CNA: Centrica plc: Half-yearly Report

  CNA: Centrica plc: Half-yearly Report

UK Regulatory Announcement

LONDON

Centrica plc

Interim Results for the period ended 30 June 2014

Group results and highlights

RICK HAYTHORNTHWAITE, CHAIRMAN

“The first half of the year has seen challenging market conditions across the
Group, both as a result of the weather and reflecting the wider political
environment. We have continued our efforts to engage with our stakeholders,
particularly our customers, working to restore their trust. And we are taking
the steps to position the business for growth in 2015 and beyond.

Trust is addressed in part through our interactions with politicians,
regulators and the media, recognising the importance of Centrica to the
country’s energy security. But most importantly, trust is earned through our
service and relationship with the customer.

We have also reached an important stage in the succession of the Group’s
leadership, with the appointment of Iain Conn as Chief Executive, to succeed
Sam Laidlaw, who will retire at the end of this year. Iain will bring an
impressive combination of experience to our business, with deep understanding
of the energy sector from a career spanning a variety of roles in one of the
world’s leading energy businesses. His breadth of knowledge and commitment to
customers and safety make him ideally suited to lead Centrica in the next
phase of its development.

Sam has shown exceptional leadership over the past eight years. Under his
stewardship, Centrica has achieved greater strength and scale, and a platform
for long term growth, delivering returns to shareholders and securing the
future energy needs of our customers. Much remains to be achieved this year,
and I am confident that under Sam’s leadership, and with the depth of
management we have across the Group, we are well placed to position the
business for the long-term.”

RICK HAYTHORNTHWAITE
Chairman
31 July 2014


FINANCIAL SUMMARY

Adjusted figures for the period ended 30     2014      2013      Change
June
Revenue                                      £15.7bn   £13.7bn   15%
Operating profit                               £1,032m     £1,583m     (35%)
Taxation charge                                £318m       £690m       (54%)
Effective tax rate                             37%         47%         (10ppt)
Earnings                                       £530m       £767m       (31%)
Basic earnings per share (EPS)                 10.5p       14.8p       (29%)
Interim dividend per share                     5.10p       4.92p       4%
Net capital expenditure and acquisitions /     £409m       £755m       (46%)
disposals
Lost time injury frequency rate (per         0.12      0.16      (25%)
100,000 hours worked)

  *First half earnings down reflecting a challenging market environment, mild
    weather in the UK and the Polar Vortex in North America
  *Full year EPS expected to be in the range 21-22p, taking account of a
    £40million charge associated with writing off our Round 3 wind investment
    and around $110 million (£65 million) of costs attributable to the Polar
    Vortex
  *Average actual British Gas customer bill expected to be around £90 (7%)
    lower in 2014 than 2013; full year BGR profit per household in 2014
    expected to be around £40 (£51 before tax), 20% lower than in 2013

STATUTORY RESULTS

Figures for the period ended 30 June    2014       2013       Change
Operating profit                        £1,021m    £1,590m    (36%)
Profit before tax                          £890m         £1,487m       (40%)
Profit for the period                      £550m         £819m         (33%)
Basic earnings per share                10.5p      15.8p      (34%)

Unless otherwise stated, all references to operating profit or loss, taxation
and earnings throughout the announcement are adjusted figures, as reconciled
to their statutory equivalents in the Group Financial Review on pages 17 to
20.

COMMITMENT TO REAL DIVIDEND GROWTH REAFFIRMED

  *Interim dividend 30% of 2013 full year dividend, in line with established
    practice
  *Expect to complete existing £420 million share repurchase programme in the
    second half of 2014
  *Scrip dividend alternative to be introduced in April 2015

CONTINUED FOCUS ON STRONG BALANCE SHEET

  *Optimise our assets, investing where we see attractive opportunities and
    realising value where appropriate
  *Non-core asset disposals, including UK CCGTs and Ontario home services,
    and potential releases of capital from our gas assets in Trinidad and
    Tobago and our UK operational wind portfolio, expected to realise around
    £1 billion
  *Seek to maintain existing credit ratings; proceeds to be retained to
    strengthen the balance sheet further
  *Flexibility to invest along the gas value chain, in a rapidly evolving
    market place

GOOD STRATEGIC PROGRESS IN FIRST HALF OF 2014

  *Improving customer service in the UK, with increases in BGR and BGS net
    promoter scores; residential energy accounts stabilised in the second
    quarter following 1% decline in the first quarter; installed our one
    millionth residential smart meter in the UK
  *Implementation of our new BGB billing system proceeding to plan, enabling
    better service at lower cost
  *$100 million cost reduction programme in Direct Energy on track; sold DEB
    unit gas and electricity margins increased by around a third in the first
    half of 2014 compared to the second half of 2013
  *Bord Gáis acquisition completed; deregulation of the Irish residential gas
    market confirmed
  *Continued progress on cost efficiency and positioning Centrica Energy for
    lower capital expenditure, against a backdrop of falling European
    wholesale gas prices
  *Continued investment in securing sources of gas for the UK; around £60
    billion of commitments to secure energy for our customers
  *Recent acquisitions performing ahead of investment cases

  *Norwegian and Canadian gas assets delivering better than expected
    production, reserves and resources
  *Hess Energy Marketing delivering EBITDA ahead of expectations

CLEAR PRIORITIES FOR SECOND HALF OF 2014

  *Continued focus on service, innovation and cost efficiency to drive growth
    in British Gas, with specific goals to:

  *complete the migration of customer accounts to the combined billing and
    CRM system in residential energy and services
  *increase the number of residential smart meters installed to around 1.3
    million by the end of the year
  *complete the implementation of the new BGB billing system; deliver process
    improvement and continue progressing £100 million cost reduction programme
  *increase sales through the launch of new propositions for residential
    energy and services customers

  *Complete the integration of Bord Gáis
  *Deliver the cost reduction programme in Direct Energy; continue to develop
    innovative customer propositions; complete the Hess integration; continue
    US service protection plan and joint energy and services growth
  *Focus on tight cost control and targeted capital expenditure in upstream
    gas; progress our development pipeline; progress the FERC approval process
    for the 5^th train at Sabine Pass
  *Develop investment plans for our smaller, more flexible gas-fired power
    plants under the proposed capacity mechanism; continue progressing the
    sales process for the three larger CCGTs
  *Position the business for earnings growth in 2015

POSITIONED FOR GROWTH IN 2015, DESPITE LOWER UK COMMODITY PRICES IMPACTING THE
UPSTREAM

  *Expect to return to earnings growth in 2015, reflecting:

  *improving margins and more normal weather conditions in the US
  *our target to return to customer account growth in UK residential energy
    and services
  *growth in energy services on both sides of the Atlantic
  *cost reduction programmes in BGB and DE to improve competitiveness
  *a full year’s contribution from Bord Gáis

SAM LAIDLAW, CHIEF EXECUTIVE

“With challenging trading conditions on both sides of the Atlantic in the
first half, earnings will be lower in 2014 than in 2013. However, the Group is
well positioned to return to growth in 2015, and the investments we have made
mean that the business is balanced and more resilient, both upstream and
downstream.

Our leadership in smart connected homes and innovation is helping customers
reduce and control their energy consumption and offers a sustainable way to
keep bills down. The combination of mild weather, and our expectation that we
will not change energy prices this year, means the average actual British Gas
household energy bill is expected to be around £90 lower in 2014 than in 2013.

Centrica plays a vital role in helping to secure the country’s energy
requirements, a role we can only undertake if the business is profitable and
financially strong. We will continue to invest where we see attractive
opportunities, along the gas value chain. And we will continue to drive
operating efficiencies across the Group, for the benefit of both our customers
and our shareholders."

SAM LAIDLAW
Chief Executive
31 July 2014


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

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

Divisional results and highlights

INTERNATIONAL DOWNSTREAM

British Gas: Focus on service, efficiency, innovation and growth

Adjusted operating profit for the     2014          2013          Change
period ended 30 June
Residential energy supply (BGR)       £265m         £356m         (26%)
Residential services (BGS)              £129m           £135m           (4%)
Business energy supply and services   £61m          £78m          (22%)
(BGB)
Total British Gas adjusted            £455m         £569m         (20%)
operating profit
Total British Gas adjusted            £355m         £436m         (19%)
operating profit after tax
                                                               
Performance indicators for the        30 Jun 2014   31 Dec 2013   Change
period ended
Residential energy customer             15,055          15,256          (1%)
accounts (period end, ’000)
Residential services product            8,046           8,227           (2%)
holding (period end, ’000)
Business energy supply points         900           912           (1%)
(period end, ’000)

  *British Gas operating profit down, with lower consumption due to warmer
    than normal weather in the UK
  *Average actual customer bill expected to be around £90 (7%) lower in 2014
    than 2013, reflecting warmer weather and energy efficiency measures; the
    average bill for vulnerable customers was on average 20% lower this winter
    than last, due to the warm home discount and additional British Gas
    discounts
  *No change to residential energy prices expected during 2014, recognising
    competitive conditions in the UK energy supply market and the need to buy
    forward in the current uncertain environment

  *Gas and electricity contracted up to three years in advance; majority of
    requirements for next winter already purchased
  *Benefit of lower wholesale commodity prices in 2015 offset by higher
    carbon, ROC and network costs

  *British Gas Residential post-tax margins expected to be around 4%, lower
    than last year and below our long-term margin expectation of 4.5%-5%,
    which we believe is necessary to underpin investment in the business
  *Clear strategy in place to focus on three priorities: deliver great
    service, transform to grow, engage key stakeholders; new organisational
    structure in place to enable delivery of strategy
  *Good progress made in the first half of 2014, helping create a platform
    for long term sustainable growth

  *BGR customer accounts stabilised over the second quarter, following a 1%
    decline in the first quarter
  *Delivering improved service levels, with higher NPS in both BGR and BGS,
    as we target leading, high quality service for both residential and
    business customers
  *ECO delivery on track, with Affordable Warmth already completed ahead of
    March 2015 deadline
  *£100 million BGB cost reduction programme on track; implementation of new
    billing system to be completed in the second half of the year

  *Second half focus on service, efficiency and innovation to drive growth

  *Improve service and deliver efficiencies by simplifying key customer
    interactions; single billing and CRM platform for energy and services
    expected to be completed in the third quarter of 2014
  *Growth opportunities in BGS through tailored offerings, new propositions
    targeted at energy customers
  *Development of new offerings, including business services, for valuable
    customer segments in BGB

  *Smart, connected homes key to future growth

  *One million residential smart meters installed; over 350,000 customers
    receiving smart energy report
  *Targeting 2.4 million residential smart meter installations by the end of
    2015
  *Launched smart meter enabled “Free Saturdays or Sundays” energy tariff
    trial
  *100,000 smart thermostats sold to date, with increased sales under the
    Hive brand

Direct Energy: Focus on customer value, service and choice

Adjusted operating profit/(loss)      2014          2013          Change
for the period ended 30 June
Residential energy supply (DER)       £48m          £99m          (52%)
Business energy supply (DEB)            (£21m)          £53m            nm
Residential and business services     £14m          £13m          8%
(DES)
Total Direct Energy adjusted          £41m          £165m         (75%)
operating profit
Total Direct Energy adjusted          £26m          £103m         (75%)
operating profit after tax
                                                               
Performance indicators for the        30 Jun 2014   31 Dec 2013   Change
period ended
Residential energy customer             3,454           3,360           3%
accounts (period end, ’000)
Residential services product          2,625         2,608         1%
holding (period end, ’000)
Performance indicators for the        2014          2013          Change
period ended 30 June
Business energy supply gas volumes      3,193           494             546%
(mmth)
Business energy supply electricity    48.9          28.0          75%
volumes (TWh)

  *Operating profit significantly down, reflecting the impact of the Polar
    Vortex and a narrowing of energy supply margins due to challenging market
    conditions

  *Total Polar Vortex costs of $110 million (£65 million) recognised in first
    half operating profit, primarily relating to additional power market
    charges

  *Sold B2B unit gross margins in the first half of 2014 increased by 35% for
    gas and 33% for power compared to the second half of 2013; expected to
    positively impact 2015
  *Hess Energy Marketing business performing ahead of investment case

  *Further growth potential through enhanced scale, dual fuel capabilities,
    oil to gas switching, advantaged positions along the gas value chain and
    long term customer relationships

  *$100 million cost reduction programme on track; driving synergies from
    enhanced scale
  *Continued focus on value

  *Sale of Texas CCGTs generated a £219 million operating profit on disposal;
    downstream operations supported through contractual relationships
  *Agreed sale in July 2014 of Ontario home services business for $550
    million (£300 million); services focus now in the US, where we see better
    opportunities for growth including combined energy and services offerings

  *Building a range of innovative energy and services product offerings,
    improving customer retention and attracting the highest value customers

  *Sales through digital channels nearly trebled in the first half of 2014
    compared to the first half of 2013
  *Targeting 250,000 US services protection plan customers and 100,000
    bundled energy and services propositions by end of 2014
  *Astrum Solar acquisition provides enhanced product range for residential
    customers, in a rapidly growing market
  *Further growth potential through connected homes and business
    propositions; Nest relationship supports innovation and customer value
    growth

INTERNATIONAL UPSTREAM

Centrica Energy: Securing energy supplies for our customers

Adjusted operating profit/(loss) for the        2014     2013     Change
period ended 30 June
International gas                               £465m    £683m    (32%)
UK power                                          £61m       £119m      (49%)
Gas-fired                                         (£70m)     (£64m)     nm
Renewables (operating assets)                     £23m       £12m       92%
Renewables (one-off write-offs, profit/loss       (£40m)     £24m       nm
on disposal)
Nuclear                                           £125m      £122m      2%
Midstream                                       £23m     £25m     (8%)
Total Centrica Energy                           £526m    £802m    (34%)
                                                               
Adjusted operating profit after tax for the     2014     2013     Change
period ended 30 June
International gas                                 £235m      £182m      29%
UK power                                        £42m     £100m    (58%)
Total Centrica Energy                           £277m    £282m    (2%)
                                                               
Performance indicators for the period ended     2014     2013     Change
30 June
International gas production (mmth)^1             1,945      1,696      15%
International liquids production (mmboe) ^ 1      8.7        9.8        (11%)
International total gas and liquids               40.9       37.6       9%
production (mmboe) ^ 1
Total UK power generated (TWh)                  10.7     10.6     1%
1. Includes a 100% share of Canadian assets held in partnership with QPI

  *International gas profit after tax up 29% despite lower UK wholesale
    commodity prices, reflecting the benefits of forward hedging and small
    field tax allowances; full year profit after tax expected to be broadly
    unchanged compared to 2013
  *Underlying power operating profit slightly higher, before impact of
    one-off write offs and profits/losses on disposal in renewables
  *Previous investments performing well

  *Sustained strong power generation volumes from the nuclear fleet
  *E&P assets acquired from Statoil and Suncor both delivering production,
    reserves and resources in excess of investment cases
  *Good availability and favourable yields for operational wind farms

  *Clear priorities in second half in low wholesale price environment

  *Targeting flat E&P unit lifting and cash production costs over the next
    three years
  *Targeting a reduction in E&P spend to around £900million per year on
    average over the next three years; continue to optimise portfolio with
    targeted investment and selective divestments of non-core assets
  *Strategic review of gas-fired power generation portfolio completed;
    developing investment plans for smaller, more flexible plants and
    commenced sales process for three larger CCGTs

CENTRICA STORAGE

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

Adjusted operating profit for the            2014    2013    Change
period ended 30 June
Centrica Storage                             £10m    £47m    (79%)

  *Strong operational performance; substantially lower operating profit due
    to low seasonal gas spreads for 2013/14 and 2014/15 storage years
  *Commenced programme to deliver £15 million of cost reductions through
    operational improvements over the next three years

Performance Overview

OVERVIEW

Centrica has faced a range of external challenges in the first half of this
year. But we have shown the flexibility and determination to tackle those
challenges, all the time underpinned by a clear sense of strategic direction.
Customers are at the core of our business, in the UK, Ireland and
NorthAmerica. The combination of energy and services, alongside leadership
positions in innovation and smart connected homes, provides us with a
distinctive platform to build sustainable growth. And our vertically
integrated business model enables us to direct capital where we see the most
attractive returns, securing energy supplies for our customers in an
increasingly international market.

Overall, the quality of our recent investments across the Group has
strengthened the business, forging strong relationships with world-class
partners, and helping to offset the effects of market headwinds which have
affected returns from existing assets. During the year to date, we have made
good progress in key areas for the long term health of the business.

Management succession

On 29 July 2014, we announced the appointment of Iain Conn as Chief Executive,
with effect from 1 January 2015. Iain will join from BPplc where he has been
Chief Executive, Downstream, for the past seven years and brings an impressive
combination of experience to Centrica. He heads a global consumer brand
familiar to millions of people and possesses a deep understanding of the
energy sector, built up over many years in the industry. Iain will succeed Sam
Laidlaw who will retire from the Board on 31 December 2014.

Following the announcement of his resignation on 7 January 2014, Nick Luff,
Centrica’s Chief Financial Officer, will leave the company on 31 August 2014.
Jeff Bell, currently Centrica’s Director of Corporate Finance, will take on
the role of Chief Financial Officer on an interim basis and will join the
ExecutiveCommittee on 1 September 2014. Jeff has been with Centrica since
2002, and has held a number of other senior management positions, including
Group Strategy Director.

It was announced on 29 May 2014 that Chris Weston, Managing Director,
International Downstream had tendered his resignation. A succession process is
underway, and further details regarding his succession will be given in due
course.

With the announcement of a new Chief Executive and interim Chief Financial
Officer, we are making the transition to a new management team which has deep
experience of the energy markets that shape our business and of the challenges
we face in building customer trust and creating a sustainable energy future.

Business performance summary

We delivered good operational performance in the first half of 2014, with high
reliability from our gas and oil production, power generation and gas storage
assets, and improved customer service levels in our downstream businesses. We
also delivered further improvements in our health and safety record during the
first half of the year, with a 25% reduction in the lost time incident
frequency rate compared to the first half of 2013 and no significant process
safety incidents recorded during the period.

Downstream in the UK, we faced challenging market conditions, continued
political and regulatory scrutiny and warmer than normal weather. Against this
backdrop we delivered much improved service levels in British Gas, while our
residential energy customer account numbers stabilised in the second quarter
following a period of sustained account losses in the fourth quarter of 2013
and early in 2014. We are targeting a return to growth in the second half. The
transfer of customer accounts onto a new combined energy and services system
is nearing completion and we are also making good progress on the
transformation of British Gas Business, with the cost reduction programme and
billing system upgrade on track.

We have now completed the acquisition of Bord Gáis Energy in Ireland. The
business is expected to be earnings accretive in the first full year of
ownership and is expected to contribute around €40 million of EBITDA in 2015.
The transaction provides Centrica with a vertically integrated energy supply
business in an adjacent deregulated market, and also provides a good platform
for growth. We will use our experience from the UK and US to develop
innovative propositions for our customers in Ireland, in energy supply and
energy services.

In North America, extreme weather conditions due to the Polar Vortex held back
earnings in the first half, with the business energy supply division making an
operating loss, and market conditions remained challenging in residential
energy supply. However margins on new B2B sales are improving, reflecting a
re-pricing of risk, and the B2B energy marketing business acquired from Hess
in 2013 is performing ahead of expectations. We are making good progress on
developing innovative propositions across Direct Energy, and now have
residential solar capability following the Astrum Solar acquisition. We are
also on track to deliver our $100 million cost reduction programme. Direct
Energy Services is performing well, with the focus now on delivering growth in
Alberta and the United States, following our decision in July 2014 to dispose
of our Ontario home services business.

In upstream exploration and production, against a backdrop of falling
wholesale commodity prices, we are targeting stable unit production costs and
a reduction in capital expenditure over the next three years, while forward
hedging and tax allowances are helping to maintain current year profit after
tax. We also further strengthened our relationship with Qatar Petroleum
International, announcing that they will acquire a 40% share of our wholly
owned gas assets in Western Canada, fully aligning our interests in the
region.

In UK power generation, the nuclear fleet once again delivered strong
operational performance, however market conditions remained weak for our
gas-fired stations. As a result, following a review of the UK CCGT fleet, we
will target investment towards our more flexible, smaller power stations,
which are well positioned to benefit from the Government’s capacity market
proposals, while releasing capital from the larger stations.

Centrica Storage also delivered strong operational performance, with good
reliability. However low seasonal gas price spreads meant that profitability
was substantially lower than the first half of last year.

Earnings, dividend and outlook

Overall adjusted operating profit fell by 35%. This was partially offset by a
lower effective tax rate, reflecting the mix of profit, the benefit of forward
hedging, upstream small field allowances and a tax credit relating to the
disposal of the Greater Kittiwake Area assets. As a result adjusted earnings
per share (EPS) of 10.5p were 29% lower in the first half of 2014 compared to
the first half of 2013. This predominantly reflects the impact of margin
compression and the Polar Vortex in North America, mild weather in the UK,
continued low seasonal gas storage spreads and a charge associated with
writing off our Round3 offshore wind investment. For the full year, we expect
EPS to be in the range 21-22p, after taking into account the Round 3 wind
write-off.

Looking further ahead, we expect the Group to return to earnings growth in
2015, with the prospect of underlying operating profit improvements in
services and B2B in both the UK and North America, a first year of
contribution from Bord Gáis and more normal weather conditions, more than
offsetting the impact of lower UK gas prices on our E&P business. This remains
subject to the usual variables of commodity prices, weather and asset
performance, together with the downstream regulatory and competitive
environment.

We reaffirm our commitment to delivering real dividend growth, a core
component of ensuring appropriate returns to investors commensurate with the
risks undertaken. We have now also completed just over half of the current
£420million share repurchase programme, having purchased 64.75million shares
to date for a total cost of £213million, and expect to complete the programme
later this year.

In line with our established practice, the Board proposes an Interim Dividend
payment of 30% of the prior year’s full year dividend, being 5.10pence per
share, payable on 12 November 2014 to shareholders on the register on
26September 2014.

CLEAR PRIORITIES FOR SECOND HALF OF 2014

We have clear priorities for the second half of the year, aligned to our
strategic priorities.

Downstream, new organisational structures are now operational on each side of
the Atlantic, and we are improving our core operations to deliver better
customer service, while continuing to drive efficiency improvements and
working to achieve growth through innovative propositions.

In British Gas, we have a clear strategy focused on three priorities - deliver
great service, transform to grow and engage key stakeholders. We continue to
target leading service levels for all our customers, and will drive further
improvements in the second half to increase the net promoter score (NPS). We
are simplifying a number of key residential customer interactions, in
particular for direct debit payments and moving home, and we will complete the
migration of residential customers onto a single billing and CRM platform for
energy and services during the third quarter. Overall we are targeting a
return to residential customer account growth through competitively priced
products, the launch of innovative new propositions and a trial of the smart
meter enabled “Free Saturdays and Sundays” energy tariff.

In BGS, we have developed proposals to change engineer terms and conditions,
which are strongly supported by the GMB Trade Union and are now subject to
ballot. These changes will deliver greater operational flexibility to improve
service levels for our customers and enable us to develop attractive new
propositions. We are on track to have sold over 150,000 smart thermostats by
the end of the year, in excess of our original target. We also continue to
build our leadership position in smart, connected homes, and expect to have
installed around 1.3million residential smart meters by the end of the year
and 2.4 million by the end of 2015, considerably more than any other energy
supplier.

In BGB, we are implementing a new billing system, which is expected to be
completed in the third quarter of 2014. Alongside an ongoing programme of
process simplification, this should enable us to deliver improved service and
lower costs, and we are on track to achieve £100 million of annual operating
cost and bad debt reductions by the end of 2015. We are also looking to
develop propositions tailored to valuable customer segments, driving growth
through dual fuel offerings and energy efficiency packages.

In Direct Energy, we are targeting disciplined margin expansion across the
business, focusing on customer value and customer service and choice. In DEB,
we will look to build on the sales margin increases we experienced in the
first half of the year, which should position the business to deliver a
material improvement in profit in 2015. The Hess Energy Marketing acquisition
is performing well, and we expect to complete the integration in the second
half while looking to drive growth – through our dual fuel capabilities, oil
to gas switching, advantaged positions along the gas value chain and long-term
customer relationships. We will also continue to drive operational efficiency
across Direct Energy, having grounded initiatives to deliver our $100 million
cost reduction target.

In North America residential energy and services, we are targeting improved
retention and attracting the highest value customers, through increased use of
digital platforms and the development of attractive propositions. We expect to
grow our services franchise footprint further, while we are targeting 250,000
US protection plan customers and also expect to have sold 100,000 bundled
energy and services products by the end of the year. The acquisition of Astrum
Solar in July 2014 will allow us to offer solar alongside our existing range
of energy and services products, while smart connected homes and businesses
will become increasingly important and we have an exclusive partnership with
Nest to sell 100,000 smart thermostats across North America over the next 18
months.

In Centrica Energy, in a lower wholesale price environment, we will focus on
improving our returns through operational efficiency and capital discipline.
In E&P, we will look to deliver production and capital expenditure targets,
and successful drilling results, while a fourth well at York and a new well at
Grove are both set to produce first gas during the second half. In Midstream,
we will continue to contract for sources of gas to provide energy security for
our customers at competitive prices, and develop our LNG business. We continue
to work towards approvals at the fifth train at the Sabine Pass LNG export
facility in the United States, with FERC approval expected around the end of
the year. Securing contracts to deliver gas for our customers remains an
important role for the Group.

In Power, we have now commenced the sales process for the three larger
gas-fired stations in our fleet, which we expect to occur within the next 12
months. We will continue to develop plans for our remaining smaller stations,
evaluating investment options under the proposed capacity auction.

FOCUS ON MAINTAINING A STRONG BALANCE SHEET

Maintaining appropriate financial discipline, with a strong balance sheet and
healthy cashflow position, is a core priority for the Group. It is also
important that we maintain sufficient financial flexibility, to be able to
deploy capital where we see attractive opportunities, and to realise value
from non-core assets. In this context, we have initiated a programme of
disposals, selling assets that are no longer core to the Group’s strategy. The
programme includes the disposal of our three larger gas-fired power stations
in the UK and our Ontario home services business, while we will also
potentially look to release capital from our gas assets in Trinidad and Tobago
and our UK operational wind portfolio. In total, we expect the programme to
realise around £1billion.

As part of their ongoing review of the sector, in April, Moody’s Investor
Services Limited placed the Company on review for downgrade, noting the
political and regulatory environment for energy supply in the UK, as well as
the inherent risks upstream and in North America. In May, Standard & Poor’s
Credit Market Services Europe Limited placed the Company on CreditWatch
Negative, noting the challenging regulatory, political and market outlook.

We continue to engage with both credit rating agencies, with a view to
retaining the existing A3/A- credit ratings, underlining our position as a
strong counterparty for procurement contracts to bring gas to the UK, and
optimising our requirements for collateral in our trading and upstream
operations. We would expect proceeds from the disposal programme to be
retained to further strengthen the balance sheet and improve the Group’s
financial metrics. While we do not currently anticipate initiating a further
share repurchase programme until the Group’s financial metrics have been
strengthened, the Group’s underlying cash flows remain strong, underpinning
future financial flexibility and the ability to invest for long term growth,
or return capital to shareholders where appropriate.

In 2015, we expect to commence a scrip dividend programme as an alternative to
the cash dividend commencing with the 2014 final dividend, subject to
shareholder approval.

CONTINUED STAKEHOLDER ENGAGEMENT

Energy policy remains a key issue for the UK, as we seek to balance the often
competing needs of energy security, climate change and affordability. With
trust in the energy sector at a low level, it is vital that all stakeholders
have the clear facts to form a balanced view, enabling greater understanding
of the cost drivers behind energy bills and of the implications of the policy
decisions being taken. To help achieve this, we will continue to engage
closely with all stakeholders – policy makers, regulators, the media and above
all, our customers – in an open and transparent way, to begin the task of
restoring trust in the sector.

We welcome the clarity which the Competition and Markets Authority (CMA)
investigation into the UK energy sector will bring. This will be a full and
rigorous review by an independent and respected body and we look forward to
engaging constructively and comprehensively throughout the process - helping
to clear the air, enabling investment to continue and consumer confidence in
the sector to be restored.

We believe that there is effective competition in the energy market and that
it brings significant benefits to consumers, delivering consumer prices which
remain low compared to many European markets. There are currently some 25
suppliers active in the British domestic retail market, with new entrants now
an established competitive force. Today, over 60% of our customers receive
electricity as well as gas from us – each of those electricity accounts was
won in the competitive market. In the six months to March 2014, over 3.5m
customer accounts moved from one supplier to another – roughly 7% of the
total; and within BritishGas, we see around 20% of customer accounts
switching to a different tariff each year, including in response to our
‘Tariff Check’ service.

We offer exactly the same products and prices to existing and new customers.
And through innovation, such as smart meters and our ‘Hive’ remote heating
control product, we are able to help customers control their energy use and
over time, to take advantage of time of use tariffs. However, rising retail
energy prices have, understandably, become a real concern for customers. This
upward trend over the past few years has been driven by increases in wholesale
commodity prices, higher network charges and the rising costs of Government
policies. Taken together, these factors make up around 85% of the typical
British Gas dual fuel energy bill. With further upward pressure predicted, an
open and honest debate about these costs, with transparency from all parties,
is clearly needed.

Regulation and policy interventions continue to define the way in which
suppliers compete in the market. While the UK Government’s recent changes to
the Energy Company Obligation and the Warm Home Discount have delivered a
welcome short term reduction in costs, non-commodity costs are expected to
increase because of the growing cost of decarbonisation and continued
investment in energy networks. We therefore propose three principles which
will help the country to meet its carbon reduction commitments in a more
cost-effective way, without compromising long term ambitions: concentrate on
the lowest-cost, least regret options; set simple and cost-effective
decarbonisation targets; and support those most affected, whether they are
energy intensive industries or vulnerable households. Together, these measures
can help to ensure a sustainable, low carbon energy future for the UK, while
minimising the cost for the consumer.

As North Sea resources decline, Centrica plays a critical role in bringing
supplies of gas to the UK. Our vertically integrated business model enables us
to protect our customers from short term volatility in market prices, at lower
cost than would be the case for a stand-alone supplier. We invest over
£1billion each year across the Group, and have made commitments totalling
around £60 billion to secure long term gas and power supplies to meet the
future energy needs of our customers. We can only make this scale of
contribution to the country’s security of supply if we are a profitable
company with a strong balance sheet and cash flows.

PREVIOUS INVESTMENTS AND CONTINUED FOCUS ON SERVICE AND COSTS LEAVE GROUP WELL
PLACED

Organic investments and acquisitions over recent years have left the business
better balanced and more resilient.

  *We have invested in systems and service and developed a leadership
    position in innovation and smart connected homes in British Gas
  *We have established a larger scale downstream business in North America,
    providing a platform for further growth in energy supply and services
  *We have a more balanced upstream gas and oil business spanning the
    Atlantic basin, with scale positions in Norway and Western Canada in
    addition to the UK
  *We have a power generation business that benefits from low carbon baseload
    nuclear production alongside renewables and gas-fired generation
  *We have a growing midstream business, in an increasingly international
    energy market
  *We have forged strong relationships with world-class global energy
    partners, providing security of supply for our customers

Our investments are generally performing well. The British Energy nuclear
fleet is delivering sustained strong generation volumes, while in E&P,
although some of our organic investments in the Southern North Sea have proved
challenging, the gas and oil assets acquired from Statoil and Suncor have
materially increased our upstream scale in Norway and Western Canada
respectively, and have delivered reserves and production in excess of the
original investment cases.

In North America, the Hess Energy Marketing acquisition is delivering returns
ahead of the investment case, and gives us an industry leading position in B2B
energy supply in North America, as well as enhanced presence along the gas
value chain. We have also successfully integrated a number of residential
bolt-on acquisitions, including the Bounce Energy acquisition which provides
us with the foundation to grow our digital offering and offer innovative
products across DE Residential. In energy services, through the Clockwork and
Home Warranty of America transactions we now have a scalable platform in a
growing but highly fragmented market, with the potential for energy and
services bundling, while the recent acquisition of Astrum Solar provides us
with capabilities in residential solar.

We have also added value through the development of a substantial wind
portfolio, realising value through capital efficient financing and selective
divestments, with further opportunities to realise value from the remaining
five operational wind farms. By contrast, returns from our gas-fired power
stations and the Rough gas storage facility have declined materially, while we
suffered from the UK Government’s decision to increase the effective tax rate
on upstream gas and oil assets in the 2011 Budget. Overall, these impacts
broadly offset the contribution from acquisitions.

Although a large proportion of investment has been in the upstream business
and in North America, the UK downstream business remains core, contributing a
material part of the Group’s profit after tax. Our relentless focus on
improving service and reducing costs, alongside investment in new systems, has
helped us to maintain our competitive position over the past few years. And
our leadership position in smart, connected homes and innovation provides a
platform for long term, sustainable growth.

FIRST HALF PERFORMANCE

BRITISH GAS

British Gas Residential

British Gas Residential operating profit fell by 26% compared to the first
half of 2013. This reflects warmer than normal weather and an underlying
consumption decline, in part due to energy efficiency measures, resulting in
24% and 9% reductions in average residential gas and electricity consumption
respectively.

The number of customer accounts reduced by around 1% during the first quarter
of 2014, which reflected high levels of customer switching following the
increase in residential prices in November 2013. However they were broadly
stable over the second quarter, despite fierce competition from smaller
suppliers who are currently benefiting from an exemption from some
environmental obligations. This reflects British Gas being the first energy
company to pass on savings in full to all our residential customers in January
following the announcement of changes to the ECO programme, and the
introduction of attractive fixed price propositions.

Service levels in British Gas Residential significantly improved over the
first half of the year. Average answering and call handling times both reduced
compared to the second half of 2013, and drove a +11 point movement in our
contact NPS, reflecting our focus on delivering leading, high quality service.
We are targeting a significant reduction in customer complaints over the next
three years. We remain on track to complete the migration of all residential
customers onto our new billing and CRM platform in the second half of 2014,
and the new system will deliver a more integrated customer experience.

Innovation and smart connected homes

We continue to lead the industry in technology, innovation and smart connected
homes. Around two-thirds of our customer interactions are now made through
digital channels, with around half of those initiated from a mobile or tablet
device, and customer downloads of our top rated mobile App have now reached
1.3 million.

We have now installed over one million residential smart meters in the UK and
expect to have installed around 1.3million by the end of the year. We
strongly support the 2020 mandate for full smart roll-out and are on track to
support the ‘go live’ of the Data Communications Company in December next year
and to lead industry testing of the new systems in mid-2015. We encourage the
industry, Government and regulatory bodies to maintain momentum on all fronts
to ensure the smart roll-out is delivered on schedule. Smart meters will bring
significant customer benefits including an end to estimated bills, greater
ability to monitor and reduce consumption, flexible time of use tariffs, and
simpler and faster switching between suppliers, helping to improve trust in
the UK energy industry.

Over 350,000 smart meter customers now regularly receive our unique Smart
Energy Report (SER). The SER provides customers with a comprehensive analysis
of their energy consumption including a breakdown by type of use, benchmarking
against similar homes, personalised energy saving tips and access to an online
tool. The report is helping improve levels of customer satisfaction and the
overall perception of British Gas.

We have also taken the lead in the roll-out of smart meters to prepayment
customers and are currently trialling a SMETs capable prepayment meter, the
first of its kind. We plan to launch it in 2015, a year ahead of the
Government’s target. Leveraging our experience in Direct Energy, we are now
also trialling a new time of use energy tariff, “Free Saturdays or Sundays
September 2015”, for full launch next year.

We have now sold 100,000 smart thermostat products in the UK, mostly under our
innovative Hive brand that was launched in September 2013. The Hive product is
now available in Apple stores nationwide and has been received extremely
positively, featuring in T3’s ‘The Great British Tech List’ in July this year.
The brand NPS of customers using Hive is over +40, with 80% saying they would
actively recommend the product. We have a strong development pipeline of
further innovative products and have now commenced trials of a ‘smart
connected boiler’ product and a ‘virtual in home display’, both of which we
plan to launch next year. Our nationwide network of over 8,000 highly trained
service engineers with trusted access to customers’ homes remains a key
competitive advantage for British Gas in the connected homes market.

Helping people today

Helping customers to reduce and control their energy consumption is the
sustainable way to keep bills down. We have made good progress in delivering
our commitments under ECO, which is providing energy efficiency measures such
as insulation to transform homes and communities across the UK. We are on
track to meet our obligations and have already delivered the Affordable Warmth
component of the scheme, well in advance of the March 2015 deadline.

We do more than any other supplier to assist the most vulnerable customers.
This past winter, in addition to the £135 Warm Home Discount, we made a
payment of up to £60 to over 500,000 eligible customers, and these customers’
bills were on average 20% lower this winter than last. This year we have
committed £9million to the British Gas Energy Trust, an independent charity
giving grants to households struggling with bills, and our total donations
since 2004 have now reached £65 million. We also continue to work closely with
our key charity partners, Shelter and National Energy Action, to improve the
safety and warmth of homes in the private rental sector and to tackle fuel
poverty.

We continue to support job creation in the UK with over 1,100 apprentices
currently in training and a further 250 expected to be recruited this year as
part of our smart meter roll-out programme. We are also working with
Accenture, Princes Trust, Job Centre Plus and Global Action Plan to provide
training opportunities to young people not in employment, education or
training (NEETs). In addition, all of our direct UK-based employees are paid
at least the ‘living wage’ rate.

British Gas Services

British Gas Services delivered high levels of customer service in the period,
both in our contact centres and in customers’ homes. Customer complaints fell
by 40% compared to last year and the NPS for our engineers increased to +64,
with our investment in a more resilient operating model, in addition to the
warmer weather, resulting in improved response times for breakdowns. We have
developed proposals to change engineer terms and conditions, which are
strongly supppoered by the GMB Trade Union and are now subject to ballot.
These changes will deliver greater operational flexibility to improve service
levels for our customers and enable us to develop attractive propositions to
drive growth.

The market for central heating installations is showing signs of recovery,
with the number of boilers installed increasing by 11% compared to the same
period in 2013. For contract customers, retention levels remained high,
underlining the value that our products continue to provide. However,
improvements in the UK economy have yet to feed through into higher contract
sales, which have also been impacted by a focus on compliance training for
front line staff and protecting service levels during the migration of
customer accounts onto the new billing and CRM platform. As a result, the
number of services product holdings fell by 181,000 during the first half of
the year, although we did see an increase in the number of landlord contracts,
an important growth opportunity, and we are developing new channels and
propositions to increase sales in the second half of the year. British Gas
Services operating profit fell slightly compared to the first half of 2013,
predominantly reflecting the decline in the number of contract holdings.

British Gas Business

The number of British Gas Business supply points was broadly flat over the
first half. However operating profit reduced compared to the same period in
2013, largely reflecting the warmer than normal weather, with total gas and
electricity volumes down by 22% and 3% respectively compared to the first half
of 2013. We remain on track to deliver £100million of targeted reductions in
operating costs and bad debt, in part enabled by the implementation of a new
billing system, which is expected to be fully operational by the third quarter
of 2014, and so far this year we have removed over 300 roles from the
business. We remain on track to deliver the programme by the end of 2015 and
these cost efficiencies will help offset the margin pressures resulting from a
competitive market and our decision in 2013 to end the auto-rollover of
contracts at renewal.

To drive growth in BGB, we are developing a new customer segmentation model
based on external research, to drive growth through dual fuel offerings,
energy efficiency packages and joint energy and services propositions. We
continue to develop our business services capabilities. We have secured a
contract with Sainsbury’s for ground source heat pump installations and three
further energy performance contracts have entered the construction phase. Our
solar business also continues to expand, with a landmark contract at Toyota’s
Deeside plant nearing completion, while we recently announced our
participation in the Generation Community scheme to deliver up to £60 million
in solar PV solutions for Local Authority and Housing Association properties.

DIRECT ENERGY

Direct Energy profit was 75% lower in the first half of 2014 compared to the
same period in 2013, and 73% lower after adjusting for foreign exchange
movements. This was predominantly due to margin pressures on sales made during
the second half of 2013, particularly in our legacy business supply division,
and the one-off impact of additional ancillary and other charges resulting
from the extreme weather conditions, the Polar Vortex, seen across much of
North America early in the year. The total impact of these charges was
approximately $110 million (£65 million) in the first half of 2014, across
both residential and business energy supply. However following the Polar
Vortex we have seen evidence that the C&I market is pricing in additional risk
into retail power products, and have seen a material increase in our sold unit
margins for both gas and power over the first half of the year.

Our $100 million cost reduction programme is progressing to plan and we have
now grounded initiatives to achieve the target by the end of 2014. A number of
initiatives are underway, including investment in our billing systems,
consolidation of our services operating systems and integration of our energy
and services call centres.

Direct Energy Residential

The number of residential energy accounts increased by 94,000 in the first
half of the year, despite the expected further decline in Ontario due to the
Energy Consumer Protection Act (ECPA), as we gained accounts in the US North
East following the acquisition of aggregation customers in Ohio. However
Direct Energy Residential operating profit fell, as we incurred additional
costs related to the extreme weather conditions and we faced a challenging
competitive sales environment in both Texas and the US North East, leading to
a reduction in unit margins. Against this challenging backdrop we are focused
on delivering high quality customer service, and our NPS remained high and
retention levels improved.

We also made good progress on developing innovative products and the number of
residential sales coming through digital channels nearly trebled, following
the acquisition of Bounce Energy in 2013. We have now started selling bundled
energy and protection plan products, and have sold over 20,000 in the year to
date. We have also now sold over 10,000 smart thermostats so far this year in
Alberta, and have signed an exclusive partnership with Nest to sell 100,000
additional units across North America over the next 18 months. In July 2014,
we entered the rapidly growing US residential solar market through the
acquisition of Astrum Solar for $54 million (£32 million). The transaction
allows Direct Energy to sell solar alongside its existing range of energy and
services products, as we look to develop further attractive propositions and
attract the highest value customers.

Direct Energy Business

In business energy supply, the Hess Energy Marketing acquisition is performing
ahead of our investment case. This 2013 acquisition made 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 we now have a
more balanced gas and power portfolio. We have retained key personnel and
systems and delivered good levels of customer service, with customer retention
strong as a result. Reflecting the impact of the acquisition, business gas
volumes increased by over 500% while power volumes increased by 75%.

Overall Direct Energy Business made an operating loss in the period,
reflecting the one off impact of the Polar Vortex and also margin pressures on
power sales made during 2013. However, sold margins in the first half of 2014
increased by 35% for gas and 33% for electricity compared to the second half
of 2013, reflecting a re-pricing of risk following the Polar Vortex. This will
improve margins over time and we expect the business to deliver a much
improved result in the second half of 2014 and in 2015. We also continue to
look to attract new customers who wish to switch from oil to natural gas
heating and to develop innovative propositions for our C&I customers. We have
a partnership agreement with BuildingIQ to offer cloud-based energy efficiency
solutions for customers, while we have also partnered with Panoramic Power to
offer wireless energy sensors, helping customers understand the details of
their power consumption.

In January, we completed the sale of our three Texas CCGTs, releasing capital
and recognising a £219 million profit on disposal as a result. The three year
heat rate call option agreed at the time of signing the transaction has now
commenced and we believe that this arrangement, together with a liquid
physical and financial power market in Texas, can support our downstream
operations through contractual relationships rather than asset ownership.

Direct Energy Services

The number of Direct Energy Services customer accounts was up slightly over
the period, with growth in our US protection plan base offsetting a decline in
accounts in Canada. Our HVAC leasing proposition is also progressing well,
with customers willing to undertake a higher value of work when purchased
through rental payments as opposed to upfront payment. First half operating
profit was up slightly compared to 2013, although after accounting for
exchange rate movements it increased by 27%.

In July 2014 we agreed to sell our branded Ontario home services business to
EnerCare for $550 million (£300million) including normal adjustments for
working capital. This is an attractive opportunity to realise value from our
Ontario business and focus our attention on opportunities in the US and
Alberta, where we see good prospects for growth. We also entered the rapidly
growing US residential solar market through the acquisition of Astrum Solar
for $54 million (£32 million). The transaction allows Direct Energy to sell
solar alongside its existing range of energy and services products, as we look
to develop further attractive propositions and attract the highest value
customers.

CENTRICA ENERGY

E&P

Our E&P business is benefiting from previous investments in both Norway and
Canada, with production from the assets acquired from Statoil in 2012 and from
Suncor in 2013 both ahead of our investment cases. Following these recent
acquisitions we now have a more diverse portfolio, and the new management
structure put in place last year is enabling us to maximise the full potential
of our core E&P regions of UK and Netherlands, Norway and Canada.

Our assets delivered high levels of availability during the first half of the
year. Total gas and liquids production was up 9% compared to the same period
in 2013, predominantly due to production from North America more than doubling
following the acquisition of a package of assets from Suncor in the second
half of 2013. In May 2014 we announced that QPI will acquire 40% of our wholly
owned gas and liquids assets in Canada for C$200 million (£107 million), fully
aligning our interests and further strengthening the relationship with our
Qatari partners. We also announced in May that the partnership had agreed to
acquire a package of natural gas assets in Alberta from Shell Canada Energy
for C$42 million (£23 million). An increasing proportion of our capital is now
being directed towards North America, where we are well placed to benefit from
increases in gas prices through the accelerated development of our resources.

In Europe, production from our core assets, such as Morecambe and Kvitebjorn,
remained good. However, total production from the region decreased, partly as
a result of the disposals of three packages of North Sea assets, all announced
in late 2013. We continue to invest in new sources of gas for the UK,
including the large-scale Cygnus and Valemon projects in the North Sea, which
remain on schedule. We have completed fracking activities on our Grove
project, and expect first production later in 2014, while we delivered first
production from Kew in January 2014, with good initial performance. A fourth
well at York has tested positively and is expected to produce first gas in the
second half, following disappointing results on both the second and third
wells. Two wells drilled adjacent to the Butch discovery, Butch East and Butch
South West, did not find further commercial hydrocarbons, however the results
contributed valuable information that should allow us to optimise the
development of the main Butch field. On exploration, we drilled five wells,
four of which were successful in finding hydrocarbons. Commercial development
prospects are being reviewed for the Valemon North, Solberg and Cepheus wells,
but the Novus exploration well in the Norwegian Sea is unlikely to be of
commercial size and the Kookaburra well was dry.

In the current environment, with lower forward gas prices and higher costs,
new North Sea development will be directed to the best projects. We expect to
spend an average of £900million over the next three years, down from 2013
levels, with capital expenditure expected to be around £1 billion in 2014
reflecting expenditure on Cygnus and Valemon. As a result, over the next few
years a larger proportion of our capital employed will be productive. In 2014
we expect full year international gas and liquids production to be around
83mmboe and to remain in the 80-85mmboe per annum range in 2015 and 2016,
subject to any acquisition or divestment activity. In July 2014, we agreed the
disposal of the undeveloped 1a and 1b blocks in Trinidad. We are currently
considering options for our remaining Trinidad and Tobago non-operated
producing assets and operated undeveloped resources, to potentially release
capital from the assets for value.

International gas operating profit fell by 32% in the first six months of 2014
compared to 2013 despite an increased contribution from our Canadian assets,
reflecting lower wholesale gas and oil prices. However profit after tax
increased by 29%, reflecting the benefits from forward hedging, a production
mix weighted to lower taxed assets some small field tax allowances and a tax
credit associated with the disposal of the Greater Kittiwake Area assets. Unit
lifting and other cash production costs in the first half were slightly up
compared to the same period in 2013, and with the leadership team focused on
countering inflationary impacts, we are targeting stable unit costs over the
next three years.

Midstream

Our midstream business continued to perform well in 2014, as we managed
periods of wholesale market volatility related to the Russia and Ukraine
dispute and falling UK gas and power prices. We see further growth
opportunities in our asset backed trading and optimisation model, including
the development of our LNG activities. In 2013, we signed a 20 year contract
with Cheniere to purchase approximately 89 billion cubic feet (bcf) per annum
of LNG for export from the Sabine Pass liquefaction plant 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. Federal Energy Regulatory Commission (FERC) approval is
currently anticipated for the fifth train at Sabine Pass around the end of
2014, and if approval is received, the US Department of Energy would then
assess the export licence application. Subject to these regulatory approvals
being received, we expect a final investment decision on the fifth train to be
made in the first half of 2015, with a target date for first commercial
delivery in September 2018.

Power

In UK power, the performance of the nuclear fleet was once again strong, with
volumes in the first half 7% higher than in the same period in 2013. This
reflects continued investment in the fleet and underlines the quality of the
original investment we made in 2009. Nuclear operating profit was slightly up,
as the benefit from higher generation volumes was mostly offset by the impact
of lower wholesale power prices and inflationary cost increases.

Our renewables assets performed well, with favourable wind yields in the
spring. Generation volumes increased substantially, reflecting a full
contribution from the Lincs offshore wind farm, which was fully commissioned
in the second half of 2013, and higher load factors due to windy weather
conditions over the period. We have reviewed the economic viability of our
Round 3 Irish Sea Zone project, Celtic Array, and following discussions with
The Crown Estate and our partners in the project, Dong Energy, development
activity has now stopped. We have recognised a charge of £40 million,
principally in respect of writing off the total book value of the project, and
as a result the renewables business reported an operating loss. However
underlying renewables operating profit nearly doubled, when also taking
account of £24 million of net one-off profit in 2013, predominantly reflecting
a profit on disposal related to the sale of the Braes of Doune onshore wind
farm.

The market remained challenging for our fleet of gas-fired power stations,
with low market clean spark spreads resulting in low load factors and
continued operating losses. Against this backdrop, and with the UK generation
market undergoing significant structural change and capacity payments due to
be introduced from 2018, we completed a strategic review of our gas-fired
power business during the first half of the year. Following this review, we
announced that we intend to focus our UK gas-fired generation strategy on
smaller flexible “peaking” plants and we will seek to release capital through
the sale of the three larger operating power stations in our portfolio.

CENTRICA STORAGE

The Rough gas storage asset delivered strong operational performance during
the first half, with good reliability. The warmer than normal weather meant
the net reservoir volume (NRV) ended the first half at the highest level for
that time of year since Centrica acquired the asset in 2002. However seasonal
gas price spreads were at historically low levels towards the end of 2013 and
although forward summer / winter gas price differentials for the 2014/15
storage year increased slightly over the course of the first half, the
financial impact was limited. We announced in April that we had sold all SBUs
for the 2014/15 storage year at 20.0p, lower than the 23.3p achieved in
2013/14 and the 33.9p achieved in 2012/13. As a result, operating profit in
the first half of the year was substantially lower than for the same period in
2013.

At the start of the year, Centrica Storage commenced a three year programme to
deliver £15 million of cost reductions through operational improvements,
starting with a reorganisation of our business and operational support
functions, while maintaining a sharp focus on safety and capital discipline.

Group Financial Review

GROUP REVENUE

Group revenue increased by 15% to £15.7 billion (2013: £13.7 billion). British
Gas gross revenue decreased by 12%, predominantly reflecting the impact of
warmer than normal weather on domestic and business energy consumption
compared to a colder than normal first half of 2013. Residential energy supply
gross revenue fell by 17%, with total gas consumption 27% lower and total
electricity consumption 11% lower, only slightly offset by the impact of
higher retail tariffs. Residential services gross revenue was broadly flat,
with higher central heating installation volumes and inflationary price
increases offset by lower contract volumes. Business energy supply and
services gross revenue fell by 3%, with lower consumption only partially
offset by higher retail tariffs.

Direct Energy gross revenue more than doubled. This predominantly reflects
additional business energy supply revenue following the Hess Energy Marketing
acquisition, which completed in the second half of 2013. As a result, business
energy supply gross revenue broadly trebled. Residential energy supply gross
revenue increased by 7%, reflecting a slightly higher number of customer
accounts and additional gas and power volumes as a result of extreme weather
conditions across much of North America, while residential and business
services gross revenue fell by 7%.

Centrica Energy gross revenue fell by 11%. International gas gross revenue
fell by 13%, despite increased production resulting from the acquisition of
Canadian assets from Suncor in 2013, reflecting lower European wholesale gas
prices. Power gross revenue fell by 1%. Centrica Storage gross revenue fell by
35%, reflecting lower seasonal gas price spreads.

OPERATING PROFIT

Throughout the statement, reference is made to a number of different profit
measures, which are shown in the table below:

                                                      2014                                     2013
                                        Exceptional                                 Exceptional
                          Business      items and         Statutory   Business      items and         Statutory
                                        certain                                     certain
                          performance   re-measurements   result      performance   re-measurements   result
Period ended 30  Notes  £m           £m               £m         £m           £m               £m
June
Adjusted
operating
profit
British Gas               455                                         569
Direct Energy             41                                          165
Centrica Energy           526                                         802
Centrica               10                                     47                           
Storage
Total adjusted
operating         4b      1,032                                       1,583
profit
Depreciation of
fair value
uplifts from
Strategic         4b      (40)                                        (51)
Investments
(British Energy
post tax)
Share of joint
ventures’ /
associates’      4b     (63)                                   (47)                         
interest and
taxation
Group operating   4b, 6   929           92                1,021       1,485         105               1,590
profit
Net finance      7      (131)        -                (131)      (103)        -                (103)
cost
Profit before             798           92                890         1,382         105               1,487
taxation
Taxation         6, 8   (281)        (59)             (340)      (649)        (19)             (668)
Profit for the         517          33               550        733          86               819
year
Attributable to
non-controlling           (17)                                        -
interests
Depreciation of
fair value
uplifts from     9      30                                     34                           
Strategic
Investments,
after taxation
Adjusted               530                                    767                          
earnings
                                                                                                                

British Gas operating profit fell by 20%. Profitability in residential energy
supply fell by 26%, with lower revenue only partially offset by lower total
commodity costs. Residential services profit, which includes the receipt of an
ECO management fee from residential energy supply, fell slightly,
predominantly reflecting a lower average number of contracts. Business energy
and services operating profit fell by 22%, reflecting the warmer than normal
weather and lower margins as a result of challenging market conditions and our
decision to end the auto-rollover of contracts at renewal.

Direct Energy operating profit fell by 75%. This predominantly reflects
challenging market conditions leading to a narrowing of margins in both
residential and business energy supply, in particular in our legacy B2B power
business, and additional ancillary and other charges incurred as a result of
the Polar Vortex, estimated at approximately $110million (£65 million).
Residential energy supply profitability broadly halved, while the business
energy supply division recorded an operating loss. Residential and business
services profitability increased slightly.

Centrica Energy operating profit fell by 34%, with lower profitability in both
the gas and power segments. Gas operating profit fell by 32%, despite higher
production, reflecting the impact of lower achieved European gas prices in a
lower wholesale price environment. Total costs increased reflecting higher
volumes, with unit DDA rates falling reflecting a higher mix of production
from North America. Unit lifting and other cash production costs increased
reflecting our European production mix moving towards more recently developed
fields and industry inflation. Power profitability fell by 49%. This
predominantly reflects the impact of a £40 million charge associated with the
impairment of our Round 3 wind interest in 2014, compared to one-off profits
of £24 million in 2013, predominantly reflecting a profit on disposal related
to the Braes of Doune wind farm.

Centrica Storage operating profit fell by 79%, reflecting the impact of low
seasonal gas price spreads.

GROUP FINANCE CHARGE AND TAX

Net finance cost increased to £131 million (2013: £103 million), with higher
average levels of debt in the period reflecting $1.35 billion raised in the US
bond market in October 2013. The taxation charge reduced to £281 million
(2013: £649 million) and after taking account of tax on joint ventures and
associates and the impact of fair value uplifts, the adjusted tax charge was
£318 million (2013: £690 million). The resultant adjusted effective tax rate
for the Group was 37% (2013: 47%), reflecting the mix of profit, the impact of
forward hedging in the upstream gas business, upstream small field tax
allowances and a tax credit relating to the disposal of the Greater Kittiwake
Area assets. An effective tax rate calculation, showing the UK and non-UK
components, is shown in the table below:

                                       2014                    2013
Period ended 30 June     UK    Non-UK  Total    UK     Non-UK  Total
                          £m     £m       £m          £m      £m       £m
Adjusted operating        779    253      1,032       1,140   443      1,583
profit
Share of joint ventures   (36)   -        (36)        (23)    -        (23)
/ associates interest
Net finance cost         (81)  (50)    (131)    (61)   (42)    (103)
Adjusted profit before   662   203     865      1,056  401     1,457
taxation
Taxation on profit        137    144      281         376     273      649
Tax impact of
depreciation on Venture   10     -        10          15      2        17
fair value uplift
Share of joint ventures  27    -       27       24     -       24
/ associates taxation
Adjusted tax charge      174   144     318      415    275     690
Adjusted effective tax   26%   71%     37%      39%    69%     47%
rate
                                                                             

GROUP EARNINGS AND DIVIDEND

Reflecting all of the above, profit for the period fell to £517 million
(2013:£733 million) and after adjusting for profits attributable to
non-controlling interests and fair value uplifts, adjusted earnings were £530
million (2013: £767 million). Adjusted basic earnings per share (EPS) were
10.5 pence (2013: 14.8 pence). The Group is currently reviewing its definition
of adjusted earnings, with the possibility that it may change for the full
year results. It expects to provide a further update around the time of its
November Interim Management Statement.

The statutory profit for the period was £550 million (2013: £819 million). The
reconciling items between Group profit for the period from business
performance and statutory profit are related to exceptional items and certain
re-measurements. The decrease compared with 2013 is principally due to lower
profit from business performance and a net loss from certain re-measurements
of £107 million (2013:gain of £86million), partially offset by a net
exceptional gain of £140 million (2013: £nil) relating to the disposal of
gas-fired power stations in Texas. The Group reported a statutory basic EPS of
10.5pence (2013: 15.8 pence).

An interim dividend of 5.10 pence per share (2013: 4.92 pence per share) will
be paid on 12 November 2014 to shareholders on the register on 26 September
2014, in line with our established practice of paying an interim dividend of
30% of the prior year’s full year dividend.

GROUP CASH FLOW, NET DEBT AND BALANCE SHEET

Group operating cash flow before movements in working capital was lower at
£1,495 million (2013: £2,058 million), reflecting the reduced profit from
business performance. After working capital adjustments, tax, and payments
relating to exceptional charges, net cash flow from operating activities was
£1,054 million (2013: £1,411 million).

The net cash outflow from investing activities was lower at £355 million
(2013: £647 million), including the £411 million receipt from the disposal of
the Texas gas-fired power stations.

The net cash outflow from financing activities was £587 million (2013: £897
million). The outflow reflects dividend and interest payments and shares
repurchased under the programme announced in February, and was lower than in
2013 due to higher cash inflow from the net issuance of debt of £300 million
(2013: £20 million).

Reflecting all of the above, the Group’s net debt at 30 June 2014 was £5,197
million (31 December 2013: £5,049million; 30 June 2013: £4,251 million).

During the period net assets decreased slightly to £4,984 million (31 December
2013: £5,257 million). Impacts of the Group’s share repurchase programme,
dividend payments, and foreign currency movements on the retranslation of
foreign subsidiaries more than offset the retained earnings for the period and
actuarial gains on the Group’s defined pension schemes.

EXCEPTIONAL ITEMS

On 22 January 2014 the Group disposed of its Texas gas-fired power stations to
Blackstone for consideration of £411 million. As a result, an exceptional
pre-tax gain of £219 million was recognised within Group operating profit
during the period. Taxation on this gain generated a charge of £79 million,
resulting in an exceptional post-tax gain of £140 million.

No exceptional items were recorded during the six months ended 30 June 2013.

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 pre-tax losses of £127 million (2013: gains of £105 million)
relating to these re-measurements. The Group recognises the realised gains and
losses on these contracts in business performance when the underlying
transaction occurs. The profits arising from the physical purchase and sale of
commodities during the period, which reflect the prices in the underlying
contracts, are not impacted by these re-measurements. See note 3 for further
details.

BUSINESS COMBINATIONS

On 27 June 2014, the Group acquired natural gas assets in the Foothills region
of Alberta from Shell Canada Energy for $42 million (£23 million). The assets
were acquired by the CQ Energy Canada Partnership (CQECP), the 60:40
partnership with Qatar Petroleum International (QPI). As part of the
transaction, the Group disposed of its interests in the Burnt Timber gas
processing plant and the Waterton undeveloped lands in south-west Alberta.

On 30 June 2014, the Group acquired Bord Gáis Energy’s (BGE) gas and
electricity supply business in the Republic of Ireland, including the
Whitegate gas-fired power station for total consideration of €197 million
(£160 million).

Further details on business combinations, plus details of asset purchases,
disposals and disposal groups are included in notes 4(d) and 11.

EVENTS AFTER THE BALANCE SHEET DATE

On 24 July 2014, the Group announced it had agreed to sell its Ontario home
and small commercial services business to Enercare Inc. for C$550 million
(£300 million) including normal adjustments for working capital, comprising of
C$450 million in cash and C$100 million in ordinary equity. The transaction is
expected to complete towards the end of 2014.

On 29 July 2014, the Group acquired the US residential solar business, Astrum
Solar, for $54 million (£32 million). The transaction provides Direct Energy
with a position in the rapidly growing US residential solar market.

Further details of events after the balance sheet are described in note 16.

PRINCIPAL RISKS AND UNCERTAINTIES

The Group’s principal risks and uncertainties are largely unchanged from those
set out in its 2013 Annual Report and Accounts. Details of how the Group has
managed financial risks such as liquidity and credit risk are set out in note
18.

Details on the Group’s capital management processes are provided under sources
of finance in note 12.

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.

Key Performance Indicators

BRITISH GAS

Total British Gas                                     
Performance
indicators for the           H1 2014   H1 2013   Δ%      FY 2013
period ended
Total customer
accounts (period             24,001    24,933    (4)     24,395
end) (’000)
Total customer
households (period           10,961    11,334    (3)     11,120
end) (’000)
Joint product
households (period           2,174     2,364     (8)     2,257
end) (’000)
Gross Revenue (£m)           6,928     7,912     (12)    14,226
Operating cost
(excluding bad debt)         704       686       3       1,392
(£m)
Operating profit             455       569       (20)    1,030
(£m)
Operating profit             355       436       (19)    777
after taxation (£m)
Lost Time Injury             0.12      0.15      (20)    0.11
Frequency Rate
                                                        
Residential energy                                    
supply
For the period ended         H1 2014   H1 2013   Δ%      FY 2013
Customer accounts
(period end):
 Gas (’000)                         8,466       8,846       (4)       8,603
 Electricity (’000)         6,589     6,828     (4)     6,653
 Total (’000)               15,055    15,674    (4)     15,256
Estimated market
share (%):
  Gas                                37.6        39.3        (1.7)     38.2
                                                             ppts
  Electricity                24.3      25.3      (1.0)   24.5
                                                             ppts
Average consumption:
  Gas (therms)                       236         311         (24)      492
 Electricity (kWh)          1,765     1,936     (9)     3,688
Total consumption:
  Gas (mmth)                         2,009       2,763       (27)      4,342
 Electricity (GWh)          11,667    13,146    (11)    25,078
Gross Revenue (£m):
  Gas                                2,899       3,726       (22)      6,033
 Electricity                1,652     1,760     (6)     3,454
 Total                      4,551     5,486     (17)    9,487
Operating profit             265       356       (26)    571
(£m)
Operating profit             207       273       (24)    423
after taxation (£m)
Post-tax margin (%)          4.5       5.0       (0.5)   4.5
                                                             ppts
                                                                       
Residential services                                  
For the period ended         H1 2014   H1 2013   Δ%      FY 2013
Customer product
holdings (period
end):
  Central heating
  service contracts                  4,470       4,617       (3)       4,575
  (’000)
  Kitchen appliances
  care (no. of                       432         460         (6)       453
  customers) (’000)
  Plumbing and                       1,652       1,711       (3)       1,683
  drains care (’000)
  Home electrical                    1,397       1,445       (3)       1,420
  care (’000)
 Other contracts            95        114       (17)    96
  (’000)
 Total holdings             8,046     8,347     (4)     8,227
  (’000)
Domestic central
heating                      51        46        11      101
installations (’000)
Gross Revenue (£m):
  Central heating                    404         411         (2)       841
  service contracts
  Central heating                    135         121         12        263
  installations
 Other                      265       273       (3)     551
 Total                      804       805       (0)     1,655
Operating profit             129       135       (4)     318
(£m)
Operating profit             101       103       (2)     241
after taxation (£m)
Post-tax margin (%)          12.6      12.8      (0.2)   14.6
                                                             ppts
                                                                       
Business energy                                       
supply and services
For the year ended           H1 2014   H1 2013   Δ%      FY 2013
Customer supply
points (period end):
  Gas (’000)                         307         317         (3)       310
 Electricity (’000)         593       595       (0)     602
 Total (’000)               900       912       (1)     912
Average consumption:
  Gas (therms)                       1,188       1,480       (20)      2,476
  Electricity (kWh)          14,196    14,651    (3)     28,852
Total consumption:
  Gas (mmth)                         366         472         (22)      784
  Electricity (GWh)          8,487     8,756     (3)     17,260
Gross Revenue (£m):
  Gas                                431         531         (19)      904
  Electricity                        1,004       983         2         1,951
 Business Services          138       107       29      229
 Total                      1,573     1,621     (3)     3,084
Operating profit             61        78        (22)    141
(£m)
Operating profit             47        60        (22)    113
after taxation (£m)
Post-tax margin (%)          3.0       3.7       (0.7)   3.7
                                                             ppts
                                                                       

DIRECT ENERGY

TotalDirect Energy                                             
For the period ended                 H1 2014  H1 2013  Δ%          FY 2013
Total residential energy and
services accounts (period end)       6,079    5,838    4           5,967
(’000)
Gross revenue (£m)                   6,469    3,191    103         7,325
Operating profit (£m)                41       165      (75)        276
Operating profit after taxation      26       103      (75)        189
(£m)
Lost Time Injury Frequency Rate      0.09     0.13     (31)        0.12
                                                                       
Residential energy supply                                       
For the period ended                 H1 2014  H1 2013  Δ%          FY 2013
Customer accounts (period end)
(’000)
Texas                                 793       719       10           787
Canada regulated                      758       779       (3)          766
Canada deregulated                    446       501       (11)         480
US North East                        1,457    1,398    4           1,327
Total                                3,454    3,397    2           3,360
Gross revenue (£m)                   1,399    1,308    7           2,517
Operating profit (£m)                48       99       (52)        163
Operating profit after taxation      30       62       (52)        111
(£m)
Post-tax margin (%)                  2.1      4.7      (2.6) ppts  4.4
Post-tax underlying margin (%)       3.6      4.7      (1.1) ppts  4.4
H1 2014 post-tax underlying margin (%) excludes £21m (£33m pre-tax) of costs
associated with the Polar Vortex.
                                                                       
Business energy supply                                          
For the period ended                 H1 2014  H1 2013  Δ%          FY 2013
Gas sales (mmth)                      3,193     494       546          1,839
Electricity sales (GWh)               48,894    27,999    75           63,919
Gross revenue (£m)                   4,814    1,609    199         4,238
Operating profit / (loss) (£m)       (21)     53       nm          77
Operating profit / (loss) after      (14)     33       nm          53
taxation (£m)
Post-tax margin (%)                  (0.3)    2.1      (2.4) ppts  1.3
Post-tax underlying margin (%)       0.4      2.1      (1.7) ppts  1.8

FY 2013 post-tax underlying margin (%) excludes £25m (£36m pre-tax) relating
to amortisation of customer intangibles and integration costs associated with
the Hess Energy Marketing acquisition.
H1 2014 post-tax underlying margin (%) excludes £9m (£13m pre-tax) relating to
amortisation of customer intangibles and integration costs associated with the
Hess Energy Marketing acquisition and £22m (£33m pre-tax) of costs associated
with the Polar Vortex.

Residential and business                                    
services
For the period ended               H1 2014  H1 2013  Δ%        FY 2013
Contract relationships             2,625    2,441    8         2,608
(period end) (’000)
On demand and installation              351       350       0          748
jobs (’000)
Gross revenue (£m)                 256      274      (7)       570
Operating profit (£m)              14       13       8         36
Operating profit after             10       8        25        25
taxation (£m)
Post-tax margin (%)                3.9      2.9      1.0 ppts  4.4
                                                                       
Direct Energy (with
comparator year of 2013
restated to remove                                          
effect of foreign exchange
movements)
For the period ended               H1 2014  H1 2013  Δ%        FY 2013
Gross revenue (£m)
Residential energy supply               1,399     1,168     20         2,301
Business energy supply                  4,814     1,456     231        3,924
Residential and business           256      245      4         520
services
Direct Energy revenue              6,469    2,869    125       6,745
Operating profit / (loss)
(£m)Residential energy supply
Residential energy supply               48        90        (47)       152
Business energy supply                  (21)      49        nm         73
Residential and business           14       11       27        33
services
Direct Energy operating            41       150      (73)      258
profit
2013 figures restated at H1 2014 weighted average exchange rate


CENTRICA ENERGY

Total Centrica Energy                                           
For the period ended                 H1 2014  H1 2013  Δ%          FY 2013
Operating profit (£m)                526      802      (34)        1,326
Operating profit after taxation      277      282      (2)         468
(£m)
Lost Time Injury Frequency Rate      0.19     0.18     6           0.10
                                                                  
International gas                                               
For the period ended                 H1 2014  H1 2013  Δ%          FY 2013
Gas production volumes (mmth)
East Irish Sea                        328       344       (5)          718
Other UK and Netherlands              490       541       (9)          1,071
Norway                                378       436       (13)         828
North America                         616       252       144          701
Trinidad & Tobago                    133      123      8           239
Total                                1,945    1,696    15          3,557
Liquids production volumes (mmboe)
UK and Netherlands                    2.4       3.5       (31)         6.3
Norway                                5.1       5.8       (12)         11.0
North America                        1.2      0.5      140         1.4
Total                                8.7      9.8      (11)        18.7
Total production volumes (mmboe)     40.9     37.6     9           77.3
Average achieved gas price
(p/therm)
Europe                                56.0      65.8      (15)         65.0
North America and Trinidad & Tobago  24.1     20.5     18          20.9
Total                                44.0     55.7     (21)        53.7
Average oil and condensate sales
price (£/boe)
Europe                                59.9      64.5      (7)          62.9
North America and Trinidad & Tobago  47.1     46.8     1           43.3
Total                                58.4     63.7     (8)         61.6
DDA costs (£/boe)
Europe                                12.5      12.9      (3)          12.9
North America and Trinidad & Tobago  5.2      7.0      (26)        6.1
Total                                10.0     11.9     (16)        11.4
Lifting and other cash production
costs (£/boe)
Europe                                14.6      13.0      12           13.5
North America and Trinidad & Tobago  9.2      8.5      8           9.7
Total                                12.8     12.2     5           12.6
Exploration & appraisal costs (£m)   48       47       2           154
Operating profit (£m)                465      683      (32)        1,155
Operating profit after taxation      235      182      29          325
(£m)
                                                                       
UK power                                                        
For the period ended                 H1 2014  H1 2013  Δ%          FY 2013
Power generated (GWh)
Gas-fired                             4,058     4,531     (10)         8,897
Renewables                            483       290       67           753
Nuclear                              6,173    5,763    7           12,097
Total                                10,714   10,584   1           21,747
Load factor
Gas-fired                             24%       27%       (2.9) ppts   27%
Renewables                            38%       33%       5.4 ppts     36%
Nuclear                              80%      76%      4.2 ppts    79%
Achieved Clean Spark                  9.8       10.0      (2)          11.7
Spread (£/MWh)
Achieved power price
(including ROCs)                      113.2     104.3     9            114.5
(£/MWh) - renewables
Achieved power price                 51.0     52.1     (2)         51.9
(£/MWh) - nuclear
Operating profit / (loss) (£m)
Gas-fired                             (70)      (64)      nm           (133)
Renewables (operating assets)         23        12        92           36
Renewables (one off write-offs,       (40)      24        nm           (11)
profit/loss on disposal)
Nuclear                               125       122       2            250
Midstream                            23       25       (8)         29
Operating profit (£m)                61       119      (49)        171
Operating profit after taxation      42       100      (58)        143
(£m)
                                                                       

CENTRICA STORAGE

Total
Centrica                                        
Storage
For the                    H1      H1      Δ%      FY
period ended                             2014       2013                  2013
Average SBU
price (in                  22.2    30.3    (27)    26.7
period)
(pence)
Gross
Revenue (£m)
Standard                                50         69         (28)       121
SBUs
Optimisation               20      38      (47)    67
/ other
Total                      70      107     (35)    188
Operating                  10      47      (79)    63
profit (£m)
Operating
profit after               7       36      (81)    48
taxation
(£m)
Lost Time
Injury                     0.07    0.06    17      0.06
Frequency
Rate
                                                                          

Statement of Directors’ Responsibilities

The Directors are responsible for preparing the Interim Results for the six
month period ended 30 June 2014 in accordance with applicable law, regulations
and accounting standards. In preparing the condensed interim Financial
Statements, the Directors are responsible for ensuring that they give a true
and fair view of the state of affairs of the Group at the end of the period
and the profit or loss of the Group for that period.

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

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

The Directors of Centrica plc are listed in the Group’s 2013 Annual Report and
Accounts. A list of current Directors is maintained on the Centrica plc
website which can be found at www.centrica.com.

By order of the Board

SAM LAIDLAW        NICK LUFF
31 July 2014          31 July 2014
Chief Executive       Chief Financial Officer
                      

Independent Review Report to Centrica plc

REPORT ON THE CONDENSED INTERIM FINANCIAL STATEMENTS

Our conclusion

We have reviewed the condensed interim Financial Statements, defined below, in
the Interim Results of Centrica plc for the six months ended 30 June 2014. 
Based on our review, nothing has come to our attention that causes us to
believe that the condensed interim Financial Statements are not prepared, in
all material respects, in accordance with International Accounting Standard 34
as adopted by the European Union and the Disclosure and Transparency Rules of
the United Kingdom's Financial Conduct Authority.

This conclusion is to be read in the context of what we say in the remainder
of this report.

What we have reviewed

The condensed interim Financial Statements, which are prepared by Centrica
plc, comprise:

  *the Group Balance Sheet as at 30 June 2014;
  *the Group Income Statement and Group Statement of Comprehensive Income for
    the period then ended;
  *the Group Cash Flow Statement for the period then ended;
  *the Group Statement of Changes in Equity for the period then ended; and
  *the explanatory notes to the condensed interim Financial Statements.

As disclosed in note 2, the financial reporting framework that has been
applied in the preparation of the full annual financial statements of the
Group is applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.

The condensed interim Financial Statements included in the Interim Results
have been prepared in accordance with International Accounting Standard 34,
‘Interim Financial Reporting’, as adopted by the European Union and the
Disclosure and Transparency Rules of the United Kingdom's Financial Conduct
Authority.

What a review of condensed interim Financial Statements involves

We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410, ‘Review of Interim Financial Information
Performed by the Independent Auditor of the Entity’ issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim financial
information consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures.

A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK and Ireland) and, consequently,
does not enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.

We have read the other information contained in the Interim Results and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed interim Financial
Statements.

RESPONSIBILITIES FOR THE CONDENSED INTERIM FINANCIAL STATEMENTS AND THE REVIEW

Our responsibilities and those of the Directors

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

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

PricewaterhouseCoopers LLP
Chartered Accountants
31 July 2014
London


Notes

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

Group Income Statement


                                                      2014                                     2013
                                                                                                       
                                        Exceptional       Results                    Exceptional
                          Business      items and         for          Business      items and         Results
                                        certain                                      certain           for
                          performance   re-measurements   the          performance   re-measurements   the
                                                          period                                       period
Six months       Notes  £m           £m               £m         £m           £m               £m
ended 30 June
                                                                                                       
Group revenue     4(a)    15,748       –                15,748       13,651       –                13,651
Cost of sales
before
exceptional               (13,472)      –                 (13,472)     (10,886)      –                 (10,886)
items
and certain
re-measurements
Re-measurement
of energy         6(b)    –            (146)            (146)        –            104              104
contracts
Cost of sales          (13,472)     (146)            (13,618)   (10,886)     104              (10,782)
Gross profit              2,276        (146)            2,130        2,765        104              2,869
Operating costs
before                    (1,398)       –                 (1,398)      (1,332)       –                 (1,332)
exceptional
items
Exceptional       6(a)    –            219              219          –            –                –
items
Operating costs           (1,398)       219               (1,179)      (1,332)       –                 (1,332)
Share of
results of
joint ventures
and              5      51           19               70         52           1                53
associates, net
of interest and
taxation
Group operating   4(b)    929          92               1,021        1,485        105              1,590
profit
Financing costs   7       (155)         –                 (155)        (129)         –                 (129)
Investment        7       24           –                24           26           –                26
income
Net finance            (131)        –                (131)      (103)        –                (103)
cost
Profit before             798           92                890          1,382         105               1,487
taxation
Taxation on      8      (281)        (59)             (340)      (649)        (19)             (668)
profit
Profit for the         517          33               550        733          86               819
period
Attributable                                                                             
to:
Owners of the             500           33                533          733           86                819
parent
Non-controlling        17           –                17         –            –                –
interests
                                                                                                       
Earnings per                                       Pence                                  Pence
ordinary share
Basic             9                                       10.5                                         15.8
Diluted          9                                  10.5                                   15.7

The notes on pages 33 to 50 form part of these condensed interim Financial
Statements.

Group Statement of Comprehensive Income

Six months ended 30 June                                2014     2013
                                                           £m          £m
Profit for the period                                   550      819
Other comprehensive income/(loss):
Items that will be or have been recycled to the
Group Income Statement:
Gains on revaluation of available-for-sale                 2           –
securities, net of taxation
                                                                  
Net gains on cash flow hedges                              9           2
Transferred to income and expense on cash flow             16          12
hedges
Taxation on cash flow hedges                             (7)       (4)
                                                           18          10
Exchange differences on translation of foreign             (130)       42
operations
Share of other comprehensive (loss)/income of joint      (3)       12
ventures and associates, net of taxation
                                                           (113)       64
Items that will not be recycled to the Group Income               
Statement:
Net actuarial gains/(losses) on defined benefit            103         (198)
pension schemes
Taxation on net actuarial result on defined benefit      (20)      48
pension schemes
                                                           83          (150)
Share of other comprehensive loss of joint ventures     (11)     (15)
and associates, net of taxation
Other comprehensive loss, net of taxation               (41)     (101)
Total comprehensive income for the period               509      718
Attributable to:
Owners of the parent                                       494         718
Non-controlling interests                               15       –
                                                                             

Group Statement of Changes in Equity

                                                                 Non-         
                    Share       Share       Retained     Other                controlling     Total
                    capital     premium     earnings     equity     Total     interests       equity
                £m        £m        £m         £m       £m      £m            £m
1 January           321         931         4,255        (315)      5,192     65              5,257
2014
Total
comprehensive       –           –           533          (39)       494       15              509
income
Employee            –           –           (3)          49         46        –               46
share schemes
Purchase of
treasury            –           –           (1)          (212)      (213)     –               (213)
shares (note
9)
Cancellation
of treasury         (7)         –           (382)        389        –         –               –
shares
Dividends           –           –           (610)        –          (610)     –               (610)
Taxation         –         –         –          (5)      (5)     –             (5)
30 June 2014     314       931       3,792      (133)    4,904   80            4,984

                                                                 Non-         
                    Share       Share       Retained     Other                controlling     Total
                    capital     premium     earnings     equity     Total     interests       equity
                £m        £m        £m         £m       £m      £m            £m
1 January           321         929         4,186        491        5,927     –               5,927
2013
Total
comprehensive       –           –           819          (101)      718       –               718
income
Employee            –           2           (6)          35         31        –               31
share schemes
Purchase of
treasury            –           –           –            (213)      (213)     –               (213)
shares (note
9)
Dividends           –           –           (611)        –          (611)     –               (611)
Taxation            –           –           –            14         14        –               14
Exchange         –         –         –          (2)      (2)     –             (2)
adjustments
30 June 2013     321       931       4,388      224      5,864   –             5,864
                                                                                                     

The notes on pages 33 to 50 form part of these condensed interim Financial
Statements.

Group Balance Sheet

                                            30 June      31 December
                                                  2014             2013
                                  Notes    £m           £m
Non-current assets
Property, plant and equipment                     6,767            7,446
Interests in joint ventures and                   2,668            2,658
associates
Other intangible assets                           2,166            1,905
Goodwill                                          2,701            2,819
Deferred tax assets                               112              105
Trade and other receivables                       100              150
Derivative financial                              293              227
instruments
Retirement benefit assets             13(c)       276              205
Securities                         12(b)    205          202
                                          15,288       15,717
Current assets
Trade and other receivables                       4,835            5,446
Inventories                                       471              530
Derivative financial                              834              573
instruments
Current tax assets                                149              151
Securities                            12(b)       11               9
Cash and cash equivalents          12(b)    815          719
                                          7,115        7,428
Assets of disposal groups          11(c)    766          301
classified as held for sale
                                          7,881        7,729
Total assets                               23,169       23,446
Current liabilities
Derivative financial                              (960)            (506)
instruments
Trade and other payables                          (5,092)          (5,630)
Current tax liabilities                           (468)            (645)
Provisions for other                              (342)            (258)
liabilities and charges
Bank overdrafts, loans and         12(c)    (1,118)      (859)
other borrowings
                                          (7,980)      (7,898)
Liabilities of disposal groups     11(c)    (187)        (99)
classified as held for sale
                                          (8,167)      (7,997)
Non-current liabilities
Deferred tax liabilities                          (1,398)          (1,426)
Derivative financial                              (386)            (431)
instruments
Trade and other payables                          (154)            (64)
Provisions for other                              (2,745)          (2,934)
liabilities and charges
Retirement benefit obligations        13(c)       (131)            (165)
Bank overdrafts, loans and         12(c)    (5,204)      (5,172)
other borrowings
                                          (10,018)     (10,192)
Total liabilities                          (18,185)     (18,189)
Net assets                                 4,984        5,257
Share capital                                     314              321
Share premium                                     931              931
Retained earnings                                 3,792            4,255
Other equity                               (133)        (315)
Total shareholders’ equity                 4,904        5,192
Non-controlling interests                  80           65
Total shareholders’ equity and             4,984        5,257
non-controlling interests

The notes on pages 33 to 50 form part of these condensed interim Financial
Statements.

Group Cash Flow Statement

*Story too large*
Six months ended 30 June                              Notes  2014    2013
                                                               £m        £m
Group operating profit including share of results of         1,021   1,590
joint ventures and associates
Less share of profit of joint ventures and                  (70)    (53)
associates
Group operating profit before share of results of              951       1,537
joint ventures and associates
Add back/(deduct):
Depreciation, amortisation, write-downs and                    623       679
impairments
Profit on disposals                                            (196)     (30)
Decrease in provisions                                         (23)      (27)
Defined benefit pension service cost and                       3         (3)
contributions
Employee share scheme costs                                    26        23
Unrealised losses/(gains) arising from                      111     (121)
re-measurement of energy contracts
Operating cash flows before movements in working               1,495     2,058
capital
Decrease in inventories                                        59        149
Decrease/(increase) in trade and other receivables             704       (36)
^(i)
Decrease in trade and other payables ^(i)                   (729)   (227)
Operating cash flows before payments relating to               1,529     1,944
taxes and exceptional charges
Taxes paid                                                     (413)     (401)
Payments relating to exceptional charges                    (62)    (132)
Net cash flow from operating activities                     1,054   1,411
Purchase of businesses, net of cash and cash                   (113)     (2)
equivalents acquired
Sale of businesses, net of cash and cash equivalents           433       5
disposed of
Purchase of property, plant and equipment and          4(d)    (741)     (789)
intangible assets
Sale of property, plant and equipment and intangible           9         6
assets
Investments in joint ventures and associates                   (10)      (34)
Dividends received from joint ventures and                     43        103
associates
Repayments of loans to, and disposal of investments            13        59
in, joint ventures and associates
Interest received                                              13        11
Purchase of securities                                12(b)  (2)     (6)
Net cash flow from investing activities                     (355)   (647)
Issue and surrender of ordinary share capital for              20        9
share awards
Purchase of treasury shares under share repurchase             (207)     (203)
programme
Financing interest paid                                        (124)     (116)
Realised net foreign exchange gain on cash
settlement of derivative contracts

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