We are now moving from a period of considerable investment in growth opportunities and strategic market entries, to a period of delivery from these investments.

Business review 1/5

We have a strong business with leading market positions and I am confident that our strategy will continue to deliver value for our shareholders.

During 2002 we have continued to see strong overall financial performance, in particular from our core UK energy business, where improvement in margins and growth were accompanied by new momentum in our services to business customers and expansion of our upstream energy asset portfolio. Our AA roadside and personal finance operations continue to deliver solid underlying profit growth and at Goldfish we are developing a more focused product range. Despite slow regulatory progress in our UK telecoms and North American energy markets, we are expanding in both businesses.

Turnover and profitability

Group turnover (excluding Accord trading revenue) was £10 billion in 2002, up 11% from the previous year. Higher sales to our business customers – through Centrica Business Services – were complemented by an increase in residential electricity sales as well as growth in North America, the AA’s roadside and personal finance businesses, home services and One.Tel. UK gas sales volumes were lower, largely due to unusually warm weather in the first and fourth quarters of the year.

Customer service

We maintained our focus on improving customer service across all of our brands. We are now placing greater importance on qualitative and value-based measures which are built into a scorecard evaluation and reflected in the remuneration of staff at all levels.

As a result of our focus on these areas, we continue to be highly rated by external agencies. In particular, the AA won the JD Power & Associates 2002 UK Roadside Assistance Study award for customer satisfaction for the third time in five years. Further accolades include Which? magazine naming the AA as the UK’s best motoring organisation, and www.house.co.uk winning the 2002 Customer Management National E-commerce Customer Service Award.

Outlook

We are now moving from a period of considerable investment in growth opportunities and strategic market entries, to a period of delivery from these investments, underpinned by new customer relationship management (CRM) systems and common processes for building deeper customer relationships.

For British Gas, we expect continuing recovery in residential gas margins and further electricity growth to improve profit, although this will be partially offset by the higher costs of the government’s Energy Efficiency Commitment and peak CRM system implementation expenses through to 2004. We expect the benefits from CRM to drive further medium term growth in British Gas operating margins.

The launch of Centrica Business Services has resulted in increased management focus on the commercial energy market, and on growing product portfolios. We expect to increase market share and profitability in the future.

We anticipate output from our Morecambe Bay gas production facilities to decline by around 10% a year. However, this will be offset over time by gas from other assets we currently hold, or will acquire.

We expect the profitability of the AA to continue to improve, with expenditure on information technology peaking in 2003. For One.Tel, we expect that regulatory improvements will warrant renewed investment in brand and product marketing at the same time as developing our growing mobile and internet businesses. For Goldfish, significant improvement to credit card and loans contributions are expected in 2003 and, with a more focused rollout of new products, breakeven will occur towards the end of the year.

North America continues to offer significant opportunities, given our focus on the marketing and service elements of deregulated energy supply. We continue to lobby to maintain legal frameworks and pricing controls, which allow sufficient headroom to attract new market entrants. We will build the business through either organic growth, or through the acquisition of customers from existing suppliers. The timing for achievement of our broader scale ambition in North America will also depend upon the availability and pace of key acquisition opportunities.

Our strategy in continental Europe is to build a significant customer base in the medium term. Although the pace of energy deregulation varies across individual countries the whole of the European Union residential energy market is expected to be open by mid 2007.

We are focusing on those countries where markets are opening more quickly and regulatory and political conditions are more favourable.

Employees

Our employees are central to the delivery of our strategy and we need to continue to attract and retain high quality, highly motivated people. I am committed to making Centrica an employer of choice and the recent accreditation of our AA brand unit as ‘Investors in People’ is just one indication that we are developing the highest standards of employment policies and practices. Increased scores in our satisfaction survey in 2002 demonstrate that our employees share our vision and are committed to delivering our strategy. I would like to join the chairman in thanking them all for their ongoing and valued commitment.

Conclusion

To sum up, we have a strong business with leading market positions. Our core businesses are growing and are strongly cash generative and our investment in new businesses is proceeding as market opportunities emerge. I am confident therefore that our strategy will continue to deliver value for shareholders.

Sir Roy Gardner

Chief Executive

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