CNA: Centrica plc: Final Results

  CNA: Centrica plc: Final Results

UK Regulatory Announcement

LONDON

Centrica plc

Preliminary Results for the year ended 31 December 2013

Group results and highlights

RICK HAYTHORNTHWAITE, CENTRICA CHAIRMAN

“The opportunity to chair Centrica is a great privilege. It is a company with
a deep heritage and relevance to the UK, supplying energy or services to over
11 million of the country’s homes, employing over 30,000 people in the UK, and
with a responsibility to pension funds and over 700,000 individual
shareholders. Our vision remains to be the leading integrated energy company
with customers at its core, and our scale is of great benefit to the UK as we
secure the future energy needs of our customers. In an increasingly
international gas market, our interests and those of our customers remain
inextricably linked.”

RICK HAYTHORNTHWAITE
Chairman
20 February 2014

SOLID YEAR ON YEAR EARNINGS IN DIFFICULT MARKET CONDITIONS

Adjusted financial figures
for the year ended 31           2013             2012            Change
December
Operating profit                £2,695m          £2,743m         (2%)
Taxation charge                  £1,022m           £1,112m          (8%)
Effective tax rate               43%               45%              (2ppt)
Earnings                         £1,370m           £1,378m          (1%)
Basic earnings per share         26.6p             26.6p            0%
Full year dividend per           17.0p             16.4p            4%
share
Group capital and                £2,565m           £2,727m          (6%)
acquisition expenditure
Lost time injury frequency
rate (per 100,000 hours         0.11             0.20            (45%)
worked)
The Group has applied IAS19 (revised) pensions accounting. As a result, 2012
net finance costs, taxation, earnings and earnings per share have been
restated

GOOD STRATEGIC PROGRESS, HELPING SECURE FUTURE GAS SUPPLIES FOR THE UK

  *Group wide £500 million cost reduction programme completed
  *Engaging with all stakeholders to improve understanding and rebuild trust
  *£14 billion of new gas supply agreements signed with Cheniere and
    Qatargas, taking the Group’s gas and power supply commitments to over £60
    billion
  *£2.6 billion invested in the year, including:

       *Over £1.5billion of organic investments, predominantly in North Sea
         E&P, including in major projects such as Cygnus
       *C$1 billion Canadian upstream gas acquisition, in partnership with
         Qatar Petroleum International
       *The acquisition of a 25% stake in the Bowland shale exploration
         licence in the UK
       *$1.2 billion Hess Energy Marketing acquisition, delivering a
         step-change in North America B2B
       *£650 million of divestments of selected E&P assets, UK wind assets
         and US power stations, for value

  *Adding value through 56mmboe of organic reserve additions, principally in
    Norway, however £699million pre-tax (£318 million post-tax) exceptional
    impairments of UK Southern North Sea projects and existing Canadian gas
    assets
  *£420 million share repurchase programme in 2014 following sale of Texas
    CCGTs; recommending a 4% increase in the full year dividend to 17.0 pence
    per share

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 12, 13 and 14. Statutory operating profit is £1,892 million (2012:
£2,625 million). Statutory profit before taxation is £1,649 million (2012:
£2,416 million). Statutory earnings are £950million (2012: £1,245 million),
including post-tax exceptional items of £667million (£1,064 million before
tax) relating to an onerous contract charge on Rijnmond, E&P impairment
charges and UK gas storage impairment and provision charges. Statutory basic
EPS is 18.4p (2012:24.0p).

NEW TARGETS FOR EACH AREA OF THE BUSINESS

  *Overall, 2014 trading is in line with recent market forecasts, other than
    a one-off impact from extreme weather conditions in Direct Energy, with
    Group adjusted EPS for the year expected to be lower than in 2013
  *New targets set, creating a platform for long term, sustainable growth,
    both downstream and upstream
  *Targeting a return to account growth in UK residential energy and
    services, following a 2% decline in 2013
  *Aiming to achieve industry leading, high quality service for all our
    customers
  *Efficiency and cost reduction programmes across the Group
  *Selective investment, concentrating on the most attractive opportunities

       *Reducing organic E&P capital expenditure by approximately 20% to
         around £900 million per year on average over the next three years
       *Limited UK power investment against a backdrop of losses in gas-fired
         generation

SAM LAIDLAW, CENTRICA CHIEF EXECUTIVE

“We have made good strategic progress across the Group in 2013, investing
along the gas value chain to secure long term, affordable energy supplies for
our customers. We have completed strategic reviews in both British Gas and
Direct Energy, and introduced new management structures. These will help us
deliver consistent, high quality customer service, reduce costs and drive
growth through innovation. In Centrica Energy, we entered into a number of key
strategic transactions to drive long term growth and we also added reserves
from the drill-bit, mainly in Norway.

Recently we have seen unprecedented focus on the energy sector in the UK, with
intense political and media scrutiny at a time when many customers have faced
declining real disposable income. In British Gas, we have simplified our
energy product range to just four residential tariffs, we have made further
improvements to the transparency of our reporting, and we were the first
energy company to reduce retail tariffs following proposed changes to the ECO
programme.

Market conditions are set to remain challenging in 2014 with margin pressures
and unusual weather patterns on both sides of the Atlantic, rising unit costs
in the North Sea and weak economics for gas storage and gas-fired power
generation. However in the short term, we are focused in our downstream
businesses on improving service levels, reducing costs and returning to growth
through innovation, technology and customer propositions. Upstream, we will
continue to drive efficiencies and will be increasingly selective in our
investments, focusing on the projects that offer the best returns and the
lowest political risk. The acquisitions we announced in 2013 are performing
well and together with the positive action we are taking across the Group,
position Centrica well for the future, for the benefit of both customers and
shareholders.”

SAM LAIDLAW
Chief Executive
20 February 2014

ENQUIRIES

Investors and Analysts:  Andrew Page                01753 494 900
                          email:                      ir@centrica.com
Media:                    Greg Wood / Sophie Fitton   0800 107 7014
                          email:                      media@centrica.com

Interviews with Rick Haythornthwaite (Chairman), Sam Laidlaw (Chief
Executive), Nick Luff (Group Finance Director) and Chris Weston (International
Downstream Managing Director) are available on www.centrica.com.

Divisional results and highlights

INTERNATIONAL DOWNSTREAM

British Gas: Focus on service, efficiency and innovation

Adjusted operating profit
for the year ended 31             2013            2012           Change
December
Residential energy supply         £571m           £606m          (6%)
(BGR)
Residential services (BGS)         £318m            £312m           2%
Business energy supply and        £141m           £175m          (19%)
services (BGB)
Total British Gas                 £1,030m         £1,093m        (6%)
                                                              
Performance indicators for        2013            2012           Change
the year ended 31 December
Residential energy customer        15,256           15,618          (2%)
accounts (year end, ’000) ^1
Residential services product       8,227            8,402           (2%)
holding (year end, ’000)
Business energy supply            912             924            (1%)
points (year end, ’000)
1. British Gas residential energy customer accounts as at 31 December 2012
have been restated to exclude 38,000 accounts subsequently classified as
dormant

  *Strategic review complete; new organisational structure in place
  *Aiming to deliver industry leading, high quality service for both
    residential and business customers
  *BGR operating profit down due to higher commodity and non-commodity costs,
    with warm weather towards the end of the year resulting in an 18% decline
    in operating profit in the second half of the year compared to 2012

       *Targeting a return to customer account growth, following a 2% decline
         in 2013, helped by our January 2014 price reduction and the
         introduction of new fixed price propositions
       *Simplified product range to four residential tariffs; further
         improvements in transparency of reporting
       *First energy supplier to reduce retail tariffs in 2014, following
         proposed ECO changes

  *BGS benefited from cost reduction initiatives

       *Targeting a return to customer account growth, leveraging our
         insurance capabilities and developing differentiated propositions
         such as Hive

  *BGB operating profit down as a result of difficult trading environment and
    the ending of auto roll-over of contracts for the benefit of customers

       *£100 million cost reduction programme underway to improve
         competitiveness
       *Implementation of new billing system proceeding to plan

Direct Energy: Enhanced scale in deregulated markets

Adjusted operating profit
for the year ended 31           2013             2012           Change
December
Residential energy supply       £163m            £156m          4%
(DER)
Business energy supply           £77m              £121m           (36%)
(DEB)
Residential and business        £36m             £33m           9%
services (DES)
Total Direct Energy             £276m            £310m          (11%)
                                                             
Performance indicators
for the year ended 31           2013             2012           Change
December
Residential energy
customer accounts (year          3,360             3,455           (3%)
end, ’000)
Residential services
product holding (year            2,608             2,401           9%
end, ’000)
Business energy supply           1,839             793             132%
gas volumes (mmth)
Business energy supply          63.9             51.4           24%
electricity volumes (TWh)
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

  *Strategic review complete, new organisational structure in place
  *Overall Direct Energy profitability down, reflecting challenging market
    conditions leading to a narrowing of energy supply margins
  *$100 million cost reduction programme launched to improve competitiveness,
    driving synergies from enhanced scale
  *Profit growth in DER, as we benefitted from previous acquisitions

       *Innovative products and enhanced digital capability key to future
         growth; ‘Power To Go and ‘Free Electricity Saturdays’ both proving
         popular with customers

  *Decline in DEB margins and profitability, with rising wholesale costs and
    a highly competitive power supply market resulting in difficult trading
    conditions

       *Hess integration proceeding well; EBITDA in first three months ahead
         of our expectations
       *Growth potential through enhanced scale, dual fuel capabilities,
         advantaged positions along the gas value chain, long term customer
         relationships

  *Increase in DES profitability, with services accounts up by more than
    200,000

       *Services protection plans a unique differentiating factor
       *Significant potential for bundling of energy and services over time

INTERNATIONAL UPSTREAM

Centrica Energy: Securing energy supplies for our customers

Adjusted operating
profit/(loss) for the year        2013             2012           Change
ended 31 December
International gas (E&P)           £1,155m          £940m          23%
UK Power                           £171m             £311m           (45%)
Gas-fired                          (£133m)           (£4m)           nm
Renewables                         £25m              £56m            (55%)
Nuclear                            £250m             £237m           5%
Midstream                         £29m             £22m           32%
Total Centrica Energy             £1,326m          £1,251m        6%
                                                               
Adjusted operating profit
after tax for the year ended      2013             2012           Change
31 December
International gas                  £325m             £198m           64%
UK Power                          £143m            £243m          (41%)
                                                               
Performance indicators for        2013             2012           Change
the year ended 31 December
International gas production       3,557             2,990           19%
(mmth)^1
International liquids              18.7              17.4            7%
production (mmboe) ^ 1
International total gas and
liquids production (mmboe) ^       77.3              66.8            16%
1
International Upstream
proven and probable reserves       711               633             12%
(mmboe) ^ 2
Total UK power generated          21.7             21.5           1%
(TWh)
To reflect a new organisational structure, the North American upstream gas
business has been reallocated from Direct Energy upstream and wholesale to
Centrica Energy International gas

1. Includes a 100% share of Canadian assets acquired from Suncor in
partnership with QPI

2. Centrica’s share of reserves, including a 60% share of Canadian assets
acquired in partnership with QPI from Suncor, and excluding Rough cushion gas
of 30mmboe

  *Increased international gas operating profit, with strong production from
    recently acquired assets and the impact of higher UK gas prices more than
    offsetting North Sea cost pressures

       *155mmboe of 2P reserves added in total; 56mmboe added organically,
         predominantly in Norway; 2Cresource base up by 28%
       *£318 million of post-tax exceptional impairments relating to UK
         Southern North Sea projects and existing Canadian gas assets

  *Reducing organic E&P capital expenditure by approximately 20% to around
    £900 million per year on average over the next three years, against a
    backdrop of rising costs and lower wholesale market prices
  *Targeting flat E&P unit lifting and cash production costs over the next
    three years
  *Power profit down significantly despite strong nuclear performance

       *Gas-fired fleet loss making, reflecting weak spark spreads and
         following the loss of free carbon allowances

  *Near term investment in the UK power sector likely to be limited

Centrica Storage: Making an important contribution to the UK’s security of
supply

Adjusted operating profit for the       2013     2012     Change
year ended 31 December
Centrica Storage                        £63m     £89m     (29%)

  *Profitability impacted by continuing low seasonal gas spreads; further
    significant decline expected in 2014
  *Decision not to proceed with new gas storage projects at Caythorpe and
    Baird resulted in post-tax exceptional impairments and provisions of £224
    million
  *Programme launched to deliver £15 million of cost reductions through
    operational efficiencies over the next three years

Chairman’s Statement

I regard the opportunity to chair Centrica as a great privilege. It is a
company with a strong heritage and deep relevance to the UK, serving over 11
million UK households, employing over 30,000 people in the UK and contributing
around £1billion of tax across the Group each year. With approximately
700,000 individual shareholders and numerous pension fund investors, Centrica
also forms an important part of the savings and pension plans of millions of
people across the country. In other words, Centrica is essential to the
quality of life and competitiveness of the UK.

But beyond the statistics, Centrica also has an important role to play in the
resolution of some of the most pressing issues for the UK – energy security,
climate change and affordability. It has the know-how, balance sheet and
assets to play a leading role in helping to deliver a solution to these
issues. And yet, the company is sometimes regarded as part of the problem
rather than the solution. Levels of trust between energy companies and wider
society have come under severe pressure. I therefore believe that it will be
essential to establish common ground between the participants in the debate,
to enable us to meet the energy challenges which the country faces.

Centrica recognises the need to reaffirm and demonstrate its commitments to
treating customers well, working constructively with policy makers and
conducting its business in the most transparent manner possible. I have found
such a response to be instinctive within the company and very much the focus
of attention – as evidenced by the pace at which savings from recent UK
Government policy changes were passed on to customers.

But this alone is unlikely to be sufficient to completely turn the tide. So,
in parallel, I have been using my early independence to explore some of the
issues to find a way to accelerate the restoration of trust and collaboration.

First, I have been looking into the various criticisms that have been directed
towards the industry and am conducting my own independent fact finding review
of some of the issues that are most important to our customers and seeing for
myself whether we are truly living by the Business Principles we espouse.

Secondly, I have been meeting our customers to discuss what they need from
their energy supplier, the trade-offs involved in fulfilling these needs and
what it will take to re-establish a sense of mutual partnership. My early
impression is that, while there are issues around customer trust and service
levels, the reputation of British Gas in the eyes of our customers is vastly
better than one would be led to believe from the media and political
commentary, particularly when it comes to our service engineers helping
customers in their homes.

At the same time, the growth and performance of the wider Centrica Group
should not be forgotten. While our UK downstream businesses still contribute
the largest proportion of the Group’s post-tax earnings, we have substantially
increased the scale of our North American operations, and now serve over six
million residential and business customers. We have also delivered good
strategic progress upstream, despite some setbacks in the UK North Sea, adding
reserves organically and through acquisition. And we continue to play a
critical role in bringing supplies of gas to the UK as North Sea resources
decline. Last year we signed new deals with both Qatari and US exporters,
taking our supply commitments to over £60 billion.

In summary, our interests and those of customers are inextricably linked. Our
financial future and corporate capability depend on forward momentum, both in
and outside the UK. In an increasingly international gas market, Centrica has
a clear strategic direction and strong management, positioning itself for
long-term, sustainable growth.

RICK HAYTHORNTHWAITE
Chairman
20 February 2014

Chief Executive’s Review

STRATEGY AND FOCUS REAFFIRMED

In 2013, we saw unprecedented focus on the energy sector in the UK, with
intense political and media scrutiny against a backdrop of declining real
disposable income for many consumers. However much has been achieved during
the year. We have simplified our energy offering and now have just four
residential tariffs, and are leading the industry in the transparency of our
reporting; the recently announced changes to the Government’s ECO energy
efficiency programme will help more people at lower cost; and there is
improved public understanding and recognition of the real costs of securing
energy supplies, the impact of climate change objectives, and the global
market in which we operate.

However investor confidence and public trust in the industry have been
damaged, with proposals for price controls and the potential for further
political intervention, at a time when substantial investment is required to
secure supplies of energy for the UK for the long term. The consensus that
existed between political parties over key questions of energy policy has
broken down. We are engaging with all stakeholders, working towards a
sustainable and affordable energy policy which recognises the need for strong
underlying economics and investment certainty.

In February 2013, we announced new 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. Developments over the past year have reaffirmed these
priorities and validated our strategic direction. As existing sources of gas
decline, and worldwide energy markets become more interrelated, the UK will
need to look further afield to secure energy supplies for the future.

Downstream, we have completed strategic reviews in both British Gas and Direct
Energy, and introduced new management structures. This will enable us to focus
on improving our core operations in order to deliver better customer service,
reduce costs where appropriate, and drive growth through innovative
propositions.

Upstream, we entered into a number of key transactions which will not only
benefit our customers but provide the business with sustainable growth over
the longer term. We also added reserves organically, mainly in Norway. Moving
forward, against a backdrop of challenging economics upstream, particularly in
the UK North Sea, we will be increasingly selective in our investments,
directing capital towards the projects offering the most attractive returns
with the lowest political risk.

SOLID EARNINGS AND GOOD STRATEGIC PROGRESS IN CHALLENGING MARKET CONDITIONS

Centrica performed well in 2013, with good operational performance in gas and
oil production, power generation and gas storage, and we are benefiting from
improved scale from previous E&P and North American acquisitions. We delivered
further improvements in our safety record, with the frequency of lost time
incidents falling by 45% in 2013 compared to 2012 and no significant process
safety incidents recorded during the year. I was also pleased to see another
increase in employee engagement levels in 2013, and remain grateful to all my
colleagues for their commitment and hard work during the year, particularly
during times when the company was the subject of much political and media
scrutiny.

We have made good strategic progress in 2013 in challenging market conditions
- investing along the gas value chain to secure long term, affordable energy
supplies, with customers at the core of our activities:

  *we signed £14 billion worth of new gas supply agreements with Cheniere and
    Qatargas, helping secure supplies for the UK;
  *we completed the C$1 billion acquisition of a portfolio of Canadian gas
    assets in partnership with Qatar Petroleum International (QPI), adding
    over 100mmboe of reserves to our international upstream portfolio at lower
    cost than for equivalent North Sea assets;
  *we acquired a 25% stake in the Bowland shale exploration licence, bringing
    our expertise and resources to a potentially important long-term source of
    gas for our customers;
  *we made over £1.5billion of organic investments across the Group,
    predominantly in our North Sea E&P portfolio, including in major projects
    such as Cygnus;
  *we added 56mmboe organically to our reserves base, mostly from upgrades to
    our Norwegian assets;
  *we announced £650 million of disposals, of selected North Sea assets, our
    Texas CCGTs and non-core UK wind assets, underlining our commitment to
    capital discipline and value; and
  *we acquired the Hess Energy Marketing business for $1.2 billion,
    transforming the capabilities of our North American B2B activities.

However, with economic and market headwinds impacting many areas of the
business, adjusted earnings per share were flat year-on-year at 26.6p. We also
recognised pre-tax impairments and provisions totalling £1,064 million, £667
million after tax.

Downstream in the UK, the post-tax margin for residential energy supply fell
to 4.5%, in part reflecting the impact of mild weather on consumption towards
the end of the year. This followed unusually cold weather in the first half,
with the benefit from higher consumption used to absorb the increased external
costs being faced by the business for as long as possible. However, in October
we announced the decision to increase our residential energy tariffs, as a
result of higher commodity and non-commodity costs. Following the
announcement, the level of customer switching increased significantly and the
number of residential customer accounts reduced by 2% over the year. However,
although account losses have continued in early 2014, with around 100,000 in
the year to date, the position is now stabilising, with British Gas the first
to pass on savings in full to all our customers following the announcement of
changes to the ECO programme and the introduction of new fixed price
propositions.

British Gas Services once again recorded operating profit growth despite the
challenging economic environment, benefiting from cost reduction initiatives
implemented over the course of 2012 and 2013. Early signs of economic recovery
are also benefiting our central heating installations business. Installations
were 7% higher in 2013 compared to 2012, while weekly sales of our remote
heating control product have more than doubled since its launch under the Hive
brand in September. In British Gas Business, the trading environment remained
difficult in a highly competitive market. We led the industry with our
programme to end auto-rollover of contracts at renewal, although this has
placed further pressure on margins.

Downstream in North America, we delivered profit growth in both residential
energy and residential services, as we benefitted from previous acquisitions
and services account growth. However total Direct Energy profitability fell as
a result of lower margins in Direct Energy Business, with rising wholesale
costs and a highly competitive power market resulting in difficult trading
conditions.

Upstream, gas and liquids production performance was good, as recent
acquisitions in the North Sea and Canada delivered production better than our
investment cases. We also added 56 mmboe of 2P reserves organically,
predominantly on our Norwegian assets. However, following reserve and resource
downgrades and increases in expected costs on certain projects in the Southern
North Sea, and a reduction in North American natural gas prices since previous
asset acquisition and development, we recognised exceptional post-tax
impairments of £318 million.

In UK power generation, the performance of the nuclear fleet was once again
strong. However, our gas-fired fleet was loss-making, reflecting weak spark
spreads and the end of free carbon allocations. In this environment we
continued to minimise our cost base and run our plants as efficiently as
possible. We also recognised a £125 million exceptional onerous contract
charge on the Rijnmond tolling contract in the Netherlands as a result of
decreases in expected future revenues.

Our Rough gas storage asset performed well, particularly during the prolonged
cold weather at the start of the year, making an invaluable contribution to UK
security of supply. However, forward seasonal gas spreads remain very low,
leading to a significant reduction in profit in 2013. The low seasonal
spreads, together with the UK Government’s decision to rule out
incentivisation for new gas storage projects to be built, caused us not to
proceed with the Baird storage project and to put our project at Caythorpe on
hold. As a result, we have recognised exceptional impairments and provisions
relating to storage projects of £224million after tax.

We successfully completed our £500 million Group-wide cost reduction
programme, announced at the start of 2012. We also completed our £500 million
share repurchase programme launched in February, and in December announced a
further £420million share repurchase programme, following the sale of our
Texas CCGTs, to be undertaken over the course of 2014.

WORKING TOWARDS A TRANSPARENT AND AFFORDABLE ENERGY POLICY

Over the past year, UK energy policy has seen unprecedented levels of debate
and discussion amongst stakeholders. As a result, there is improved awareness
of the costs of securing and supplying energy, the majority of which are
external to the business. However, it is important that the facts are made
public and that all stakeholders – energy companies, regulators, politicians,
consumers and commentators - engage in full and open conversation.

We have simplified our UK residential energy product range to four tariffs,
and led the way earlier in 2013 with our unique ‘Tariff Check’, making it
easier for our customers to ensure they are on the most appropriate British
Gas tariff for them. We continue to improve the transparency of our reporting,
including publication of audited Ofgem segmental statements as part of our
year end reporting and separating out our midstream power profits, and call on
others to follow. We also protected over half a million of our most vulnerable
customers from the November price rise, through a special discount to be
applied to their bills. As a result, we currently expect this group of
customers to have lower bills in 2014 than in 2013. And we welcome the
proposed changes announced by Government to the ECO programme, enabling more
customers to benefit, at lower cost.

However, the prospect of political intervention and a wide range of potential
policy initiatives has damaged investor confidence. In particular, we believe
that a price freeze is not a credible solution, when the large majority of
costs are external to the business. Such proposals create both short term
uncertainty for all energy suppliers and longer term additional costs for
customers. With substantial investment required to secure energy supplies for
the UK, these uncertainties increase the cost of capital and, in the eyes of
major global producers, reduce the credit worthiness of prospective buyers of
their gas, impairing rather than improving the UK’s energy security position.

Against this uncertain background, financial stewardship and discipline remain
important to our business, for the benefit of customers and shareholders.
Customers rely on us for our financial strength to enter into long term supply
contracts and shareholders require an appropriate return, reflecting the risks
inherent in managing commodity price and weather risk in the underlying
business and in the investments we make. Whilst delivering good service and
value for customers is paramount, with a significant proportion of our share
capital held by UK pension funds and around 700,000 individual shareholders,
making appropriate investments and delivering a fair level of return to
investors also remains a core responsibility.

We firmly believe that any form of price control in a competitive market is
not the answer and is not in the best interests of customers, and this has
been clearly demonstrated by experience in other markets. The industry
requires a stable policy environment, which recognises the need for strong
underlying economics and investment certainty, to deliver secure supplies for
our customers. We will continue to engage with all policymakers to present
proposals for more affordable ways to decarbonise and reduce energy
consumption, helping more people at lower cost.

INVESTING TO SECURE ENERGY SUPPLIES FOR OUR CUSTOMERS

We have made substantial progress in delivering our gas value chain strategy,
positioning the business for future growth. In an increasingly global gas
market, it is important that the UK is able to source gas at the most cost
effective price. Centrica plays an important role, with existing relationships
to secure pipeline gas from Norway and Continental Europe, and LNG from Qatar.
During the year we extended our LNG supply contract with Qatargas until 2018.
We also signed a contract with Cheniere to take gas export capacity at the
Sabine Pass facility in Louisiana, which gives us destination rights over
cargoes for the first time, and will allow us to benefit from any differential
between North American gas prices and other worldwide markets.

With rising costs in the North Sea, we are targeting our investment towards
opportunities that offer the best value, particularly in Norway and in North
America. We have taken a stake in UK shale exploration, potentially a
significant source of gas for the UK. And in power, our Lincs offshore wind
farm, which is capable of providing electricity for up to 200,000 UK homes, is
now fully operational.

POSITIONING THE BUSINESS FOR THE FUTURE

Market conditions are expected to remain challenging in 2014, with margin
pressures in our energy supply businesses on both sides of the Atlantic,
rising North Sea unit costs, and weak economics for both gas storage and
gas-fired power generation. In British Gas Residential, the level of margin
achieved in a competitive market is dependent on a number of factors,
including retail and wholesale prices, service and the weather, which has been
warmer than usual in the year to date. The wider external environment also
currently provides a challenging operating backdrop. In North America,
although the Hess Energy Marketing business is performing well, Direct Energy
has had a difficult start to 2014. With a weaker US dollar, continued margin
pressures, and exceptionally cold weather which resulted in additional short
term system charges, we currently expect Direct Energy operating profit to be
broadly flat year on year. Overall for the Group, 2014 trading is in line with
recent market forecasts, other than the one-off impact from extreme weather
conditions in Direct Energy, with adjusted earnings per share in 2014 expected
to be lower than in 2013.

Recognising the challenges, we are maintaining our focus on operational and
capital efficiency, with specific new targets appropriate for each area of the
business.

We have now completed strategic reviews in both British Gas and Direct Energy,
and our downstream strategic priority – Innovate to drive growth and service
excellence – remains robust. New organisational structures are in place on
both sides of the Atlantic to ensure delivery, as we target improvement in our
core operations to enhance service and reduce costs, while driving growth
through innovative propositions.

In our UK residential energy and services businesses, we are targeting
industry leading service levels for our customers. We will aim to improve
service and deliver further efficiencies by simplifying key customer
interactions, in part enabled by our investment in a single residential
Customer Relationship Management (CRM) system for energy and services, which
is expected to be completed in 2014.

Our leadership in digital, smart and connected homes enables us to offer
compelling, differentiated propositions.

By the end of 2014 we are targeting over 100,000 sales of our ‘Hive Active
Heating’ smart thermostat and currently expect to have installed 1.3 million
residential smart meters. We see the smart connected home as core to our
customer proposition, materially improving the customer experience and
providing an opportunity for growth.

We also see further opportunities in residential services, leveraging our
insurance capabilities to offer new pricing structures and an expanded product
choice, and from growing share in adjacent markets such as the landlord
sector. Through enhanced price competitiveness, improved service quality and
innovation we are targeting a return to account growth in both UK residential
energy and services.

In British Gas Business, we are also targeting industry leading service
levels, with a sustained programme of process simplification and the
implementation of a new billing system expected to deliver improved service at
lower cost.

A cost reduction programme is underway, which is expected to generate £100
million of annual savings by the end of 2015, helping to offset the impact of
continuing difficult market conditions and the impact of our decision to lead
the market in ending auto-rollover at contract renewal. Longer term, we expect
to deliver growth from the development of new offerings tailored to the most
valuable customer segments, and from business services, where the market
opportunity is comparable in size to business energy.

In North America, with margin pressures persisting in 2014, improving cost
competitiveness is a core priority. Against this backdrop we have launched a
$100 million cost reduction programme, driving synergies from the enhanced
scale of our business. We are already benefiting from call centre
consolidation and back office integration, while we have started investment in
a new residential energy billing system.

We are also positioning the business for growth, and building a range of
innovative product offerings is core to our North American business model,
enabling improved customer retention and delivering growth. Our ‘Power To Go’
prepayment offering and our innovative ‘Free Electricity Saturdays’ product
have both proved popular with residential energy customers, while we are
targeting further growth in our services protection plan offering in 2014,
which we see as a unique differentiating factor in our business model. Over
time, we see significant potential for bundling of energy and services
propositions to our residential customer base.

In Commercial and Industrial energy supply, the integration of Hess Energy
Marketing is proceeding well. Our priority for 2014 is to fully integrate the
teams, retaining key personnel and systems, and in turn to deliver good
service levels and high levels of customer retention. In the first three full
months of our ownership, the business has delivered EBITDA in excess of our
investment case. Over time, the enhanced scale, dual fuel capabilities,
advantaged positions along the gas value chain and long-term customer
relationships delivered by the Hess acquisition provide additional growth
opportunities.

Our International E&P business has been re-organised with a substantially new
leadership team, to help realise the full potential of the international
resource base. We have added 155mmboe in total to our 2P reserves, organically
and through acquisition. We also retain a number of attractive investment
options, particularly in Norway and Canada, having increased our 2C resource
base by 28% to 771mmboe over the year. However, with rising costs, in the UK
in particular, we are targeting savings to keep unit lifting and other cash
production costs flat over the next three years.

Against this backdrop, we are being increasingly selective in our investment,
concentrating on the most attractive opportunities. An increasing proportion
is expected to be directed towards North America, where we are well placed to
benefit from any increase in gas prices. Taking account of forward UK gas
prices and higher costs, we are targeting a reduction in our organic
investment in gas and oil projects to approximately £900million on average
over the next three years. This is around 20% lower than previously expected
levels, but will have limited impact on near-term production, which we expect
to be in the range 80-85mmboe per annum. Our current level of committed
capital expenditure in the short to medium term gives us flexibility to
consider acquisition opportunities, if the economics are attractive and the
assets provide a good fit with our existing portfolio, while potentially
divesting non-core assets for value.

In UK power generation, reflecting the challenging market conditions that
resulted in losses for our gas-fired power stations, we will continue to
optimise the running of our existing fleet to capture the benefit from any
improvement in market spark spreads. However, following our decision not to
invest in new nuclear in the UK and to sell the Race Bank offshore wind
project to Dong, we expect our near-term investment in the UK power sector to
be limited. Any future investment in new build gas-fired generation capacity
will depend on the economics of the projects and the successful introduction
of a capacity market, including an assessment of the political risk.

Centrica is an important company, providing energy or services for over 11
million homes in the UK as well as serving some sixmillion customer accounts
in North America. We directly employ over 35,000 people worldwide, make a tax
contribution of around £1billion a year and make a valuable contribution to
retirement savings through our dividend payments, as well as securing
cost-effective sources of energy for the UK.

Centrica has a strong balance sheet, providing flexibility for targeted
investments for value. However, maintaining tight capital discipline is a core
priority, as evidenced by our share repurchase programmes. We are recommending
2013 full year dividend growth of 4%, in excess of the UK retail price index,
and are maintaining our commitment to real dividend growth.

In a challenging external environment, we remain committed to our guiding
principles of offering good service and value for customers and playing a
vital role in the transition to a lower carbon economy. Whilst the outlook for
the UK business has been impacted by short term political uncertainty, we are
taking positive action across the Group to position the business for the long
term, for the benefit of both customers and shareholders.

SAM LAIDLAW
Chief Executive
20 February 2014

Group Financial Review

Group revenue was up 11% to £26.6 billion (2012: £23.9 billion). Revenue
increased in British Gas, primarily due to the impact on retail energy prices
of higher UK wholesale gas and electricity prices and non-commodity costs.
Revenue in Direct Energy increased, predominantly reflecting the impact of
higher gas and power volumes, and the acquisition of the Hess Energy Marketing
business which completed in November. Revenue increased in Centrica Energy,
with higher gas and liquids production due to the full-year impact of the 2012
asset purchases and higher achieved gas and liquids prices in Europe. Centrica
Storage revenue fell slightly, reflecting lower seasonal gas spreads and a
higher proportion of storage capacity sold internally.

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
                                     Exceptional                                 Exceptional
Year ended             Business      items and         Statutory   Business      items and         Statutory
31 December   Notes  performance  certain          result     performance  certain          result
                       £m            re-measurements   £m          £m            re-measurements   £m
                                     £m                                          £m
Adjusted
operating
profit
British Gas            1,030                                       1,093
Direct                 276                                         310
Energy
Centrica               1,326                                       1,251
Energy
Centrica            63                                     89                           
Storage
Total
adjusted       5c      2,695                                       2,743
operating
profit
Depreciation
of fair
value
uplifts from   5c      (66)                                        (96)
Strategic
Investments,
before tax
Interest and
taxation on
joint         5c     (111)                                  (85)                         
ventures and
associates
Group
operating      5c, 6   2,518         (626)             1,892       2,562         63                2,625
profit
Net finance            (243)         –                 (243)       (209)         –                 (209)
cost
Taxation      6, 8   (942)        243              (699)      (1,031)      (140)            (1,171)
Profit for             1,333         (383)             950         1,322         (77)              1,245
the year
Depreciation
of fair
value
uplifts from  10     37                                     56                           
Strategic
Investments,
after
taxation
Adjusted            1,370                                  1,378                        
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.

In British Gas, total profitability decreased. Operating profit decreased in
residential energy supply, with the impact of higher unit tariffs more than
offset by increased wholesale commodity, transmission and metering, and
environmental costs. Operating profit decreased in business energy supply and
services, with lower margins as a result of challenging market conditions and
our programme to end the auto-rollover of contracts. Operating profit
increased in residential services, predominantly reflecting the impact of cost
efficiencies.

In Direct Energy, overall profitability decreased, as increases in residential
energy supply and residential and business services operating profit,
resulting from previous acquisitions and services account growth, were more
than offset by decreased profitability in the business energy supply segment,
which experienced margin pressure on power sales in a competitive environment.
In Centrica Energy, overall profitability increased, with higher operating
profit in the gas segment more than offsetting lower power operating profit.
In the gas segment, higher gas and liquids production and higher achieved
prices in Europe more than offset the impact of increased unit costs. In the
power segment, profitability decreased following the loss of free carbon
allowances. In Centrica Storage, reduced seasonal gas price differentials led
to lower profitability.

Net finance cost increased to £243 million (2012: £209 million), with higher
average levels of debt in the year, as the Group raised $1.35 billion in the
US bond market to fund North American acquisitions completed during the year.
The taxation charge reduced to £942 million (2012: £1,031 million) and the
adjusted tax charge was £1,022 million (2012: £1,112 million). The resultant
adjusted effective tax rate for the Group was 43% (2012: 45%). An effective
tax rate calculation, showing the UK and non-UK components, is shown in the
table below:

                                   2013                          2012
                 UK       Non-UK   Total        UK       Non-UK  Total
                  £m        £m        £m              £m        £m       £m
Adjusted
operating         1,903     792       2,695           2,079     664      2,743
profit
Share of joint
ventures /        (60)      -         (60)            (44)      –        (44)
associates
interest
Net finance      (146)    (97)     (243)        (105)    (104)   (209)
cost
Adjusted
profit before    1,697    695      2,392        1,930    560     2,490
taxation
Taxation on       493       449       942             694       337      1,031
profit
Tax impact of
depreciation
on Venture        29        -         29              40        –        40
fair value
uplift
Share of joint
ventures /       51       -        51           41       –       41
associates
taxation
Adjusted tax     573      449      1,022        775      337     1,112
charge
Adjusted
effective tax    34%      65%      43%          40%      60%     45%
rate
Reflecting all of the above, profit for the year was £1,333 million
(2012:£1,322 million) and after adjusting for fair value uplifts adjusted
earnings were broadly flat at £1,370 million (2012: £1,378 million). Adjusted
basic earnings per share (EPS) were unchanged at 26.6 pence (2012: 26.6
pence).

The statutory profit for the year was £950 million (2012: £1,245 million). The
reconciling items between Group profit for the year from business performance
and statutory profit are related to exceptional items and certain
re-measurements. The decrease compared with 2012 is principally due to an
increased net exceptional charge of £667million (2012: £481million) and a
reduced gain from certain re-measurements of £284 million
(2012:£404million). The Group reported a statutory basic EPS of 18.4pence
(2012: 24.0 pence).

In addition to the interim dividend of 4.92 pence per share, we propose a
final dividend of 12.08 pence, giving a total ordinary dividend of 17.0 pence
for the year (2012: 16.4 pence), an increase of 4%.

Group operating cash flow before movements in working capital was higher at
£3,737 million (2012: £3,542 million), with the full year impact of the 2012
upstream asset purchases being the main contributing factor. After working
capital adjustments, tax, and payments relating to exceptional charges, net
cash flow from operating activities was £2,940 million (2012: £2,820 million).

The net cash outflow from investing activities was lower at £2,351 million
(2012: £2,558 million), predominantly reflecting the receipt of a larger
nuclear dividend and increased proceeds from the disposal of businesses.

The net cash outflow from financing activities was £791 million (2012: inflow
of £190 million). The outflow mainly reflects the impact of the Group’s £500
million share repurchase programme, fully undertaken during the year, and a
reduced net issuance of debt during the period of £809 million (2012: £1,196
million).

Reflecting all of the above, the Group’s net debt at 31 December 2013 was
£5,049 million (2012: £4,047 million).

During the year net assets decreased to £5,257 million (2012: £5,927 million),
reflecting the impact of the Group’s share repurchase programme, actuarial
losses on the Group’s defined benefit pension schemes, and foreign currency
movements on the retranslation of foreign subsidiaries.

EXCEPTIONAL ITEMS

Exceptional pre-tax charges of £1,064 million were incurred within Group
operating profit during the year (2012:£534million). Taxation on these
charges generated a credit of £397 million (2012: £93 million), while there
was a £40 million exceptional tax charge in 2012 related to the effect of a
change in upstream UK tax rates. This resulted in exceptional post-tax charges
of £667 million (2012: £481 million).

Following reserve and resources downgrades and increases in expected costs on
the Seven Seas, York and Ensign fields in the Southern North Sea, and a weaker
outlook for North American natural gas prices and an increase in the discount
rate applicable to North American assets, the Group recognised pre-tax
impairment charges of £699 million relating to UK and Canadian exploration and
production assets. Taxation on these charges generated a credit of £381
million, resulting in exceptional post-tax charges of £318 million.

In September, in the light of weak economics for new storage projects and the
UK Government’s announcement ruling out incentivisation for gas storage
capacity to be built in the UK, Centrica announced its decision not to proceed
with the Baird offshore gas storage project and to put the onshore project at
Caythorpe on hold indefinitely. As a result, the Group has recorded £240
million of impairments and provision charges as exceptional operating costs.
Taxation on these charges generated a credit of £16 million resulting in
exceptional post-tax charges of £224 million.

The Group also recognised a further onerous contract charge of £125 million
(no tax impact) for the Rijnmond power tolling contract in the Netherlands as
a result of decreases in expected future revenues.

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. 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 £438 million (2012: £597 million) relating to these
re-measurements, of which there are a number of elements. The Group recognises
the realised gains and losses on these contracts in business performance when
the underlying transaction occurs. The profits arising from the physical
purchase and sale of commodities during the year, which reflect the prices in
the underlying contracts, are not impacted by these re-measurements. See note
2 for further details.

BUSINESS COMBINATIONS

On 15 April 2013, the Group 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. The
transaction completed on 26 September 2013 for consideration of C$987 million
(£601 million). The Group owns a 60% share in the partnership and operates the
assets. It has fully consolidated the partnership for accounting and reporting
purposes.

On 30 July 2013, the Group announced that it had agreed to acquire the New
Jersey-based energy marketing business of Hess Corporation. The transaction
completed on 1 November 2013 for consideration of $1,194million (£736
million) including a payment for the working capital of the business of
approximately $416million (£257 million).

Further details on business combinations, plus details of asset purchases,
disposals and disposal groups held for sale are included in notes 5(f) and 15.

EVENTS AFTER THE BALANCE SHEET DATE

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

RISKS AND CAPITAL MANAGEMENT

The Group’s risk management processes are largely unchanged from 31 December
2012. Details of how the Group has managed financial risks such as liquidity
and credit risk are set out in note 4.

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

ACCOUNTING POLICIES

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

Operating Review

INTERNATIONAL DOWNSTREAM

The operating environment for both our UK and North American downstream
businesses was challenging during 2013. However we made good strategic
progress on both sides of the Atlantic, positioning ourselves for the future,
and our downstream strategic priority – Innovate to drive growth and service
excellence – has been reaffirmed. Under the leadership of Chris Weston a new
management structure is in place, designed to enable us to focus on improving
our core operations to deliver better customer service and drive growth
through innovative propositions.

BRITISH GAS

In the UK, the operating environment for our downstream energy supply
businesses was unprecedented. Affordability has been a key concern for both
residential and business customers, amplified by media and political debate
ahead of the 2015 election. Against this backdrop we welcomed the Government’s
proposed changes to the Energy Company Obligation (ECO), announced in
December, which enabled us to be the first UK energy supplier to reduce retail
tariffs. We have also made good progress in positioning the business for the
future, with further development of our digital platforms, the launch of new
propositions, continued industry leadership on smart metering, and an ongoing
focus on service and cost efficiency.

Residential energy supply operating profit fell by 6%, reflecting warmer
weather towards the end of the year and higher commodity and non-commodity
costs, while business energy supply and services operating profit fell by 19%
in challenging market conditions. A continued focus on cost reduction resulted
in an increase in residential services profit, although delivering new sales
of services contracts proved challenging. The health and safety of our
employees and customers remains a core priority and the lost time injury
frequency rate (LTIFR) over 2013 was 0.11 per 100,000 hours worked in British
Gas (2012: 0.23).

Tough environment for residential energy supply

Having absorbed higher commodity and non-commodity costs for as long as
possible, we took the decision in October to increase average household gas
prices by 8.4% and average household electricity prices by 10.4%, an average
of 9.2%. The price rise took effect in late November. However, the UK
Government’s proposed changes to the ECO programme allowed British Gas to
reduce average household gas and electricity prices by 3.2%, effective from 1
January 2014. Including the Government’s £12 rebate in relation to the Warm
Home Discount, the average customer bill will reduce by £53, or 4.1%.

We strongly support the aims of the ECO programme, which is providing energy
efficiency measures such as insulation to transform homes and communities
across the UK, helping keep homes warm and reducing carbon emissions.
Therefore we welcome the proposed changes to the ECO programme, which will
extend the obligation period by two years to March 2017 and broaden
eligibility measures, allowing us to help more customers and reduce the short
term impact on bills. We expect our costs to be over £1.7 billion over the
life of the programme, and in 2013 we incurred £420 million of costs. We also
completed all work under the CERT and CESP programmes around the middle of
2013, later than the target date of December 2012. Overall, through these
programmes, we installed 236,000 energy efficiency measures in customer homes
in 2013, over half of which were for the elderly, disabled or those most in
need.

We continue to lead the industry in helping the most vulnerable, having helped
more than 1.8 million households suffering from fuel poverty. We maintain the
widest eligibility criteria among all energy suppliers for the Warm Home
Discount, which benefited over 500,000 of our customers during the year. We
also protected these customers from our November price increase through an
additional discount of up to £60 to be applied to their bills.

We now offer four distinct tariffs, all with a standing charge and single unit
rate, and have consolidated our discount structures. We introduced our unique
‘Tariff Check’ in the first half of the year, which provides a personalised
comparison of their energy costs under each British Gas tariff and enables
customers to check that they are on the most appropriate tariff for them. In
October, the Government announced a new annual competition review for the UK
energy sector, and we expect the results to be published around the end of the
first quarter of 2014.

Helping restore confidence in the energy industry is a top priority for
British Gas. Our independent Customer Board is in its third year and has
continued to challenge and advise on a range of service and product topics.
And we are making good progress on implementing Ofgem’s Standards of Conduct
and have established a Customer Fairness Committee, which includes two
independent external members. We also continue to invest in jobs, with 1,200
apprentices currently in training, while we have committed that from January
2014 all UK-based employees will be paid at least the ‘living wage’ rate.

Focus on delivering great customer service

The number of residential accounts on supply as at the end of 2013 was 15.3
million, 2% lower than at the start of the year. This reflects a competitive
market and higher levels of customer churn in the period immediately following
our pricing announcement in October. Customer account losses have continued
into 2014, with around 100,000 in the year to date, however the position is
now stabilising, reflecting our January 2014 price reduction and the
introduction of new fixed price propositions.

In a competitive market for energy supply it is important to focus on
delivering high levels of customer service. The migration of our residential
customers onto a new Customer Relationship Management (CRM) platform will be
completed in 2014. We experienced some system outages during implementation,
which was exacerbated by higher call volumes caused by the tariff increase
announcement. Reflecting this, the total British Gas net promoter score
decreased to +15 in 2013 (2012: +30). However we invested in additional
customer service advisors to address the short term issues, and the new system
is expected to deliver a more integrated customer experience.

We are leading the industry in the use of digital platforms, reducing our cost
to serve and increasing customer engagement, and British Gas was awarded ‘best
e-commerce utility supplier’ at the 2013 e-commerce awards for excellence.
Customer downloads of our top-rated mobile ‘App’ were up 37% and over a
million have been downloaded since its launch. The number of customers
transacting through digital channels also increased. Total transactions
increased 16%, while 1.2 million customers booked their annual service or
boiler breakdown online, up 22% and nearly 40% of bills were sent
electronically. In January 2014, we fully launched ‘Me’ (Mobile Energy), a new
energy brand capable of being delivered entirely via mobile devices and aimed
at the private tenant segment.

We are also developing smart and 'connected home' solutions to give customers
greater visibility and control over their energy usage. We have now installed
over 1.3 million smart meters for homes and businesses in the UK, with over
800,000 of these for residential customers, and in 2014 we expect to be the
first company to install smart meters for residential prepayment customers.
The industry-leading progress we have made leaves us well placed, as we move
towards the mandated roll-out of smart meters in the UK from the end of 2015.
Over 200,000 customers now receive our ‘Smart Energy Report’, which we
launched in March 2013. This provides customers with comprehensive analysis of
their energy usage, and has resulted in a positive impact on customers’
perception of British Gas. In September we launched Hive, our rebranded Remote
Heating Control proposition, which allows customers to control their heating
and hot water remotely via their smart phone or online. Initial brand
recognition has been strong, and we have now sold over 50,000 smart
thermostats, with weekly sales having doubled since the Hive launch.

Strong cost focus in residential services in tough sales environment

Market conditions remained challenging for British Gas Services, in part due
to continued pressure on household disposable income. Retention of existing
customers was strong, with customers recognising the value of our services
products during sustained periods of cold weather in the first half. However
sales of new products were lower, reflecting the overall economic environment.
As a result, the number of services customer accounts fell by 2% during 2013,
ending the year at 8.2million. We are beginning to see some pick up in the
market for new central heating installations, with the number increasing by 7%
in 2013 compared to 2012, and by 10% in the second half of the year, in part
reflecting our leadership position on the ‘Green Deal’. British Gas was the
first energy supplier to market on the ‘Green Deal’ and we now have 300 Green
Deal advisors trained, and have completed over 10,000 installation measures.

British Gas Services delivered strong levels of operational performance in the
year. Overall we responded to 3.2million boiler breakdowns, over 200,000 more
than in 2012. Despite the higher workload, our net promoter score increased to
+59 (2012: +55), while the average speed to answer calls improved.

Although we incurred additional costs as a result of the higher level of
call-outs, residential services operating profit increased slightly compared
to 2012, reflecting the benefit of cost savings delivered in 2012 and 2013.
With the existing cost reduction programme now complete, we will maintain a
keen focus on cost efficiency in the business. We will also look to develop
new and innovative products and propositions. During 2013 we launched packages
tailored specifically for landlords and tenants, while we also launched
British Gas branded home insurance in partnership with AXA and entered into a
new partnership agreement with Nationwide’s ‘buy-to-let’ mortgage arm.

Continued challenging market conditions for business energy supply and
services

The number of business energy supply points fell by 12,000 over the year, and
were flat in the second half of the year. The tough economic and competitive
environment continued to put pressure on business energy supply margins, which
were also impacted by our programme to end the auto-rollover of contracts at
renewal, for the benefit of customers. This decision ensures our customers
have a transparent choice of products, and should provide long-term benefits.
As a result of the margin pressures, operating profit in 2013 was
significantly lower than in 2012.

During the year we started the implementation of a new business energy billing
system, which is proceeding to plan and is expected to be fully operational by
the end of 2014. The system leverages previous investment in residential
platforms and will result in improved customer service at lower cost, helping
to offset margin pressures. We continue to develop our business services
propositions, and we have now mobilised two major new contracts with Cornwall
Council and a consortium of eight local authorities in the North East of
England. We have also signed and commenced work on thirteen energy performance
contracts. Business services revenue increased by 11% in 2013 compared to
2012, while our secured pipeline of future work increased by 25% to over £200
million.

Reduced year-on-year operating profit

Total British Gas gross revenue increased to £14,226 million (2012: £13,857
million) while total British Gas operating profit fell to £1,030 million
(2012: £1,093 million) with a slight increase in residential services
profitability more than offset by declines in residential energy supply and
business energy supply and services. British Gas has delivered its £300
million share of the Group’s cost reduction programme, with the full year
impact of 2012 initiatives coming through and further savings delivered in
2013 through procurement, IT and operational efficiencies. Reflecting the
impact of inflation and investment in growth areas, British Gas operating
costs were up slightly in 2013 compared to 2012, while previous investment in
systems and a more proactive approach to helping customers resulted in the bad
debt charge as a proportion of revenue holding broadly flat.

Residential energy supply gross revenue increased to £9,487 million (2012:
£9,121 million), predominantly reflecting the impact of higher commodity and
non-commodity costs on retail gas and electricity tariffs. Average gas
consumption was broadly flat compared to a cold 2012, with a decline in
underlying consumption and warmer than usual weather in the fourth quarter
offsetting the impact of unusually cold weather in the first half. Average
electricity consumption fell by 3%. Second half operating profit fell by 18%
compared to 2012, while full year operating profit fell by 6% to £571 million
(2012: £606 million), as increased revenue was more than offset by higher
external costs, with commodity, transmission, metering, and environmental
costs all rising. The full year post-tax margin decreased to 4.5% (2012:
5.0%).

Residential services gross revenue decreased slightly to £1,655 million (2012:
£1,674 million). Operating profit, including the receipt of an ECO management
fee from residential energy supply, increased to £318 million (2012:£312
million), while the post-tax margin increased to 14.6% (2012: 14.1%),
primarily reflecting the impact of operational efficiencies. Business energy
and services gross revenue increased to £3,084 million (2012: £3,062 million),
while operating profit, including credits arising from improved revenue and
billing processes, fell by 19% to £141 million (2012: £175 million),
reflecting the margin pressures. The post-tax margin fell to 3.7%
(2012:4.2%).

Positioning the business for the future in a tough external environment

Having completed a comprehensive review of the business, our focus is on
improving our core operations to enhance service and reduce costs, while
driving growth through innovative propositions.

In British Gas Residential and British Gas Services, we are targeting industry
leading service levels for our customers. We will aim to improve service and
deliver efficiencies by simplifying key customer interactions, such as moving
home and paying by direct debit, to provide an effortless, consistent
experience through all channels. Our project to move to a single residential
billing platform for energy and services, which is expected to be completed
this year, will improve service and cost efficiency as well as facilitating
the integrated propositions needed to deliver increased energy and services
cross-selling.

In addition, our leadership in digital, smart and connected homes enables us
to offer compelling, differentiated propositions, such as our ‘Hive Active
Heating’ smart thermostat. We currently expect to have installed 1.3 million
residential smart meters and to have sold over 100,000 smart thermostats by
the end of 2014. We continue to see the smart connected home as core to our
customer proposition, materially improving the customer experience and
providing an opportunity for growth.

We see further growth opportunities in residential services, from new pricing
structures and expanded product choice, leveraging our insurance capabilities.
We also see opportunities to grow share in adjacent, under-served markets such
as the landlord sector and from improved conversion of boiler installation
enquiries into sales. Overall, through enhanced price competitiveness and
innovation, we are targeting a return to account growth in both residential
energy and services.

In British Gas Business, a sustained programme of process simplification and
the implementation of a new billing system, which started in 2013, is expected
to deliver improved service at lower cost. We expect to deliver £100million
of annual operating cost and bad debt reductions by the end of 2015, and have
already delivered around £20million of this in 2013. This will help to offset
the impact of transitioning our commercial model, including our decision to
lead the market in ending auto-rollover at contract renewal.

As in the residential business, we will drive growth in business energy supply
by developing new offerings tailored to valuable customer segments and
utilising a more targeted channel strategy. In business services, where the
market opportunity is comparable in size to business energy, we expect to grow
a material position over time, through a combination of organic and inorganic
growth.

Total British                                                
Gas
For the year
ended 31          FY 2013    FY 2012   Δ%     H2 2013   H2 2012   Δ%
December
Total customer
accounts          24,395     24,944    (2)    24,395    24,944    (2)
(period end)
(’000)
Total customer
households        11,120     11,379    (2)    11,120    11,379    (2)
(period end)
(’000)
Joint product
households        2,257      2,393     (6)    2,257     2,393     (6)
(period end)
(’000)
Gross Revenue     14,226     13,857    3      6,314     6,650     (5)
(£m)
Operating cost
(excluding bad    1,392      1,353     3      706       672       5
debt) (£m)
Operating         1,030      1,093     (6)    461       530       (13)
profit (£m)
Operating
profit after      777        823       (6)    nm        nm        nm
taxation (£m)
FY 2012 residential energy customer accounts have been restated to exclude
38,000 accounts subsequently reclassified as dormant.

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.

FY 2012 operating costs have been restated to reflect the reallocation of
certain costs from operating costs to cost of sales.

                                                                             
Residential                                                 
energy supply
For the year                                                  H2
ended 31           FY 2013   FY 2012   Δ%      H2 2013   2012    Δ%
December
Customer
accounts (period                                                
end):
  Gas (’000)       8,603      8,872      (3)      8,603      8,872    (3)
  Electricity     6,653     6,746     (1)     6,653     6,746   (1)
   (’000)
  Total (’000)    15,256    15,618    (2)     15,256    15,618  (2)
Estimated market
share (%):
   Gas              38.2       39.9       (1.7)    38.2       39.9     (1.7)
                                          ppts                         ppts
  Electricity     24.5      25.1      (0.6)   24.5      25.1    (0.6)
                                          ppts                         ppts
Average
consumption:
   Gas (therms)     492        494        (0)      181        218      (17)
  Electricity     3,688     3,794     (3)     1,752     1,875   (7)
   (kWh)
Total
consumption:
   Gas (mmth)       4,342      4,460      (3)      1,579      1,945    (19)
  Electricity     25,078    25,683    (2)     11,932    12,696  (6)
   (GWh)
Gross Revenue
(£m):
   Gas              6,033      5,884      3        2,307      2,668    (14)
  Electricity     3,454     3,237     7       1,694     1,646   3
  Total           9,487     9,121     4       4,001     4,314   (7)
Operating profit   571       606       (6)     215       261     (18)
(£m)
Operating profit
after taxation     423       457       (7)     nm        nm      nm
(£m)
Post-tax margin    4.5       5.0       (0.5)   nm        nm      nm
(%)                                       ppts
FY 2012 residential energy customer accounts have been restated to exclude
38,000 accounts subsequently reclassified as dormant.

Further detail on costs can be found in the Ofgem Consolidated Segmental
statement on page 74 of the Preliminary Results announcement and on the
Centrica website

Residential                                                  
services
For the year ended   FY 2013   FY 2012   Δ%      H2 2013  H2      Δ%
31 December                                                    2012
Customer product
holdings (period                                                 
end):
   Central heating
  service            4,575      4,663      (2)      4,575     4,663    (2)
   contracts
   (’000)
   Kitchen
   appliances care
   (no. of            453        465        (3)      453       465      (3)
   customers)
   (’000)
   Plumbing and
   drains care        1,683      1,714      (2)      1,683     1,714    (2)
   (’000)
   Home electrical    1,420      1,444      (2)      1,420     1,444    (2)
   care (’000)
  Other contracts   96        116       (17)    96       116     (17)
   (’000)
  Total holdings    8,227     8,402     (2)     8,227    8,402   (2)
   (’000)
Domestic central
heating              101       94        7       55       50      10
installations
(’000)
Gross Revenue
(£m):
   Central heating
   service            841        839        0        430       435      (1)
   contracts
   Central heating    263        258        2        142       137      4
   installations
  Other             551       577       (5)     278      291     (4)
  Total             1,655     1,674     (1)     850      863     (2)
Operating profit     318       312       2       183      187     (2)
(£m)
Operating profit
after taxation       241       236       2       nm       nm      nm
(£m)
Post-tax margin      14.6      14.1      0.5     nm       nm      nm
(%)                                         ppts
                                                                             
Business energy
supply and                                                   
services
For the year ended   FY 2013   FY 2012   Δ%      H2 2013  H2      Δ%
31 December                                                    2012
Customer supply
points (period
end):
   Gas (’000)         310        322        (4)      310       322      (4)
  Electricity       602       602       0       602      602     0
   (’000)
  Total (’000)      912       924       (1)     912      924     (1)
Average
consumption:
   Gas (therms)       2,476      2,737      (10)     996       1,156    (14)
  Electricity       28,852    27,521    5       14,201   14,014  1
   (kWh)
Total consumption:
   Gas (mmth)         784        940        (17)     312       399      (22)
  Electricity       17,260    17,110    1       8,504    8,581   (1)
   (GWh)
Gross Revenue
(£m):
   Gas                904        1,014      (11)     373       443      (16)
   Electricity        1,951      1,841      6        968       929      4
  Business          229       207       11      122      101     21
   Services
  Total             3,084     3,062     1       1,463    1,473   (1)
Operating profit     141       175       (19)    63       82      (23)
(£m)
Operating profit
after taxation       113       130       (13)    nm       nm      nm
(£m)
Post-tax margin      3.7       4.2       (0.5)   nm       nm      nm
(%)                                         ppts
Further detail on costs can be found in the Ofgem Consolidated Segmental
statement on page 74 of the Preliminary Results announcement and on the
Centrica website

DIRECT ENERGY

Market conditions for our North American downstream energy supply businesses
proved challenging in 2013, as rising gas and power prices, declining barriers
to entry and an increasingly competitive environment among both competitive
energy suppliers and default utility providers led to a narrowing of margins.
However we made good strategic progress during the year, with the acquisition
of the Hess Energy Marketing business significantly enhancing our scale and
capability in Commercial and Industrial (C&I) gas supply, the acquisition of
Bounce Energy providing a leading internet-based digital platform and further
organic growth in our services protection plan product. We also continued our
strong focus on health and safety, with the LTIFR remaining low at 0.12 per
100,000 hours worked in Direct Energy (2012: 0.11).

Direct Energy’s scale in deregulated markets leaves us uniquely positioned in
North America to respond to these challenging market dynamics. In the fourth
quarter of the year the business was reorganised, and the role of
ChiefOperationsOfficer was created to lead the drive for operational
synergies across our businesses. In 2014 the business will be focused on
delivering further cost reductions and building our range of innovative new
products and services, with an increased focus on digital channels. We are
positioning the business for growth, through innovation and attractive
products and propositions, while the Hess acquisition provides us with the
ability to optimise positions along the gas value chain.

The combination of organic growth and the effect of acquisitions has increased
the scale of the business, resulting in an increase in Direct Energy gross
revenue to £7,325 million (2012: £5,684 million). However operating profit
fell to £276 million (2012: £310 million), principally reflecting lower
margins in business power energy supply. The operating profit in 2013 includes
£14 million of integration costs and £22 million of additional amortisation of
acquired intangibles relating to the Hess acquisition.

Competitive pressures offsetting the impact of acquisitions in residential
energy supply

Operating profit for Direct Energy residential energy supply was up slightly
in 2013, as the positive impact of previous acquisitions and reduced operating
costs were largely offset by some narrowing of margins in Texas and the
continued decline of our customer base in Ontario as a result of our decision
to forgo renewals and new customer sales, due to the Energy Consumer
Protection Act (ECPA). Gross revenue increased to £2,517million (2012: £2,357
million) reflecting higher gas and power prices, while operating profit was
£163 million (2012:£156 million) and the post-tax margin was unchanged at
4.4%.

The number of residential energy accounts at the end of 2013 was 3.4 million,
a slight decline since the start of 2013, in part reflecting the expected
decline in Ontario, a highly competitive sales environment in both Texas and
the USNorth East and the expected loss of aggregation customers in the US
North East.

In Canada, we now have less than 200,000 customer accounts in Ontario. The
business is no longer core to our operations, with the region delivering only
11% of our residential energy supply operating profit in 2013 compared to 20%
in 2012 and 29% at its peak in 2010. We also experienced a small drop in our
regulated customer base in Alberta, although this was partially offset by
growth in the competitive customer base in the region. This resulted in an
increase in profitability in Alberta.

In the US North East, the number of accounts fell by 72,000, to 1.3 million,
with the loss of 53,000 aggregation customers and the impact of a competitive
sales environment being only partly offset by improved retention rates.
However profitability increased in the region, reflecting cost efficiencies
and the successful integration of customers acquired in 2012 in the Energetix
and NYSEG Solutions transactions onto our systems.

In Texas, retention rates also improved, with churn improving by 2ppt. However
a highly competitive sales environment, with around 50 retail energy suppliers
and 200 competitive offers, resulted in reduced renewal margins. To help
offset this margin decline, we focused on lowering our operating cost base,
with our cost to serve per customer in Texas falling by 24%. We also continued
to develop innovative products, and during the second half of the year we
launched our ‘Free Electricity Saturdays’ product, while we increased sales of
our prepayment product, ‘Power To Go’ by 30% in 2013. In the second half of
the year we also completed the acquisition of the independent electricity
retailer, Bounce Energy, for $42 million (£27 million), adding 80,000 accounts
to our Texas business and further consolidating our position as a top three
retail energy provider in Texas. The acquisition provides a leading
internet-based digital and e-commerce platform, for marketing innovative
products and online account management and over time we expect this platform
to aid residential energy and services account growth in all our core regions.

Volume growth in business energy supply not fully offsetting margin pressures

On 1 November 2013 we completed the acquisition of the New Jersey-based energy
marketing business of Hess Corporation for $1,194 million (£736 million),
including a payment for working capital of $416 million (£257 million). The
acquisition makes Direct Energy the largest C&I gas supplier on the East Coast
of the US and the second largest C&I power supplier in the competitive US
retail markets, and gives us a more balanced gas and power customer portfolio.
It also builds on our existing capabilities and further integrates our
activities along the gas value chain, linking gas supply from producers and
other market participants, through secured transport and storage capacity, to
both our C&I and residential customer bases. The initial performance of the
acquired business has been strong.

Direct Energy business energy supply gross revenue increased by 52% to £4,238
million (2012: £2,795 million), reflecting the impact of higher wholesale
commodity prices and increased sales volumes. Electricity volumes increased by
24% to 63.9TWh (2012: 51.4TWh) and gas volumes more than doubled to 1,839mmth
(2012:793mmth) reflecting two months of contribution from the Hess Energy
Marketing business and good sales performance. However the power market has
been increasingly competitive with, up until January 2014, potential
competitors finding it easier to access credit and reduced market volatility
providing lower barriers to entry. This led to a 36% decline in profitability
to £77 million (2012: £121 million). The underlying post-tax margin, excluding
the impact of integration costs and additional amortisation associated with
the Hess acquisition, fell to 1.8% (2012: 2.8%).

The business energy supply division now includes power generation and
midstream activities. In December we announced the sale of our three
Texas-based power stations, with a combined capacity of 1,295MW, to Blackstone
for $685 million (£420 million). The disposal completed in January 2014 and we
expect to recognise a profit on disposal of approximately £220 million as an
exceptional item in the 2014 financial results. As part of the transaction we
also entered into a three year heat rate call option arrangement with
Blackstone for an equivalent amount of capacity. We believe that in the near
term this arrangement, together with a liquid physical and financial power
market in Texas, can ably support our downstream operations through
contractual arrangements rather than asset ownership.

Contract and profit growth in residential and business services

Direct Energy residential and business services gross revenue increased by 7%
to £570 million (2012: £532 million), predominantly reflecting an increase in
sales from our owned operations and those of our franchises. Operating profit
increased to £36million (2012: £33 million) and the post-tax margin improved
slightly to 4.4% (2012: 4.1%) reflecting cost control.

Direct Energy Services gained market share during 2013, with the number of
accounts increasing by 207,000. This partly reflects the acquisition of the
US-based home services business, America’s Water Heater Rentals (AWHR) for $30
million (£18 million), which added over 80,000 residential customers located
primarily in the US Midwest, Florida and the US Northeast. The acquisition was
completed in October and provides Direct Energy with an expanded services
product range and the opportunity to grow its customer base further in the US,
offering rentals alongside heating, air conditioning, plumbing and electrical
services across its growing franchise business. In the year we increased our
number of franchise territories by 11% to 633.

The increase in accounts also reflects organic growth from developing our
protection plan offering in the US, in part leveraging the acquisition of Home
Warranty of America in 2012, and we now have over 100,000 whole-home warranty
plans, up from 70,000 at the time of acquisition. Direct Energy Services also
benefited from improved optimism in the economy, with a revival in new housing
starts helping drive a 25% increase in sales in our residential new
construction business.

Positioning the business for the future in a challenging external environment

Direct Energy has had a difficult start to 2014, and market conditions for our
residential and business energy supply divisions look set to remain
challenging. Although the Hess Energy Marketing business is performing well,
Direct Energy has been impacted by a weaker US dollar, continued margin
pressures and exceptionally cold weather, which had a significant impact
across all suppliers in the US North East and resulted in additional system
charges. As a result, we currently expect total Direct Energy operating profit
to be broadly flat year-on-year.

Against this backdrop, improving cost competitiveness is a core priority and a
cost reduction programme of $100million is underway, as we deliver synergies
from Direct Energy’s enhanced scale. We are already benefiting from the
creation of an integrated residential energy operations centre in Tulsa and a
consolidated energy and services call centre in Phoenix. We are also investing
in a new residential energy billing platform for the Alberta market. And in
Services, we are transitioning from eight separate operating systems to one,
to help deliver simplified processes and operating efficiencies as well as to
facilitate a more robust franchising platform.

In C&I, the integration of Hess Energy Marketing is proceeding well and on
schedule. Our priority for 2014 is to fully integrate the teams, retaining key
personnel and systems, and in turn deliver exceptional service levels and high
levels of customer retention. In the first three full months of ownership, the
business has delivered EBITDA in excess of our investment case, with the
acquisition expected to be earnings accretive in 2014. Over time, the enhanced
scale, dual fuel capabilities, advantaged positions along the gas value chain
and long-term customer relationships delivered by the Hess acquisition will
provide additional growth opportunities across the enlarged business.

Building a range of innovative product offerings is also core to our business
model, improving customer retention and delivering growth. Our ‘Power To Go’
prepayment product and our innovative ‘Free Electricity Saturdays’ product
have both proved popular with residential energy customers. The Bounce Energy
acquisition is already delivering increased sales through digital channels,
while we see scope for further growth through connected home propositions. We
have a relationship with Nest in Canada and launched a bundled thermostat and
energy offering in the first quarter of 2014. Additionally, we plan to launch
a Direct Energy branded smart thermostat in 2014.

In services, our franchise model enables expansion for limited capital outlay,
while we expect to see further growth in our protection plan offering in the
United States. We also recently launched a small scale pilot of a new HVAC
leasing proposition. Initial sales have been considerably ahead of our
expectations, with customers willing to undertake a higher value of work when
purchased through rental payments as opposed to upfront payment. Over time, we
see significant potential for bundling of energy and services propositions to
our residential customer base.

Total Direct                                                  
Energy
For the year        FY         FY                  H2         H2
ended 31           2013      2012      Δ%      2013      2012      Δ%
December
Total
residential
energy and         5,967     5,856     2       5,967     5,856     2
services
accounts (period
end) (’000)
Gross revenue      7,325     5,684     29      4,134     2,921     42
(£m)
Operating profit   276       310       (11)    111       155       (28)
(£m)
Operating profit
after taxation     189       203       (7)     nm        nm        nm
(£m)

Residential                                                   
energy supply
For the year
ended 31           FY 2013   FY 2012   Δ%      H2 2013   H2 2012   Δ%
December
Customer
accounts (period    3,360      3,455      (3)      3,360      3,455      (3)
end) (’000)
Gross revenue      2,517     2,357     7       1,209     1,147     5
(£m)
Operating profit   163       156       4       64        55        16
(£m)
Operating profit
after taxation     111       103       8       nm        nm        nm
(£m)
Post-tax margin    4.4       4.4       0.0     nm        nm        nm
(%)                                       ppts

Business energy                                               
supply
For the year
ended 31           FY 2013   FY 2012   Δ%      H2 2013   H2 2012   Δ%
December
Gas sales (mmth)    1,839      793        132      1,345      372        262
Electricity         63,919     51,378     24       35,920     27,443     31
sales (GWh)
Gross revenue      4,238     2,795     52      2,629     1,495     76
(£m)
Operating profit   77        121       (36)    24        78        (69)
(£m)
Operating profit
after taxation     53        78        (32)    nm        nm        nm
(£m)
Post-tax margin    1.3       2.8       (1.5)   nm        nm        nm
(%)                                       ppts
Post-tax                                  (1.0)
underlying         1.8       2.8       ppts    nm        nm        nm
margin (%)
FY 2013 post-tax underlying margin (%) excludes £25million (£36m pre-tax)
relating to amortisation of customer intangibles and integration costs
associated with the Hess Energy Marketing acquisition.

Residential and business services
For the year                  FY              FY                             H2              H2
ended 31              2013       2012       Δ%        2013       2012       Δ%
December
Contract
relationships         2,608      2,401      9         2,608      2,401      9
(period end)
(’000)
On demand and
installation                  748             670             12             398             360             11
jobs (’000)
Gross revenue         570        532        7         296        279        6
(£m)
Operating             36         33         9         23         22         5
profit (£m)
Operating
profit after          25         22         14        nm         nm         nm
taxation (£m)
Post-tax              4.4        4.1        0.3       nm         nm         nm
margin (%)                                                    ppts

Direct Energy (with comparator year of 2012 restated to remove effect of foreign exchange movements)
For the                           FY              FY                             H2              H2
year ended             2013       2012       Δ%        2013       2012       Δ%
31 December
Revenue                                                                     
(£m)
Residential
energy                            2,517           2,360           7              1,209           1,132           7
supply
Business
energy                            4,238           2,989           42             2,629           1,594           65
supply
Residential
and                    570        534        7         296        276        7
business
services
Direct
Energy                 7,325      5,883      25        4,134      3,002      38
revenue
Operating
profit (£m)
Residential
energy                            163             157             4              64              55              16
supply
Business
energy                            77              121             (36)           24              77              (69)
supply
Residential
and                    36         33         9         23         22         5
business
services
Direct
Energy                 276        311        (11)      111        154        (28)
operating
profit
2012 figures restated at 2013 weighted average exchange rate.

INTERNATIONAL UPSTREAM

CENTRICA ENERGY

Significant progress towards our refreshed strategic priorities

International Upstream performed well in 2013, with strong gas and oil
production, the highest UK nuclear generation volumes for eight years and
consistent operational performance from our gas-fired generation fleet. Under
the leadership of Mark Hanafin we also made significant progress towards our
refreshed strategic priority – to integrate our natural gas business, linked
to our core markets – with a new international structure enabling us to
maximise the potential of our core E&P regions of UK and Netherlands, Norway
and Canada.

We have completed three key transactions: the North American LNG export
agreement with Cheniere; the acquisition of a package of producing
conventional gas and oil assets in the Western Canadian Sedimentary Basin from
Suncor; and the acquisition of a 25% interest in the Bowland shale exploration
license from Cuadrilla Resources and AJ Lucas. Overall we added 155 million
barrels of oil equivalent (mmboe) of net proven and probable (2P) reserves in
2013, both organically – principally in Norway - and through acquisition, and
we increased our 2C resource base by 28% to 771mmboe. However, we recognised
£318 million of post-tax impairments, reflecting reserve and resource
downgrades and increases in expected costs on certain Southern North Sea
projects and a reduction in North American natural gas prices since previous
asset acquisitions and developments. We also announced the divestments of
selected North Sea E&P assets and of non-core UK wind assets for value,
evidence of our commitment to maintaining capital discipline.

International Upstream operating profit increased by 6% to £1,326 million
(2012: £1,251 million). Gas operating profit increased, reflecting higher
production volumes following recent acquisitions and higher achieved prices,
partially offset by a decrease in Power operating profit following the loss of
free carbon allowances, and continued difficult trading conditions for
gas-fired generation. Health and safety remains a core priority and we
continued our focus on the effective management of major accident hazards
through improved process safety training and reporting. We had no significant
safety events in 2013, while the LTIFR fell to 0.10 (2012: 0.22).

Increased and more diverse gas and oil production

Total production of gas and liquids increased by 16% to 77.3mmboe (2012:
66.8mmboe). Total gas production volumes increased by 19% to 3,557 million
therms (mmth) (2012: 2,990mmth) and total liquids volumes increased by 7% to
18.7mmboe (2012: 17.4mmboe). This predominantly reflects the benefit of a full
year of production from the three acquisitions completed during 2012, and a
part year of production from the package of Canadian conventional gas and
crude oil assets acquired from Suncor in partnership with QPI, with production
from new fields broadly offsetting the natural decline in our existing
portfolio.

As a result of the recent acquisitions, we now have a more diverse
geographical portfolio, with less reliance on Morecambe, and larger scale
businesses in Norway and Canada. Norwegian production increased by 36% in 2013
and production from Canada increased by 28%, while production from the East
Irish Sea contributed only 17% of total 2013 production, compared to 20% in
2012.

The assets acquired in 2012 have overall been producing better than our
investment cases and initial production from the Canadian assets acquired from
Suncor was ahead of our expectations in the fourth quarter of 2013, following
completion of the transaction in late September. This C$987million (£601
million) acquisition was made through a newly formed partnership owned by
Centrica (60%) and QPI (40%), and was the first transaction made under the
Memorandum of Understanding signed between the two parties in 2011. 100% of
production and financial performance from the assets have been consolidated
into the 2013 results. Centrica’s 60% share of 2P reserves from the assets as
at the end of 2013 was 101 mmboe, which was higher than original expectations,
and we are well placed to benefit from any upside in North American gas prices
through the accelerated development of resources in the portfolio.

In 2013 we had a full year of production from our Ensign and Seven Seas
fields, which came on-stream in 2012, and delivered first gas from our York
and Rhyl fields in the first quarter of 2013. However, lower than expected
production flow rates at Ensign, SevenSeas and York, combined with lower
forward gas prices and updated information on resource potential and
development costs, have caused significant reductions in the value of these
assets, leading to post-tax impairments totalling £252million.

In the case of Ensign, the lower flow rates have led to adverse revisions of
the future reserves potential of producing wells and of additional wells to
exploit the potential of the field. In the case of Seven Seas, lower flow
rates have led to a downward revision in 2P reserves from the production well.
In the case of York, production flow rates from a second well were below
expectations and we also suspended drilling on a third well. This has led to
an increase in expected capital expenditure, and adverse revisions to the
future reserves potential of the two producing wells and of additional wells
yet to be drilled.

In the second half of the year we announced the disposals of three packages of
North Sea assets – a 13% non-operated stake in the Babbage field, a 50%
operated interest in the Greater Kittiwake Area and a portfolio of assets in
the Heimdal area in Norway – disposing of 2P reserves totalling 12mmboe for a
combined consideration of £125 million, including contingent consideration.
The Babbage and Heimdal disposals, totalling 8mmboe of reserves, were
completed in late 2013, with the Greater Kittiwake disposal expected to
complete in late February 2014. This is in line with our strategy to optimise
the North Sea portfolio, investing selectively in assets around our existing
hubs while managing costs, and looking to divest non-core assets for value.
Taking into account these North Sea divestments and the full year impact of
the Canadian acquisition, total gas and liquids production volumes are
expected to increase to around 85mmboe in 2014, in line with previous
guidance.

Adding value through reserve additions in our E&P portfolio

Centrica Energy added 155mmboe of 2P reserves in 2013, a net 99mmboe from
acquisitions and disposals and 56mmboe from existing fields. This represents a
total production replacement ratio of 201%, and 73% from organic sources.

In Norway, we recognised an additional 23mmboe of 2P reserves across our
Kvitebjorn and Statfjord fields, reflecting strong performance from these
assets and demonstrating the quality of our acquisitions in Norway. In Canada,
incremental reserves of 7mmboe were recognised in the year from our existing
portfolio, in addition to the reserves added following the Suncor acquisition.
We have now undertaken a review of our larger Canadian portfolio and expect to
increase our capital allocation to a number of attractive liquids-rich
opportunities in the region, which we believe will drive longer term profit
growth. However we recognised a post-tax impairment of £66 million on our
existing gas assets in Canada, reflecting a weaker outlook for North American
natural gas prices and an increase in the discount rate applicable to these
assets.

We continued to make progress across our development portfolio. In addition to
producing first gas from York and Rhyl in the first quarter of 2013, first
production from Kew was delivered in January 2014, while we are currently
drilling a fourth production well at York. We have now sanctioned a sidetrack
well at Grove, which is expected to produce first gas later in 2014. The
Statoil-operated Valemon project continues to proceed as planned, with first
production expected towards the end of 2014, while the GDF-operated Cygnus
project is progressing well and remains on track to bring 53mmboe of reserves
into production around the end of 2015.

In the year, we recognised 21mmboe of 2P reserves at Butch in the Norwegian
North Sea, which was discovered in 2011, and continue to work on a development
plan for the project. We have now also commenced appraisal drilling on the
adjacent Butch East well, which has the potential to add further to reserves.
On our Block 22 project in Trinidad and Tobago we had drilling successes on
two wells, helping to firm up our resource base in the region. We continue to
review our development and partnership options for gas export.

In exploration, 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
January 2014 we were awarded 10 further Norwegian licences through the ‘Awards
in Predefined Areas’ (APA) process. In the UK, we were awarded 16 licences in
the second tranche of the 27^th UK offshore oil and gas licencing round, in
addition to the 6 licences awarded in 2012. Since the start of 2013, in line
with our commitment to capital discipline, we have relinquished our interests
in Bligh, Christian, Selkirk and Peik. Overall we have an attractive portfolio
of exploration prospects and will focus our expenditure on the best prospects.

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 announcements in July and December 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

In March, we announced a 20 year agreement with Cheniere to purchase
91,250,000 million British thermal units (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 and the full
Federal Energy Regulatory Commission application was filed in September 2013.
The contract marks an important step in delivering our 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.

In November, we announced that we had entered into a further supply agreement
with Qatargas to purchase up to 3 million tonnes per annum of LNG for the UK
from June 2014. This deal follows on from our existing agreement with
Qatargas, and highlights Centrica’s status as an attractive counterparty,
underpinning the UK’s access to the global LNG market amidst fierce demand
from Asia and Latin America.

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

International gas operating profit increased by 23% to £1,155 million (2012:
£940 million), reflecting higher production volumes and higher achieved
prices. The average achieved gas sales price, including production from North
America, increased by 10% to 53.7 pence per therm (p/th) (2012: 49.0p/th).
This primarily reflects an increased achieved gas price in Europe of 65.0p/th
(2012: 57.6p/th) due to a higher prevailing UK NBP gas price, only partially
offset by a change in the production mix towards North America. The achieved
gas price for North America and Trinidad and Tobago fell slightly to 20.9 p/th
(2012: 23.2p/th). The average achieved oil and condensate price was broadly
flat at £61.6 per boe (2012: £61.7/boe).

On a per unit of production basis, depletion, depreciation and amortisation
(DDA) costs increased by 23% in the year to £11.4/boe (2012: £9.3/boe) with a
shift in production mix towards more recently acquired and developed higher
cost fields in Europe, partly offset by additional production from lower cost
North American fields. Unit lifting and other cash production costs increased
by 2% to £12.6/boe (2012:£12.4/boe), with the impact of industry-wide cost
inflation being mostly offset by the impact of an increased proportion of
lower cost North American production. Exploration and appraisal costs were
£154 million (2012: £143 million), in part reflecting costs written down
following licence relinquishments.

International gas operating profit after tax was £325 million (2012: £198
million) and the return on total capital employed was 8.3% (2012: 5.6%). The
business generated free cash flow of £180 million, net of total capital
expenditure and acquisitions of £1,449 million.

Strong performance from existing nuclear fleet; challenging market conditions
for gas-fired generation

Output from the nuclear fleet was once again strong, with our 20 per cent
equity share of the output increasing to 12.1 terawatt hours (TWh) (2012:
12.0TWh), the highest annual output since 2005. This reflects continued
investment in the fleet, with no large unplanned outages occurring during the
year, underlining the quality of our original investment in the British Energy
fleet. The average achieved price for the year was £51.9 per megawatt hour
(MWh) (2012:£49.6/MWh), reflecting the increase in the baseload power market
price and the impact of hedging. An increase in revenue was only partly offset
by additional depreciation and inflationary cost pressures, resulting in a 5%
increase in nuclear operating profit, to £250 million (£237 million). In
February we announced that we would not be exercising our option to
participate in UK nuclear new build, taking into account increased costs and
the lengthening time frame for a return on capital invested in a project of
this scale.

The market environment remains challenging for gas-fired power generation,
with continued low market clean spark spreads. The average gas-fired load
factor increased to 27% (2012: 26%), although slightly lower capacity meant
that generation volumes reduced to 8.9TWh (2012: 9.0TWh). Against this
challenging environment, we continued to minimise costs, running the plants as
efficiently as possible and thermal fleet reliability remained high at 97%
(2012:97%), enabling running at peak times. The gas-fired operating loss
increased to £133 million (2012: £4 million loss), primarily reflecting the
end of free carbon allowances.

Our gas-fired power stations at Barry, Brigg and Peterborough were all awarded
contracts by the National Grid in March, as part of its Short Term Operating
Reserve (STOR) market. All the contracts run until the end of the first
quarter of 2015, with Brigg awarded a two-year contract, Peterborough awarded
a ‘follow-on’ contract when its current arrangement finishes in 2014 and Barry
awarded a one-year contract starting in April 2014.

Availability of our wind assets was 88% (2012: 88%), with generated volumes up
41% to 753 gigawatt hours (GWh) (2012: 533 GWh) and a load factor of 36%
(2012: 32%), reflecting output from the Lincs wind farm, with all 75 turbines
having been fully commissioned by September. In June, we sold our 50% interest
in the Braes of Doune onshore wind farm to Hermes GPE Infrastructure fund for
£59 million. In December, we were disappointed not to receive a letter of
eligibility for transitional Feed in Tariffs for our Race Bank offshore wind
project, and we sold our 100% interest in the project to DONG Energy Power
(UK) Limited, for £50 million. The net impact of these two transactions was a
£23 million profit on disposal. We retain a 50% interest in 4.2GW of potential
capacity in CelticArray, the Round 3 Irish Sea Zone, however we have impaired
the carrying value of this project by £25 million in the year. Overall,
renewables operating profit reduced to £25 million (2012: £56 million),
predominantly reflecting lower net profit on disposal during the year and the
Round 3 impairment.

Total Power profitability decreased by 45% to £171 million (2012: £311
million), with increased losses from our gas-fired fleet and lower renewables
profit only partially offset by improved nuclear and Midstream profits. UK
power operating profit after tax was £143 million (2012: £243 million) and the
return on total capital employed was 3.8% (2012: 6.7%).

Positioning the business for the future

We made good strategic progress during 2013 and we will benefit in 2014 from a
full year’s worth of production from the Canadian assets acquired from Suncor.
However the E&P business is facing rising costs in the UK North Sea, while gas
and oil prices have reduced from their peaks. As a result, we expect operating
profit to reduce in 2014 compared to 2013, although with the move in
production mix towards Canada, we expect post-tax profit to be broadly
unchanged.

In this environment, while existing projects such as Cygnus and Valemon remain
attractive opportunities and we have a number of potentially attractive future
development options in Norway, we are likely to concentrate on only the very
best North Sea investments, with North America potentially a more attractive
region for investment. We have also established new processes for project
stage-gate review and have reduced our rig commitments, to provide additional
assurance and maximise project returns. Overall we expect to invest around
£900 million per annum of capital expenditure in E&P projects over the next
three years, with an increasing proportion of capital spend in NorthAmerica.
This is around 20% lower than previously expected levels, but will have
limited impact on near-term production, which we expect to be in the range
80-85mmboe per annum. Our profile of committed investment gives us flexibility
to consider acquisitions, if the economics are attractive and they are a good
fit with our existing portfolio, while potentially divesting further non-core
assets for value.

Market conditions look set to remain challenging for our gas-fired power
stations with no sign of material recovery in 2014. We have sanctioned a
further turbine blade upgrade at our 1.3GW South Humber CCGT power station,
which will improve the efficiency of the plant and work is scheduled to
commence on the project in the first half of 2014. In addition, we have
consent for 1GW of new build CCGT on our existing site at Kings Lynn and are
exploring the option to repower the existing plant. However continued
political uncertainty is putting investment at risk, and any future investment
decisions remain dependent on the economics of the projects and the successful
introduction of the capacity market. On renewables, we retain interests in our
joint venture portfolio of operating wind assets, with purchase agreements for
both the power and the ROCs. Our focus will be on maximising value through
operating our assets efficiently.

International gas                                            
For the year ended    FY       FY       Δ%      H2       H2       Δ%
31 December            2013      2012               2013      2012
Gas production                                                  
volumes (mmth)
    East Irish Sea    718       740       (3)      374       378       (1)
     Other UK and      1,071     883       21       530       403       32
     Netherlands
     Norway            828       557       49       392       381       3
     North America     701       549       28       449       270       66
    Trinidad &       239      261      (8)     116      131      (11)
     Tobago
    Total            3,557    2,990    19      1,861    1,563    19
Liquids production
volumes (mmboe)
     UK and            6.3       7.4       (15)     2.8       3.5       (20)
     Netherlands
     Norway            11.0      8.9       24       5.2       5.9       (12)
    North America    1.4      1.1      27      0.9      0.5      80
    Total            18.7     17.4     7       8.9      9.9      (10)
Total production      77.3     66.8     16      39.7     35.9     11
volumes (mmboe)
Average achieved
gas price (p/therm)
     Europe            65.0      57.6      13       64.2      59.3      8
     North America
    and Trinidad &   20.9     23.2     (10)    21.2     22.4     (5)
     Tobago
    Total            53.7     49.0     10      51.8     50.9     2
Average oil and
condensate sales
price (£/boe)
     Europe            62.9      62.8      0        60.6      63.4      (4)
     North America
    and Trinidad &   43.3     45.5     (5)     41.3     46.9     (12)
     Tobago
    Total            61.6     61.7     0       58.8     62.5     (6)
DDA costs (£/boe)
     Europe            12.9      10.2      26       13.0      10.5      24
     North America
    and Trinidad &   6.1      6.2      (2)     5.5      5.8      (5)
     Tobago
    Total            11.4     9.3      23      11.0     9.6      15
Lifting and other
cash production
costs (£/boe)
     Europe            13.5      13.8      (2)      14.0      15.0      (7)
     North America
    and Trinidad &   9.7      7.4      31      10.4     8.0      30
     Tobago
    Total            12.6     12.4     2       13.0     13.6     (4)
Exploration &
appraisal costs       154      143      8       107      110      (3)
(£m)
Operating profit      1,155    940      23      472      421      12
(£m)
Operating profit      325      198      64      nm       nm       nm
after taxation (£m)
Return on total                            2.7
capital employed      8.3      5.6      ppts    nm       nm       nm
(%)
Total net proven
and probable          711      633      12      nm       nm       nm
reserves (mmboe)
To align with a new organisational structure, the North American Upstream gas
business is now reported in Centrica Energy. Prior year 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
year comparatives have been restated.

Centrica's share of proven and probable reserves excludes Rough cushion gas
of 30mmboe, and includes the 60% share of Canadian assets acquired from
Suncor.

UK power
For the year
ended 31          FY 2013   FY 2012   Δ%      H2 2013   H2 2012   Δ%
December
Power generated                                                 
(GWh)
Gas-fired          8,897      8,952      (1)      4,366      4,046      8
Renewables         753        533        41       463        287        61
Nuclear           12,097    12,004    1       6,334     6,050     5
Total             21,747    21,489    1       11,163    10,383    8
Achieved Clean
Spark Spread       11.7       10.7       9        13.4       11.2       20
(£/MWh)
Achieved power
price
(including         114.5      105.7      8        120.9      111.3      9
ROCs) (£/MWh) -
renewables
Achieved power
price (£/MWh) -   51.9      49.6      5       51.7      49.8      4
nuclear
Operating
profit / (loss)
(£m)
Gas-fired          (133)      (4)        nm       (69)       0          nm
Renewables         25         56         (55)     (10)       11         nm
Nuclear            250        237        5        128        119        8
Midstream         29        22        32      3         7         (57)
Operating         171       311       (45)    52        137       (62)
profit (£m)
Operating
profit after      143       243       (41)    nm        nm        nm
taxation (£m)
Return on total                          (2.9)
capital           3.8       6.7       ppts    nm        nm        nm
employed (%)
Midstream includes results from trading and from bilateral arrangements with
third party owners of power generation assets in the UK and Europe.

CENTRICA STORAGE

Good operational performance in challenging market conditions

Centrica Storage performed well operationally in 2013, with strong reliability
of 96% (2012: 92%) helping Rough make an important contribution to the UK’s
security of supply during periods of sustained cold weather in the first four
months of the year. However operating profit fell by 29%, reflecting narrowing
summer/winter gas price differentials.

The Net Reservoir Volume (NRV) reached record low levels in April, as we
experienced sustained customer withdrawals during the prolonged cold weather.
As temperatures returned to more normal levels from mid-April, customers
switched to injection, and the business delivered a record year in terms of
gas volume injected. With warmer weather in November and December resulting in
less withdrawal than usual towards the end of the year, the NRV ended the year
above the five year average.

Health and safety remains a core priority and Centrica Storage continues to
progress its process safety programme. We experienced no further lost time
incidents (LTIs) in the year, after recording our first LTI in over three
years in March.

Narrow forward seasonal spreads creating commercial headwinds

In April, Centrica Storage announced that it had sold all SBUs for the 2013/14
storage year at an average price of 23.3p (2012/13: 33.9p), reflecting low
summer/winter gas price differentials over the course of 2012 and 2013.
Forward 2014/15 market spreads remain narrower still.

The narrow summer/winter spreads also provide a challenging background for new
projects. In light of the weak economics for storage projects, and the UK
Government’s decision to rule out incentivisation for additional gas storage
capacity to be built, Centrica decided not to proceed with its offshore Baird
project and put its project at Caythorpe on hold indefinitely. As a result, a
post-tax exceptional charge of £224 million was recognised in the year,
relating to impairments and provisions for these projects.

Reduced year-on-year operating profit

Gross revenue fell 7% to £188 million (2012: £202 million). This reflected a
lower calendar year SBU price of 26.7p (2012: 31.0p) and lower optimisation
revenue, only partially offset by revenue generated from the York gas
processing terminal, which was commissioned early in the year. Operating
profit decreased by 29% to £63 million (2012:£89million), primarily
reflecting the decrease in revenue, additional fuel costs from the high levels
of injection during the year and costs associated with the York terminal.

With forward spreads even lower, Centrica Storage profitability is likely to
be only around break-even in 2014. Against this backdrop we will continue our
focus on safety, and further capital investment will be limited. We have also
now launched a three year programme to deliver £15million of cost reductions
through operational improvements.

Centrica Storage
For the year             FY             FY                             H2             H2
ended 31            2013      2012      Δ%         2013      2012      Δ%
December
Average SBU
price (in           26.7      31.0      (14)       23.3      33.9      (31)
period)
(pence)
Gross Revenue
(£m)
 Standard               121            141            (14)            52             77             (32)
  SBUs
 Optimisation      67        61        10         29        34        (15)
  / other
 Total             188       202       (7)        81        111       (27)
Operating           63        89        (29)       16        53        (70)
profit (£m)
Operating
profit after        48        67        (28)       nm        nm        nm
taxation (£m)
Return on                                              (2.0)
total capital       11.0      13.0      ppts       nm        nm        nm
employed (%)

Statement of Directors’ Responsibilities

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

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

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

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

By order of the Board

SAM LAIDLAW      NICK LUFF
Chief Executive   Group Finance Director

Group Income Statement

                                                                                                      2012
                                                       2013                                    (restated)
                                                                                                      (i)
                                         Exceptional       Results                  Exceptional       Results
Year ended 31              Business      items and         for        Business      items and         for
December          Notes  performance  certain          the year  performance  certain          the year
                           £m            re-measurements   £m         £m            re-measurements   £m
                                         £m                                         £m
                                                                                                      
Group revenue      5(b)    26,571       –                26,571    23,942       –                23,942
Cost of sales
before
exceptional
items and                  (21,464)      –                 (21,464)   (18,840)      –                 (18,840)
certain
re-measurements
^(i)
Exceptional        6       –             (125)             (125)      –             (89)              (89)
items
Re-measurement
of energy          6       –            413              413        –            603              603
contracts
Cost of sales           (21,464)     288              (21,176)  (18,840)     514              (18,326)
Gross profit               5,107        288              5,395     5,102        514              5,616
Operating costs
before                     (2,735)       –                 (2,735)    (2,680)       –                 (2,680)
exceptional
items ^(i)
Exceptional        6       –            (939)            (939)      –            (445)            (445)
items
Operating costs            (2,735)       (939)             (3,674)    (2,680)       (445)             (3,125)
Share of
profits/(losses)
in joint
ventures and      6, 12  146          25               171       140          (6)              134
associates, net
of interest and
taxation
Group operating    5(c)    2,518        (626)            1,892      2,562        63               2,625
profit
Financing costs    7       (297)         –                 (297)      (271)         –                 (271)
^(i)
Investment         7       54           –                54         62           –                62
income ^(i)
Net finance cost        (243)        –                (243)     (209)        –                (209)
Profit before              2,275         (626)             1,649      2,353         63                2,416
taxation
Taxation on       6, 8   (942)        243              (699)     (1,031)      (140)            (1,171)
profit ^(i)
Profit for the          1,333        (383)            950       1,322        (77)             1,245
year
Attributable to:                                                                         
Owners of the           1,333        (383)            950       1,322        (77)             1,245
parent
                                                                                                      
Earnings per            Pence                                    Pence
ordinary share
Basic ^(i)         10                                      18.4     24.0
Diluted ^(i)       10                                      18.3     23.9
Interim dividend
paid per           9                                       4.92     4.62
ordinary share
Final dividend
proposed per      9                                  12.08    11.78
ordinary share
(i) See note 1(a).

The notes on pages 36 to 72 form part of these Financial Statements.

Group Statement of Comprehensive Income

                                                       2013    2012
Year ended 31 December                        Notes         (restated) (i)
                                                       £m      £m
Profit for the year ^(i)                             950    1,245
Other comprehensive income/(loss):
Items that will be or have been recycled to
the Group Income Statement:
Gains on revaluation of available-for-sale             3       5
securities, net of taxation
                                                             
Net losses on cash flow hedges                         (25)    (27)
Transferred to income and expense on cash              34      108
flow hedges
Taxation on cash flow hedges                           (1)    (20)
                                                       8       61
Exchange differences on translation of                 (217)   (44)
foreign operations
Share of other comprehensive income/(loss)
of joint ventures and associates, net of               18     (12)
taxation
                                                       (188)   10
Items that will not be recycled to the Group                 
Income Statement:
Net actuarial losses on defined benefit                (179)   (293)
pension schemes ^(i)
Taxation on net actuarial losses on defined            31     71
benefit pension schemes ^(i)
                                                       (148)   (222)
Reversal of revaluation reserve, net of                (17)    –
taxation and exchange differences
Share of other comprehensive (loss)/income
of joint ventures and associates, net of            (15)   44
taxation
Other comprehensive loss net of taxation            (368)  (168)
Total comprehensive income for the year             582    1,077
Attributable to:
Owners of the parent                                   590     1,077
Non-controlling interests                           (8)    –
(i) See note 1(a).

Group Statement of Changes in Equity

                  Share     Share     Retained   Other    Total   Non-controlling   Total
                capital  premium  earnings  equity  £m     interests        equity 
                  £m        £m        £m         £m               £m                £m
1 January 2012
(as previously   319      874      4,043     364     5,600  –                5,600
reported)
Effect of
adoption of IAS  –        –        (297)     297     –      –                –
19 (revised
2011) ^(i)
1 January 2012    319       874       3,746      661      5,600   –                 5,600
(restated)
Total
comprehensive     –         –         1,245      (168)    1,077   –                 1,077
income ^(i)
Employee share    2         55        11         (2)      66      –                 66
schemes
Dividends         –         –         (816)      –        (816)   –                 (816)
Taxation          –         –         –          (1)      (1)     –                 (1)
Exchange         –        –        –         1       1      –                1
adjustments
31 December      321      929      4,186     491     5,927  –                5,927
2012 (restated)
Total
comprehensive     –         –         950        (360)    590     (8)               582
income
Employee share    –         2         (15)       70       57      –                 57
schemes
Purchase of       –         –         (2)        (500)    (502)   –                 (502)
treasury shares
Amounts arising
on acquisition    –         –         –          –        –       81                81
(see note 15)
Distribution
paid to           –         –         –          –        –       (8)               (8)
non-controlling
interests
Dividends paid
to equity         –         –         (864)      –        (864)   –                 (864)
holders
Taxation on
share based      –        –        –         (16)    (16)   –                (16)
payments
31 December      321      931      4,255     (315)   5,192  65               5,257
2013
(i) See note
1(a).

The notes on pages 36 to 72 form part of these Financial Statements.

Group Balance Sheet

                                                    2013       2012
31 December                                Notes            (restated) (i)
                                                    £m         £m
Non-current assets                                         
Property, plant and equipment                       7,446      7,965
Interests in joint ventures and             12      2,658      2,721
associates
Other intangible assets                             1,905      1,579
Goodwill                                            2,819      2,543
Deferred tax assets                                 105        183
Trade and other receivables                         150        55
Derivative financial instruments            13      227        313
Retirement benefit assets                   14      205        254
Securities                                 11(b)  202       199
                                                15,717    15,812
Current assets
Trade and other receivables                         5,446      4,335
Inventories                                         530        545
Derivative financial instruments            13      573        268
Current tax assets                                  151        54
Securities                                  11(b)   9          7
Cash and cash equivalents                  11(b)  719       931
                                                7,428     6,140
Assets of disposal groups classified as    15     301       –
held for sale
Total assets                                     23,446    21,952
Current liabilities
Derivative financial instruments            13      (506)      (615)
Trade and other payables                            (5,630)    (4,545)
Current tax liabilities                             (645)      (594)
Provisions for other liabilities and                (258)      (266)
charges
Bank overdrafts, loans and other           11(c)  (859)     (566)
borrowings ^(i)
                                                (7,898)   (6,586)
Net current liabilities                          (470)     (446)
Non-current liabilities
Deferred tax liabilities                            (1,426)    (1,678)
Derivative financial instruments            13      (431)      (327)
Trade and other payables                            (64)       (26)
Provisions for other liabilities and                (2,934)    (2,480)
charges
Retirement benefit obligations              14      (165)      (166)
Bank overdrafts, loans and other           11(c)  (5,172)   (4,762)
borrowings ^(i)
                                                (10,192)  (9,439)
Liabilities of disposal groups classified  15     (99)      –
as held for sale
Net assets                                       5,257     5,927
Share capital                                       321        321
Share premium                                       931        929
Retained earnings ^(i)                              4,255      4,186
Other equity ^(i)                                (315)     491
Total shareholders’ equity                       5,192     5,927
Non-controlling interests                        65        –
Total non-controlling interests and              5,257     5,927
shareholders’ equity
(i) See note 1(a).

The Financial Statements on pages 32 to 72, of which the notes on pages 36 to
72 form part, were approved and authorised for issue by the Board of Directors
on 20 February 2014 and were signed below on its behalf by:

SAM LAIDLAW      NICK LUFF
Chief Executive   Group Finance Director

Group Cash Flow Statement

Year ended 31 December                             Notes  2013     2012
                                                            £m        £m
Group operating profit including share of results         1,892    2,625
of joint ventures and associates
Less share of profit of joint ventures and               (171)    (134)
associates
Group operating profit before share of results of           1,721     2,491
joint ventures and associates
Add back/(deduct):
Depreciation, amortisation, write-down and                  2,319     1,507
impairments
Profit on disposals                                         (21)      (38)
Increase in provisions                                      162       201
Defined benefit pension service cost and                    (87)      (52)
contributions
Employee share scheme costs                                 43        43
Unrealised gains arising from re-measurement of          (400)    (610)
energy contracts
Operating cash flows before movements in working            3,737     3,542
capital
Decrease/(increase) in inventories                          78        (88)
Increase in trade and other receivables ^(i)                (456)     (205)
Increase in trade and other payables ^(i)                697      361
Operating cash flows before payments relating to            4,056     3,610
taxes, interest and exceptional charges
Taxes paid                                                  (892)     (524)
Payments relating to exceptional charges                 (224)    (266)
Net cash flow from operating activities                  2,940    2,820
Purchase of businesses                                      (1,115)   (155)
Sale of businesses                                          140       30
Purchase of intangible assets and property, plant   5(f)    (1,615)   (2,367)
and equipment
Sale of property, plant and equipment and                  17        14
intangible assets
Investments in joint ventures and associates                (51)      (291)
Dividends received from joint ventures and          12(c)   193       110
associates
Repayments of loans to, and disposal of                     59        42
investments in, joint ventures and associates
Interest received                                           29        33
(Purchase)/sale of securities                      11(b)  (8)      26
Net cash flow from investing activities                  (2,351)  (2,558)
Issue and surrender of ordinary share capital for           20        24
share awards
Purchase of treasury shares under share                     (502)     –
repurchase programme
Distribution paid to non-controlling interests              (8)       –
Financing interest paid                                     (248)     (215)
Repayment of borrowings                             11(b)   (400)     (516)
Cash received from borrowings                       11(b)   1,209     1,712
Equity dividends paid                                    (862)    (815)
Net cash flow from financing activities                    (791)     190
Net (decrease)/increase in cash and cash                    (202)     452
equivalents
Cash and cash equivalents at 1 January                      931       479
Effect of foreign exchange rate changes                  (10)     –
Cash and cash equivalents at 31 December                 719      931
Included in th*Story too large*

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