from operating costs to
cost of sales.

The effect has been to reduce operating costs and increase cost of sales by
£87 million for the six months ended 30 June 2013, by £82 million for the six
months ended 30 June 2012 and by £164 million for the 12 months ended 31
December 2012. The prior period comparatives have been restated accordingly.

(ii) Current/non-current classification of interest accruals

The Group has reclassified the interest accruals on bank overdrafts, loans and
other borrowings from non-current liabilities to current liabilities because
the amounts are due for payment within 12 months.

The effect has been to increase current liabilities and reduce non-current
liabilities by £139 million as at 30 June 2013 and by £94 million as at 31
December 2012. The prior period comparatives have been restated accordingly.

(iii) Presentation of gains and losses on revaluations in financing costs

The Group has represented fair value gains and losses on its derivatives and
hedges on a net basis within financing costs because it aids comparability
with prior periods. Historically such gains and losses were recognised gross
within financing costs and investment income.

The effect has been to reduce financing costs and reduce investment income by
£190 million for the six months ended 30 June 2013, by £89 million for the six
months ended 30 June 2012 and by £166 million for the 12 months ended 31
December 2012. The prior period comparatives have been restated accordingly.

(c) Centrica specific accounting measures

Use of adjusted profit measures

The Directors believe that reporting adjusted profit and adjusted earnings per
share measures provides additional useful information on business performance
and underlying trends. These measures are used for internal performance
purposes. The adjusted measures in this report are not defined terms under
IFRS and may not be comparable with similarly titled measures reported by
other companies.

The measure of operating profit used by management to evaluate segment
performance is adjusted operating profit. Adjusted operating profit is defined
as operating profit before:

  * exceptional items;
  * certain re-measurements;
  * depreciation resulting from fair value uplifts to property, plant and
    equipment (PP&E) on the acquisition of Strategic Investments;

but including:

  * the Group’s share of the results of joint ventures and associates before
    interest and taxation.

Note 5(b) contains an analysis of adjusted operating profit by segment and a
reconciliation of adjusted operating profit to operating profit after
exceptional items and certain re-measurements.

Adjusted earnings is defined as earnings before:

  * exceptional items, net of taxation;
  * certain re-measurements, net of taxation; and
  * depreciation of fair value uplifts to PP&E on the acquisition of Strategic
    Investments, net of taxation.

A reconciliation of earnings is provided in note 10.

The Directors have determined that for Strategic Investments it is important
to separately identify the earnings impact of increased depreciation arising
from the acquisition-date fair value uplifts made to PP&E over their useful
economic lives. As a result of the nature of fair value assessments in the
energy industry the value attributed to strategic assets is a subjective
judgement based on a wide range of complex variables at a point in time. The
subsequent depreciation of the fair value uplifts bears little relationship to
current market conditions, operational performance or underlying cash
generation. Management therefore reports and monitors the operational
performance of Strategic Investments before the impact of depreciation on fair
value uplifts to PP&E and the segmental results are presented on a consistent
basis. The Group has two Strategic Investments for which reported profits have
been adjusted due to the impact of fair value uplifts. These Strategic
Investments relate to the 2009 acquisitions of Venture Production plc
(‘Venture’), the operating results of which are included within the ‘Centrica
Energy – Gas’ segment and of the 20% interest in Lake Acquisitions Limited
(‘British Energy’), which owned the British Energy Group, the results of which
are included within the 'Centrica Energy – Power’ segment.

(i) Venture

Significant adjustments have been made to the acquired PP&E to report the
acquired oil and gas field interests at their acquisition-date fair values
which are subsequently depreciated through the Group Income Statement over
their respective useful economic lives using the unit of production method.

Whilst the impact of unwinding the PP&E at their acquisition-date fair values
is included in overall reported profit for the period, the Directors have
reversed the earnings impact of the increased depreciation and related
taxation resulting from fair value uplifts to the acquired oil and gas
interests in order to arrive at adjusted profit from operations after
taxation.

(ii) British Energy

The 20% interest in British Energy is accounted for as an investment in an
associate using the equity method. The Group reports its share of the
associate’s profit or loss, which is net of interest and taxation, within the
Group Income Statement.

The most significant fair value adjustments arising on the acquisition of the
20% investment in British Energy relate to the fair value uplifts made to the
British Energy nuclear power stations to report the PP&E at their
acquisition-date fair values and fair value uplifts made to British Energy’s
energy procurement contracts and energy sales contracts to report these at
their acquisition-date fair values.

Whilst the impact of increased depreciation and related taxation through
unwinding the fair value uplifts to the nuclear power stations is included in
the share of associate’s post-acquisition result within the overall reported
Group profit for the period, the Directors have reversed these impacts in
arriving at adjusted profit from operations for the period. The impact of
unwinding the acquisition-date fair values attributable to the acquired energy
procurement and energy sales contracts is included within certain
re-measurements.

Exceptional items and certain re-measurements

The Group reflects its underlying financial results in the ‘business
performance’ column of the Group Income Statement. To be able to provide
readers with this clear and consistent presentation, the effects of ‘certain
re-measurements’ of financial instruments, and ‘exceptional items’, are
reported separately in a different column in the Group Income Statement and
are separately identified in segmental note 5(b).

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

Primarily because some of these trades include terms that permit net
settlement (i.e. they are prohibited from being designated as ‘own use’), the
rules within IAS 39: ‘Financial instruments’ require them to be individually
fair valued. Fair value movements on these commodity derivative trades do not
reflect the underlying performance of the business because they are
economically related to our upstream assets, capacity/off-take contracts or
downstream demand, which are typically not fair valued. Therefore, these
certain re-measurements are reported separately and are subsequently reflected
in business performance when the underlying transaction or asset impacts
profit or loss.

The arrangements discussed above and reflected as certain re-measurements are
all managed separately from proprietary energy trading activities where trades
are entered into speculatively for the purpose of making profits in their own
right. These proprietary trades are included in the business performance
column (i.e. in the results before certain re-measurements).

Exceptional items are those items which are of a non-recurring nature and, in
the judgement of the Directors, need to be disclosed separately by virtue of
their nature, size or incidence. Again, to ensure the business performance
column reflects the underlying results of the Group, these exceptional items
are also reported in a separate column in the Group Income Statement. Items
which may be considered exceptional in nature include disposals of businesses,
business restructurings, significant onerous contract charges and asset
write-downs.

Disposals of equity stakes in wind farm developments

The Group’s wind farm strategy is to realise value, share risk and reduce our
capital requirements as individual projects develop, which may include
bringing in partners at an appropriate stage. Profits and losses arising on
disposal of equity stakes in these developments are reported within the
‘business performance’ column as part of the ‘Centrica Energy – Power’
segment.

(d) Update to critical accounting judgements in applying the Group’s
accounting policies

Energy Company Obligation

The Energy Company Obligation (‘ECO’) order requires UK-licensed energy
suppliers to improve the energy efficiency of domestic households from 1
January 2013. Targets are set in proportion to the size of historic customer
bases and must be delivered by 31 March 2015. The Group continues to judge
that it is not legally obligated by this order until 31 March 2015.
Accordingly, the costs of delivery are recognised as incurred, when cash is
spent or unilateral commitments made resulting in obligations that cannot be
avoided. During the period, the Group has entered into a number of contractual
arrangements and commitments, and issued a public statement to underline its
commitment, to deliver a specific proportion of the ECO requirements.
Consequently, the Group’s result includes the costs of these contractual
arrangement and commitment obligations.

4. Risk management and financial instruments

(a) Risk management

During the period financial risk management was overseen by the Group
Financial Risk Management Committee (GFRMC) according to objectives, targets
and policies set by the Board. Commodity price risk management is carried out
in accordance with individual business unit Financial Risk Management
Committees and their respective financial risk management policies, as
approved by the GFRMC under delegated authority of the Board. The Financing &
Treasury policy, which includes management of currency risk, interest rate
risk, equity price risk and liquidity risk, is approved by the Board. The
wholesale credit risks associated with commodity trading and treasury
positions are managed in accordance with the Group’s credit risk policy.
Downstream credit risk management is carried out in accordance with individual
business unit credit policies.

(i) Commodity price risk management

During the six months ended 30 June 2013, the Group continued to be exposed to
commodity price risk in its upstream assets, energy procurement contracts,
downstream and proprietary energy trading activities. Specific limits are used
to manage the exposure to commodity prices associated with the Group’s
activities to an acceptable level. Volumetric limits are supported by Profit
at Risk (PaR) and Value at Risk (VaR) metrics in the UK and in North America
to measure the Group’s exposure to commodity price risk. Limits are also set
on PaR and VaR measurements as a further control over exposure to market
prices.

The Group measures and manages the commodity price risk associated with the
Group’s entire energy procurement, upstream and downstream portfolio. Only
certain of the Group’s energy procurement, upstream and downstream contracts
constitute financial instruments under IAS 39.

The net gain of £105 million from operations during the six months ended 30
June 2013 (six months ended 30 June 2012: £511 million) on the re-measurement
of energy contracts included within Group operating profit largely represents
the unwinding of mark-to-market positions created by gas and power purchase
contracts which were priced above the current wholesale market value of energy
at the start of the period, partially offset by the impact of wholesale market
price movements during the period. These balance sheet mark-to-market
positions are calculated with reference to forward energy prices and therefore
the extent of the economic gain or loss arising over the life of these
contracts is uncertain, and entirely dependent upon the level of future
wholesale energy prices. Generally, subject to short-term balancing, the
ultimate net charge to cost of sales will be consistent with the price of
energy agreed in these contracts and the fair value adjustments will reverse
as the energy is supplied over the life of the contract.

(ii) Credit risk management

During the six months ended 30 June 2013, counterparty credit exposure issues
remained a focal point within Centrica and the Group continues to be vigilant
in managing counterparty risks in accordance with its approved financial risk
management policies. The economic environment continues to impact the markets
in which the Group is active, however the Group has not altered its rating
thresholds for counterparty credit limits and continues to operate within its
limits. In the US and UK, there is a continuing emphasis on understanding the
impact of regulatory changes which may result in an increase in trading over
exchanges or via zero threshold margined contracts. This helps to reduce
counterparty credit risk, but carries increased liquidity requirements.

(iii) Liquidity risk management and going concern

The Group has a number of treasury and risk policies to monitor and manage
liquidity risk. Cash forecasts identifying the Group’s liquidity requirements
are produced regularly and are stress-tested for different scenarios,
including, but not limited to, reasonably possible increases or decreases in
commodity prices and the potential cash implications of a credit rating
downgrade. The Group seeks to ensure that sufficient financial headroom exists
for at least a 12-month period to safeguard the Group’s ability to continue as
a going concern. It is the Group's policy to maintain committed facilities
and/or available surplus cash resources of at least £1,200 million, to raise
at least 75% of its net debt (excluding non-recourse debt) in the long-term
debt market and to maintain an average term to maturity in the recourse
long-term debt portfolio greater than five years.

At 30 June 2013, the Group held £800 million (31 December 2012: £931 million)
of cash and cash equivalents and had undrawn committed credit facilities of
£3,444 million (31 December 2012: £3,029 million). 123% (31 December 2012:
130%) of the Group’s net debt has been raised in the long-term debt market and
the average term to maturity of the long-term debt portfolio was 12.3 years
(31 December 2012: 12.6 years). The Group’s high level of available cash
resources and undrawn committed bank borrowing facilities has enabled the
Directors to conclude that the Group has sufficient headroom to continue as a
going concern.

The Group holds cash as collateral against counterparty balances and also
pledges cash as collateral, principally under margin calls, to cover exposure
to mark-to-market positions on certain wholesale commodity contracts.
Generally, cash paid or received as collateral is interest-bearing and is free
from any restriction over its use by the holder.

The table below summarises the cash collateral balances and associated
movements for the Group’s businesses:

                                                                       
                                                          2013        2012
                                                                     
                                                          £m          £m
Cash pledged as collateral at 1 January                   (102)       (219)
Net cash (outflow)/inflow                                 (2)         132
Foreign exchange movements                                (6)         3
Cash pledged as collateral at 30 June                     (110)       (84)
                                                                       

Also during the period, the Group pledged £29 million of non-current
securities as collateral against an index-linked swap maturing on 16 April
2020.

(b) Financial instruments

(i) Fair value of financial assets and liabilities held at fair value

Financial assets and financial liabilities measured and held at fair value are
classified into one of three categories, known as hierarchy levels, which are
defined according to the inputs used to measure fair value as follows:

  * Level 1: Fair value is determined using observable inputs that reflect
    unadjusted quoted market prices for identical assets and liabilities.
  * Level 2: Fair value is determined using significant inputs that may be
    directly observable inputs or unobservable inputs that are corroborated by
    market data.
  * Level 3: Fair value is determined using significant unobservable inputs
    that are not corroborated by market data and may be used with internally
    developed methodologies that result in management’s best estimate of fair
    value.

                                                                          
30 June 2013                                                            
                                           Level 1   Level 2   Level 3   Total
                                           £m        £m        £m        £m
Financial assets
Derivative financial instruments:
Energy derivatives                         37        231       48        316
Interest rate derivatives                  –         167       –         167
Foreign exchange derivatives               –         55        –         55
Treasury gilts designated at fair          128       –         –         128
value through profit or loss
Debt instruments                           62        –         2         64
Equity instruments                         13        –         6         19
Total financial assets                     240       453       56        749
Financial liabilities
Derivative financial instruments:
Energy derivatives                         (42)      (469)     (114)     (625)
Interest rate derivatives                  –         (34)      –         (34)
Foreign exchange derivatives               –         (117)     –         (117)
Total financial liabilities                (42)      (620)     (114)     (776)
                                                                          

There were no significant transfers between Level 1 and Level 2 during the
period. The reconciliation
of the Level 3 fair value measurements during the period is as follows:

                                                                    
                                                                   2013
                                                       Financial   Financial
                                                       assets      liabilities
                                                       £m          £m
Level 3 financial instruments
1 January                                              147         (157)
Total realised and unrealised (losses)/gains           (65)        37
recognised in Income Statement
Transfers from Level 3 to Level 2                      (26)        6
30 June                                                56          (114)
Total (losses)/gains for the period recognised
within certain re-measurements                         (55)        37
for Level 3 financial instruments held at the end of
the reporting period ^(i)
(i) No gains or losses were recognised in other comprehensive income during
the period.
 

The Group’s policy is to recognise transfers in and transfers out of fair
value hierarchy levels as of the date of the event or change in circumstances
that caused the transfer. The transfers from Level 3 to Level 2 occur when the
commodity market prices used in the valuation move from being internally
derived to being quoted in an active market.

(ii) Valuation techniques used to derive Level 2 and 3 fair values and Group
valuation processes

Level 2 interest rate derivatives and foreign exchange derivatives comprise
interest rate swaps and forward foreign exchange contracts. Interest rate
swaps are fair valued using forward interest rates extracted from observable
yield curves. Forward foreign exchange contracts are fair valued using forward
exchange rates that are quoted in an active market.

Level 2 energy derivatives are fair valued by comparing and discounting the
difference between the expected contractual cashflows for the relevant
commodities and the quoted prices for those commodities in an active market.

For Level 3 energy derivatives, the main input used by the Group pertains to
deriving expected future commodity prices in markets that are not active as
far into the future as some of our contractual terms. Fair values are then
calculated by comparing and discounting the difference between the expected
contractual cash flows and these derived future prices.

Because the Level 3 energy derivative valuations involve the prediction of
future commodity market prices, sometimes a long way into the future,
reasonably possible alternative assumptions for gas, power, coal, emissions or
oil prices may result in a higher or lower fair value for Level 3 financial
instruments. Given the relative size of these fair values, it is unlikely that
the impact of these reasonably possible changes would be significant when
judged in relation to the Group’s profit and loss or total asset value.

It should be noted that the fair values disclosed in the tables above only
concern those contracts entered into which are within the scope of IAS 39. The
Group has numerous other commodity contracts which are outside of the scope of
IAS 39 and are not fair valued. The Group’s actual exposure to market rates is
constantly changing as the Group’s portfolio of energy contracts changes.

The Group’s valuation process includes specific teams of individuals that
perform valuations of the Group’s derivatives for financial reporting
purposes, including Level 3 valuations. The Group has an independent team that
derives future commodity price curves based on available external data and
these prices feed in to the energy derivative valuations. The price curves are
subject to review and approval by the Group’s Investment Sub-Committee and
valuations of all derivatives, together with other contracts that are not
within the scope of IAS 39, are also reviewed regularly as part of the overall
risk management process.

(iii) Fair value of financial assets and liabilities held at amortised cost

The carrying value of the Group’s financial assets and liabilities measured at
amortised cost are approximately equal to their fair value except as listed
below:

                                                                    
                                       30 June                     31 December
                                       2013                        2012
                                                      Carrying     (restated)
                                                                   (i)
                          Carrying     Fair           value        Fair value
                          value        value
                          £m           £m             £m           £m
Bank overdrafts and       (358)        (390)          (367)        (388)
loans
Bonds                     (4,463)      (4,930)        (4,483)      (5,119)
Obligations under         (284)        (315)          (299)        (337)
finance leases
(i) See note 3b).
                                                                    

5. Segmental analysis

(a) Revenue                                                         
                                                                   2012
Six months ended                      2013                         (restated)
30 June                                                            (i)
                            Less                         *Story
                    Gross   inter-               Gross   too
                                                         large*

[TRUNCATED]
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