Final Results

22nd Feb 2007 07:00

Centrica plc Preliminary results for the year ended 31 December 2006 Financial overview: -- Turnover@ up 22% at £16.5bn -- Operating profit*@ down by 5% to £1,442m -- Earnings*@ up 8% to £715m due to lower Group tax rate -- Exceptional charge of £331m -- Adjusted basic earnings per share up 7% to 19.4p -- Recommended final dividend of 8.0p/share, full year dividend of 11.15p/share, up 6% Operating overview: -- Solid Group performance in a volatile market place -- British Gas Residential returned to profit* in the second half, but lost 1,029,000 customer accounts -- British Gas Residential announced plans to reduce customer prices by 17% in gas and 11% in electricity effective in March 2007 -- British Gas Business turnover up 53% - operating profits* up 13% -- British Gas Services improved customer service levels through the year -- Rough field restored to full operation - Centrica Storage operating profits* up 48% -- North American turnover up 15% to £4.1bn - operating profits* up 21% -- Exceptional charge taken for systems write-down and restructuring "Financially the business performed well in a difficult year. While goodprogress is being made there is further work to be done to improve the BritishGas service levels, reduce our cost base and develop our services, energyefficiency and international businesses." Sam Laidlaw, Chief Executive Statutory results: The statutory results include exceptional items and certain re-measurementswhich are explained in the Group financial summary and disclosed in note 3. -- Operating profit@ £180m, after net exceptional charges of £331m and net charges relating to certain re-measurements of £931m (2005: Operating profit of £1,957m after net exceptional charges of £11m and net credits relating to certain re-measurements of £455m). -- Loss from continuing and discontinued operations of £155m, after net exceptional charges from continuing operations of £331m, net charges relating to certain re-measurements of £931m, interest credits of £37m and associated tax credits of £363m (2005: Earnings of £1,012m, after net exceptional charges from continuing operations of £11m, exceptional credits from discontinued operations of £34m, net credits relating to certain re-measurements of £455m, and associated tax charge of £138m). -- Basic loss per ordinary share 4.3p (2005: Basic earnings per ordinary share 27.4p). Chairman's Statement Performance review We achieved good underlying financial performance despite the particularlychallenging circumstances which prevailed throughout the year. In the winter of 2005/06 gas shortages in the UK and increasing world-widedemand for energy drove wholesale prices to record levels necessitating priceincreases to many of our customers. The management team worked hard to minimisethe effect of these increases by containing operating costs and developinginnovative products designed to protect customers and preserve loyalty inincreasingly competitive markets. Regrettably, despite these actions, we lost 1 million residential energyaccounts during the year. British Gas Residential returned to profit* by the endof the year which, together with continued good delivery in gas production,strong growth in North America and the lower tax charge, enabled the Groupoverall to deliver sound earnings* growth. The high commodity prices in the first half of the year held up the price ofassets and the Board continued to exercise financial discipline and invest onlyin additional sources of supply where returns met our rigorous financialhurdles. In the latter part of the year, there was a fundamental change in the UK energymarket. New gas supply pipelines from Norway and Holland, whose construction wasmade possible by long-term contracts entered into by British Gas, came on streamat a time when the country was experiencing the warmest autumn since recordsbegan. This change in the balance of supply and demand, combined with a fall inglobal oil prices, reversed previous wholesale gas price trends. This enabledBritish Gas to announce price reductions from March 2007 when a portion of themore expensive gas supplies to which we are already committed will be exhausted.Looking forward, it is our intention to strike a fair balance between lowerprices and sustainable profits* in order to reward both our customers andshareholders. Returns to shareholders The Board is proposing a final dividend of 8.0 pence (2005: 7.4 pence) forpayment in June 2007 bringing our full-year dividend to 11.15 pence (2005: 10.5pence). This represents a 6% year-on-year increase, in line with our policy andcommitment to real growth in the ordinary dividend. As we become more confidentin the sustainability of more benign market conditions, we will be able toconsider the reinstatement of our share buyback programme should surplus fundspermit. Board changes Sir Roy Gardner retired at the end of June. We are grateful to him for hismaterial contribution and commitment, having led Centrica through a decade ofconsiderable change. In July, Sam Laidlaw was appointed Chief Executive of the Company bringing withhim considerable experience in managing and developing large scale internationalenergy businesses. Since taking up the appointment he has made real progress indeveloping the long-term vision for the Group and in sharpening the immediatefocus on improving the current performance and efficiency of the organisation. Mark Clare left the Company in the summer to take up an appointment outside theindustry, having made an important contribution to the Group both as FinanceDirector and, more recently, Managing Director of British Gas Residential.Patricia Mann OBE retired from the Group after nine years valuable service onthe Board and her role of Senior Non-executive Director was assumed by MaryFrancis CBE. Sadly Patricia died later in the year having bravely fought along-term illness. Phil Bentley who has ably served as Finance Director and Managing Director,Europe will move to the role of Managing Director, British Gas following theappointment of Nick Luff as Group Finance Director. Nick brings with himsignificant commercial experience. Jake Ulrich has taken on responsibility forthe continental European operations. At the beginning of the year we established a main Board committee to lead ourcorporate responsibility strategy. This is chaired by Mary Francis CBE andincludes the managing directors of each business unit. I am confident that this new team will bring renewed vigour and commitment tothe successful development of Centrica in the years ahead. Our employees Our employees worked particularly hard throughout 2006 as they responded to theunusually demanding environment. External pressures arising from turbulence inthe energy market were magnified by the degree of change in systems, workingpractices, organisation and management within the Company and I thank them allfor their loyalty, hard work and dedication. The upstream team once again made amaterial contribution to our financial performance and demonstrated theirabsolute professionalism in both the operation of our offshore facilities andthe rapid recovery of our Rough storage platform following a fire earlier in theyear. Tragically the risks of working offshore were again made evident when sixpeople, four of them Centrica employees, were killed in a helicopter accident inMorecambe Bay at Christmas with a seventh person still missing, presumed dead.Our thoughts and deepest sympathies are with their families and our thanks go toall the employees who continue to help fulfil the UK's energy needs underarduous and challenging conditions. The future We are entering 2007 under new leadership but with continued commitment to thetwin goals of customer service and shareholder value creation. Lower wholesaleenergy prices have provided us with the opportunity to reduce retail prices andwe expect the completion of new systems to help to address the service levels.We will also continue our search for cost-effective supply sources to rebalanceour market exposure and sharpen our competitive edge. Our investment programme will be driven by value and our cost structure will bethe focus of continued stringent appraisal. Innovation will be key to ourmarketing effort and the application of our skills and service network to meetthe growing consumer demand for energy efficiency will be at the heart of ourendeavours. I look forward to 2007 with confidence in both our business modeland the management team. \* TRoger CarrChairman 22 February 2007\* T Earnings and operating profit numbers are stated, throughout the commentary,before exceptional items and certain re-measurements where applicable - see note1 for definitions. The Directors believe this measure assists with betterunderstanding the underlying performance of the Group. The equivalent amountsafter exceptional items and certain re-measurements are reflected in note 2 andare reconciled at Group level in the Group Income Statement. Certainre-measurements and exceptional items are described in note 3. Adjusted earningsand adjusted basic earnings per share are reconciled to their statutoryequivalents in note 7. All current financial results listed are for the 12 months ended 31 December2006. All references to 'the prior-period', 'the prior-year', '2005' and 'lastyear' mean the 12 months ended 31 December 2005 unless otherwise specified. Chief Executive's Review Overview of 2006 Against a backdrop of unprecedented volatility Centrica produced a solid set offinancial results. During the year the UK experienced large fluctuations inwholesale gas costs, particularly in the first quarter when cold weather andfear of shortages pushed the wholesale gas price to 250 pence per therm(p/therm). The six main energy suppliers struggled to keep up with this rate ofrise in commodity costs and implemented 13 separate tariff increases during thefirst 10 months of the year. Supply fears subsided in the second half of theyear as good progress was made with the construction of the Langeled and BBLpipelines, both of which were underpinned by British Gas contracts, andwholesale gas prices started to fall. The high wholesale prices in the first half of the year materially impacted thesupply businesses. British Gas Residential made a significant loss* in the firstsix months of the year and stubbornly high forward wholesale prices forced us tofollow other suppliers in increasing retail prices for a second time inSeptember. The quantity and magnitude of tariff increases across all suppliershit consumer sentiment and resulted in high levels of customer switching.Despite continuing to launch innovative products, including the very successful'Fix and Fall' offering, British Gas lost 1,029,000 energy accounts during theyear. The tariff increase in September returned the business to profit* in thesecond half of the year. Once the outlook for wholesale prices became clearerBritish Gas took the lead in announcing a price reduction to residentialcustomers of 17% in gas and 11% in electricity, effective from 12 March 2007. British Gas Business delivered further customer growth and record profits*despite the extremely challenging commodity environment in the first half of theyear. British Gas Services suffered a difficult start to the year due to theexceptionally cold weather driving higher call outs. However the businessfinished the year strongly as the changes we made to systems, management andprocesses improved both operational and service measures. Operationally the gas production business performed well but production volumeswere restricted by maintenance work during an extended summer outage at theSouth Morecambe field and management's decision not to produce from the fieldfor a large portion of the second half as a result of falling wholesale pricesand weak demand due to the unusually warm weather. This fall in prices at theend of the year greatly improved the ongoing position of the industrial andcommercial legacy contracts which were significantly loss-making* overall duringthe year. Centrica Storage had a challenging year. In February 2006 a catastrophic failureand fire at the Rough storage field halted operations. However an exceptionaleffort by the team delivered reliable injection in time to refill the fieldbefore the start of the winter production season enabling the asset to deliveranother strong financial result. In North America, Direct Energy had another year of record figures with turnoverup 15% primarily due to strong growth in business markets and Texas. The Texasoperation performed particularly well, providing a large portion of the 21%overall increase in North American profit*. This was due particularly toimproved results in both the organic business, as it gained scale, and theincumbent business, as the competitive market structure, combined with oureffective procurement, enabled us to implement proactive discounted priceofferings to customers. Despite this strong overall growth, as part of acontinual review of the efficiency of the business, decisive action was taken toreduce costs. This resulted in 450 job losses during the year, 9% of the total,primarily in Canada and in US home services. The European business made considerable progress as, overall, it moved firmlyinto profit*. However the ongoing negotiations between major companies inFrance, Spain and Holland provided evidence of continued support within EuropeanUnion member states for consolidation and the formation of national championsahead of the existence of full competition. The year ended on a tragic note with a helicopter accident in the Morecambe Bayarea which claimed the lives of six people, four of them long-standing andhighly committed Centrica employees with a seventh person still missing,presumed dead. Our thoughts are with all of their families and friends. Centricaregards safety as a top priority, and is committed to providing a healthy andsafe environment for employees and the communities which it touches. We have arange of appropriate controls in place and these are subject to regular reviewby the Board. Business outlook Since taking over from Sir Roy Gardner as the Chief Executive of Centrica inJuly of 2006, I have spent a large part of my first six months assessing thestrengths and weaknesses of the business and the priorities going forward. Myinitial observations are that the core businesses remain strong and we are in anenviable position in most of our chosen markets, with good growth being achievedinternationally, particularly in North America. In addition, after a difficultfew years, the wholesale pricing environment is starting to improve. However itis clear that the returns in our residential business in the UK have been lowand that we have proven to be overly exposed to the rapidly rising wholesalecost of the commodities which we supply to our customers. We have also suffereddual running costs and delivered less than satisfactory customer service as wehave moved to a new billing platform in British Gas, the efficacy and robustnessof which is still in the proving stage. We will now seek to build on our strengths, remove the weaknesses and overcomethe challenges. To do this I have set out some clear priorities for the Company: -- Transform British Gas -- Sharpen up the organisation and reduce costs -- Reduce risk through increased integration -- Build on our multiple growth platforms We made some progress on this agenda during the second half of the year. Theprice increase in British Gas Residential announced in July was followed laterin the year by a softening in wholesale gas and power prices; this has returnedthis business to profit* and allowed us to be the first company to offercustomers a price reduction, announced in February. We also launched ourEssentials Tariff to provide protection to our most vulnerable customers. Theservice levels in our British Gas Services business have shown a significantimprovement and our attention is now firmly focussed on service levels in theresidential business. We carried out an initial review of the costs and processes in our business. Asa result we took an exceptional non-cash charge of £196 million which reflectsthe write-down of our IT systems. We also took an exceptional cash charge of £87million for the initial restructure of parts of the corporate centre, BritishGas Residential and British Gas Services resulting in around 1,550 job losses.Together these charges reduce ongoing costs with around £50 million saved in2007. Our progress to date leaves me optimistic for 2007. We will continue to reviewthe structure of our business and put in place internal operational metricswhich will identify and drive further efficiencies. British Gas Residential ison track to return to a more sustainable operating margin* and to arrest thedecline in customer numbers assisted by the price reduction, improving customerservice and ongoing innovation in our product offerings. We are also focusing firmly on the priority of reducing the exposure toshort-term movements in the wholesale gas price. We continue to expect this tobe achieved through a mixture of upstream asset acquisitions and contractualarrangements. We will leverage Centrica's unique market position on both sidesof the Atlantic to secure liquefied natural gas for our customers and offersecurity of demand for producers. In Centrica Energy we expect gas production levels to be broadly flat on 2006.We renegotiated the terms of the inter-company sales contracts on the South andNorth Morecambe gas fields, with the agreement of HM Revenue and Customs, toestablish a direct link to month-ahead gas prices. We will also commission theMaria, Thurne and Davy East fields. The industrial and commercial contracts areforecast to become profitable* as a result of lower wholesale prices. We expect to see further growth in British Gas Business which is also benefitingfrom the fall in wholesale prices and is retaining strong customer renewal andloyalty levels. In British Gas Services we expect the investment we have made innew systems, management and processes to deliver significantly improvedfinancial performance in 2007. In North America we expect to continue to growboth revenue and profit*, with further load growth in business markets focussedprimarily in the North Eastern United States and increased profit* contributionfrom our energy wholesale and trading activities. Further expansion in continental Europe remains an important element of ourgrowth plans. However while welcoming the conclusions of the EuropeanCommission's Energy Review, that market mechanisms need to be put in place toencourage greater competition, we remain cautious about the potential for makingfurther material inroads in the short term. The recent publication of the Stern report was significant in the development ofclimate change policy in the UK. Climate change is probably the most significantenvironmental issue facing current and future generations. Accordingly, there isclear evidence that slowing or stabilising global warming is taking on greaterimportance for governments, companies and consumers alike. While Centricaalready has the lowest carbon intensity profile of the major UK power supplierswe will continue to expand our investments in the area of renewable energy andpromote the use of energy efficient technology by consumers. We will alsocapitalise on our unique expertise and capability to deliver energy efficiencyadvice, services and products to both our business and residential customers. I expect 2007 to be an important year in Centrica's development. Although someof our priorities will take longer to deliver fully, I anticipate making realprogress during this year and delivering a step up in the performance of thebusiness. \* TSam LaidlawChief Executive 22 February 2007\* T Business Commentary Group Financial Summary Group turnover from continuing operations was up 22% at £16.5 billion (2005:£13.4 billion). The increase was driven primarily by organic growth in the NorthAmerican business markets and the residential business in Texas and priceincreases in British Gas Residential and British Gas Business. Group operating profit* from continuing operations was down 5% at £1,442 million(2005: £1,513 million), with the strong growth in Centrica Storage and NorthAmerica being more than offset by reduced profits* in gas production on lowervolumes. The results include £20 million non-recurring profit* relating to thevaluation of the Group's pension schemes due to the effect of new pensionlegislation, introduced by the Finance Act from April 2006, upon the increasedestimate of future amounts of pension commuted for a lump sum. Group earnings* on a continuing basis were up by 8% to £715 million (2005: £661million). The lower operating profits* were more than offset by the reduction inthe group tax rate to 43% (2005: 52%) due to the lower contribution from hightax rate upstream gas production. The statutory loss for the year was £155million. The reconciling items between Group earnings* and the statutory lossare exceptional items and certain re-measurements that are explained below. Group operating cashflow before working capital adjustments was up from £1,936million to £1,965 million but after working capital adjustments, operationalinterest, tax, exceptional charge and discontinued items was down 36% at £737million (2005: £1,144 million) primarily due to the working capital investmentrequired by significant movements in the wholesale prices. The net cash outflowfrom investing activities increased to £720 million (2005: £529 million), 36%higher than last year due to the receipt in 2005 of £184 million of disposalproceeds relating to the sale of British Gas Connections and Onetel. The netcash outflow from financing activities increased to £597 million (2005: £335million), an increase of 78% on 2005, due mainly to a net increase in debt of£623 million in 2005, partially offset by the suspension of the share repurchaseprogramme, announced in February 2006, resulting in a reduction in year-on-yearcash outflow of £365 million. The Group's net recourse debt level at 31 December 2006 was £1,527 million(2005: £1,060 million). This was up on 2005 due primarily to the increasedworking capital requirement. This debt includes £808 million of finance leasecommitments on the Humber and Spalding power stations. Net interest payable was£183 million (2005: £145 million) and was covered seven times by operatingprofit* (2005: ten times). Net assets decreased by 33% to £1,642 million (2005: £2,442 million). This isprimarily due to the movement in our derivative financial instruments which aremarked-to-market, from an asset of £0.6 billion at the end of 2005 to aliability of £1.2 billion at the end of 2006. This resulted in a charge of £931million (including joint ventures) arising on the net mark-to-market movement onour energy procurement activities recognised as certain re-measurements in theIncome Statement, and a charge to reserves of £939 million, where certaincontracts have achieved hedge accounting under IAS 39. After the relateddeferred tax credits, these movements account for a total reduction in netassets of £1.2 billion. Exceptional charges account for a further decrease innet assets of £238 million after tax. These are partially offset by a post-taxactuarial gain on our pension liability of £332 million. Exceptionals There is a pre-tax exceptional charge for the year of £331 million (post tax£238 million). There are three elements. Firstly, there is a non-cash charge of£196 million relating to the write-down of systems assets following a review ofexisting and required future functionality within the more focussed Group. Thiswill result in a reduction of £31 million in the 2007 amortisation charge. Wealso took an £87 million exceptional cash charge mainly relating to thestreamlining of the British Gas Residential back-office, the planned closure ofthe British Gas headquarters building at Stockley Park, a restructuring of theBritish Gas Services team and a further streamlining of the Group corporatestructure including the outsourcing of parts of finance and HR, resulting inaround 1,550 job losses. This will deliver benefits of £20 million in 2007 andapproximately £39 million in 2008. Finally there is an exceptional cash cost of£48 million relating to the Rough incident in February. Tax credits of £93million have been recognised in respect of these costs. Certain re-measurements In our business we enter into a portfolio of forward energy contracts whichinclude buying substantial quantities of commodity to meet the future needs ofour customers. A number of these arrangements are considered to be derivativefinancial instruments and are required to be fair-valued under IAS 39. Fairvaluing means that we apply the prevailing forward market prices to thesecontracts. The group has shown the fair value adjustments separately as certainre-measurements as they are unrealised and non-cash in nature. The profits*arising from the physical purchase and sale of commodities during the year,which reflect the prices in the underlying contracts, are not impacted by thesere-measurements. The statutory results include charges to operating profit relating to thesere-measurements of £931 million (2005: net credit of £455 million), primarilyfrom marking-to-market some contracts relating to our energy procurementactivities. As gas and power were delivered under these contracts, the netin-the-money mark-to-market positions were unwound generating a net charge tothe Income Statement in the period of £287 million (2005: net credit of £140million). As the forward prices reduced in 2006 the portfolio of contracts fairvalued under IAS 39 reported a net loss on revaluation of £638 million (2005:credit of £298 million). The remaining £6 million (2005: credit of £17 million)reflects the proprietary trading positions relating to cross border capacity andstorage contracts. The £37 million (2005: £nil) credit to interest incomerelates to the re-measurement of the publicly traded Units of The Consumers'Waterheater Income Fund. British Gas Residential This year saw commodity prices again reach record highs with demand weightedwholesale market gas and electricity up by 42% and 32% respectively on theprevious year to 57.10p/therm and £47.13/MWh. This not only meant that thebusiness made a loss* in the first half of the year but forced tariff increasesacross the industry. These price increases resulted in an overall rise in customer churn. At the endof December we had 16.0 million energy accounts, a net loss of 1,029,000accounts year-on-year. The effect of churn on our business was reduced by thelaunch of innovative product offerings, such as the 2009 fixed price product andFix and Fall, which helped to maintain sales at around 60,000 per week. Turnover increased by 18% to £7.1 billion (2005: £6.0 billion) due to priceincreases in March and September of 2006 and the full-year effect of theSeptember 2005 price rise, partially offset by lower customer numbers andreduced consumption due mainly to an unseasonably warm autumn. In the year we incurred a charge of £175 million (2005: £85 million) for ourshare of the imbalance costs of the national network. We believe that certainindustry processes systematically disadvantage British Gas and we are workingwith the regulator to make sure that gas costs are more fairly allocated acrossthe entire industry. Overall gross margin* increased by £59 million as the increase in turnover morethan offset the higher commodity costs and the increase in transportation anddistribution charges per customer. Operating costs increased to £1,029 million (2005: £974 million) as underlyingcost reductions were more than offset by training and backfilling costsassociated with the migration of customers to the new billing system, increasedbad debt costs and the cost of implementing two price rises during the year. Operating profit* for the year increased by 6% to £95 million (2005: £90million) as operating margins* recovered strongly in the second half. We transferred 95% of our customer accounts onto our new billing system by theend of the year. We expect to have transferred all customers by the end of March2007. The increase in calls around the times of the tariff increases, coupledwith the ongoing system changes, meant that customer service levels dropped inthe middle of the year. In the second half of the year we increased front-linestaff by 800 to improve customer service. We took a pre-tax exceptional cash charge of £36 million for restructuring theoperation and the planned closure of the British Gas Residential headquartersbuilding. These result in a benefit of £7 million in 2007 and around £16 millionthereafter. We also took a pre-tax exceptional non-cash charge for systemswrite-down of £178 million, resulting in reduced amortisation charges, witharound £28 million expected in 2007. \* TFor the period ended 31 December FY 2006 FY 2005 ^% H2 2006 H2 2005 ^%--------------------------------------------------------------------------------------------------Customer numbers (period end):Residential gas ('000) 10,263 11,131 (8) 10,263 11,131 (8)Residential electricity ('000) 5,759 5,920 (2.7) 5,759 5,920 (2.7)--------------------------------------------------------------------------------------------------Total ('000) 16,022 17,051 (6) 16,022 17,051 (6)--------------------------------------------------------------------------------------------------Estimated market share (%):Residential gas 49 54 (4.5)ppts 49 54 (4.5)pptsResidential electricity 22 23 (0.8)ppts 22 23 (0.8)ppts--------------------------------------------------------------------------------------------------Average consumption:Residential gas (therms) 569 597 (4.7) 205 244 (16)Residential electricity (kWh) 4,069 4,146 (1.9) 1,938 2,097 (8)--------------------------------------------------------------------------------------------------Weighted average sales price:Residential gas (p/therm) 78.66 61.16 29 90.06 66.43 36Residential electricity (£/MWh) 95.63 75.36 27 100.04 78.80 27--------------------------------------------------------------------------------------------------Transportation & distribution costs (£m):Residential gas 1,110 1,146 (3.1) 472 528 (11)Residential electricity 511 493 3.7 257 261 (1.5)--------------------------------------------------------------------------------------------------Total 1,621 1,639 (1.1) 729 789 (8)--------------------------------------------------------------------------------------------------Operating costs (£m):British Gas Residential 1,029 974 6 540 480 13--------------------------------------------------------------------------------------------------Turnover (£m):Residential gas 4,832 4,196 15 1,948 1,841 6Residential electricity 2,280 1,836 24 1,126 972 16--------------------------------------------------------------------------------------------------Total 7,112 6,032 18 3,074 2,813 9--------------------------------------------------------------------------------------------------Operating profit/(loss) (£m)*British Gas Residential 95 90 6 238 (75) n/m--------------------------------------------------------------------------------------------------Operating margin (%)British Gas Residential 1.3 1.5 (0.2)ppt 7.7 (2.7) 10.4ppt--------------------------------------------------------------------------------------------------\* T British Gas Business This year brought unprecedented highs in commodity prices with significantincreases in input costs for both gas and electricity. Despite having to raiseprices to customers, we increased our total supply points by 2.5% to 932,000(2005: 909,000) as increases in gross churn rates in our tariff book were morethan offset by strong sales performance, continued SME contract renewal levelsof over 95% and further improvements in corporate customer retention. Turnover increased by 53% to £2.3 billion (2005: £1.5 billion) due to pricerises, higher customer numbers and higher average consumption in both fuels as aresult of winning a number of large corporate accounts. Operating profit* was up 13% to £87 million (2005: £77 million) despite asignificant loss* being made in the tariff book prior to the price increase inMarch. Profit* in the second half was markedly higher as tariff increases tookeffect and fourth quarter wholesale costs reduced, improving margins across thecustomer base. During the year operating costs increased, driven by investments in a newbilling system, rising absolute cost of debt on higher turnover and higher salesand marketing costs. We made progress on a customer service initiative that willcreate a single named point of contact for each customer and the deployment ofnew technology and processes which will rationalise our invoicing and collectionsystems. \* TFor the period ended 31 December FY 2006 FY 2005 ^% H2 2006 H2 2005 ^%--------------------------------------------------------------------------------------------------Customer supply points (period end):Gas ('000) 400 394 1.5 400 394 1.5Electricity ('000) 532 515 3.3 532 515 3.3--------------------------------------------------------------------------------------------------Total ('000) 932 909 2.5 932 909 2.5--------------------------------------------------------------------------------------------------Average consumption:Gas (therms) 3,990 3,492 14 1,702 1,517 12Electricity (kWh) 29,844 27,512 8 15,230 14,178 7--------------------------------------------------------------------------------------------------Weighted average sales price:Gas (p/therm) 69.86 51.87 35 72.30 56.60 28Electricity (£/MWh) 74.87 57.88 29 79.31 61.75 28--------------------------------------------------------------------------------------------------Transportation & distribution costs (£m):Gas 149 124 20 71 60 18Electricity 261 217 20 137 113 21--------------------------------------------------------------------------------------------------Total 410 341 20 208 173 20--------------------------------------------------------------------------------------------------Turnover (£m):Gas 1,115 692 61 492 336 46Electricity 1,188 818 45 642 449 43--------------------------------------------------------------------------------------------------Total 2,303 1,510 53 1,134 785 44--------------------------------------------------------------------------------------------------Operating profit (£m)*British Gas Business 87 77 13 76 22 245--------------------------------------------------------------------------------------------------Operating margin (%)British Gas Business 3.8 5.1 (1.3)ppt 6.7 2.8 3.9ppt--------------------------------------------------------------------------------------------------\* T British Gas Services During the year British Gas Services made significant progress on fixingoperational issues that were highlighted in the first half when temperaturesbelow the seasonal norm led to a record number of call outs. These call outs putadditional pressure on operations and affected service levels. Operationalperformance improved considerably in the second half of the year as process andsystem changes were implemented. This resulted in a marked improvement inservice levels in the latter part of the year. Most importantly we coped withthe period covering the switch-on of central heating systems in the autumn,which results in high overall demand, without any significant issues withoperations and customer service. Turnover was up by 8% at £1.1 billion (2005: £1.0 billion) as the total numberof product relationships increased by 4% over the prior year to just over sevenmillion. The average price of central heating care also increased reflectinginitial structural changes to pricing based more accurately on the costs ofservicing each customer. In addition the second half of the year saw a strongerperformance in the central heating installation business with a 9% increase ininstallation volumes on the second half of last year, recovering much of thefall in the first half. Operating profit* decreased by 8% to £102 million (2005: £111 million) due tothe increased breakdown call outs and extra cost of parts required for therepairs in the first half of the year. The second half showed a year-on-yearimprovement of 12%. During the year we significantly restructured operations to reduce cost andincrease productivity, resulting in 390 job losses with an exceptional cash costof £48 million. This will have a payback of just over three years. We alsowrote-down certain unused functionality and capitalised development costs withinthe systems portfolio. This resulted in a pre-tax exceptional charge of £18million. \* TFor the period ended 31 December FY 2006 FY 2005 ^% H2 2006 H2 2005 ^%--------------------------------------------------------------------------------------------------Customer product holdings (period end):Central heating service contracts ('000) 4,392 4,337 1.3 4,392 4,337 1.3Kitchen appliances care (no. of customers) ('000) 387 365 6 387 365 6Plumbing and drains care ('000) 1,384 1,307 6 1,384 1,307 6Home electrical care ('000) 986 860 15 986 860 15Home security ('000) 22 25 (12) 22 25 (12)--------------------------------------------------------------------------------------------------Total holdings ('000) 7,171 6,894 4.0 7,171 6,894 4.0--------------------------------------------------------------------------------------------------Central heating installations ('000) 91 92 (1.1) 49 45 9--------------------------------------------------------------------------------------------------Turnover (£m)Central heating service contracts 519 478 9 265 252 5Central heating installations 264 251 5 150 125 20Other 321 295 9 168 151 11--------------------------------------------------------------------------------------------------Total 1,104 1,024 8 583 528 10--------------------------------------------------------------------------------------------------Engineering staff employed 8,676 8,348 3.9 8,676 8,348 3.9--------------------------------------------------------------------------------------------------Operating profit (£m)*British Gas Services 102 111 (8) 58 52 12--------------------------------------------------------------------------------------------------Operating margin (%)British Gas Services 9 11 (2)ppts 10 10 0ppts--------------------------------------------------------------------------------------------------\* T Centrica Energy Centrica Energy faced a challenging year and operating profits* were down 24% at£686 million (2005: £903 million) due to lower gas production levels and theforecast increased losses* in the industrial and wholesale segment. For the year, market month ahead gas prices rose by 36% to 50.22p/therm (2005:36.82p/therm) and electricity rose 30% to £45.84/MWh (2005: £35.27/MWh). The UKexperienced huge fluctuations in wholesale gas costs, particularly in the earlypart of the year when cold weather and fear of shortages pushed the wholesaleprice per therm to 250 pence. Gas prices reduced substantially in the secondhalf of the year due to the increased flow of gas through the newly constructedLangeled and BBL pipelines. Gas production Operating profit* was down 15% to £864 million (2005: £1,020 million) due to a37% reduction in gas volumes partially offset by a 35% increase in sellingprice. The 51% reduction in Morecambe production volumes was due to managementdecisions to carry out remedial work on South Morecambe's cooler units during anextended summer maintenance period and our decision to switch off the field inresponse to low intraday gas prices especially in the fourth quarter of theyear. This was partially offset by a 16% increase in other production volumes mainlydue to the full-year effect of our 2005 acquisition of the Kerr McGee fields andthe acquisition of an increased share in the Statfjord field. These fieldscontributed to the 47% increase in oil and condensates production which reached5.6 million barrels of oil equivalent (MBOE) (2005: 3.8 MBOE) with averageselling prices of £34/BOE (2005: £29/BOE). The 36% increase in variableproduction costs is due to the increased proportion of volumes from the newerfields where depreciation levels are higher. In addition to the £151 million acquisition of a 4.84% stake in the Statfjordfield we invested £100 million in maintaining and developing our upstreamportfolio of assets during the year. Of this, we invested an initial £21 millionin the Statfjord depressurisation project to increase the level of gas reservesand spent £46 million on the development of Maria, Thurne and Davy East. Thesenew fields together with the Statfjord project add 1,348 million therms (mmth)of gas reserves and 11.6 million BOE for a total cost of £186 million. We also spent around £17 million on our focussed gas exploration programme inthe UK as we farmed into four projects. We made a successful application underthe 24th UK offshore licensing round for acreage around the Morecambe fields andopened an office in Stavanger to enable us to participate successfully in theNorwegian licensing round where we gained shares in four blocks in January 2007.We also have licence blocks in Egypt and Nigeria which we started to assess andhave made an application under the Trinidad licensing round. Industrial sales and wholesaling The industrial sales and wholesaling segment made an operating loss* of £210million (2005: £156 million loss*). Losses* from the legacy gas sales contractsremained broadly flat at £171 million (2005: £173 million loss*) as the increasein input commodity costs was offset by an increase in the weighted average salesprice combined with a reduction in volumes. Volumes reduced as three contractsended and the remaining customers chose to buy from the wholesale market whengas prices softened. This reporting segment includes certain operating costs ofCentrica Energy; these increased to £66 million (2005: £34 million) as wecontinued to expand our upstream operations. Electricity generation We generated 10.5TWh of power (2005: 11.6TWh) from our 3.4GW fleet of gas-firedpower stations in the period which was down on the prior year due to a number ofextended outages in our fleet. Total fleet load factor was 41% (2005: 49%). We started work at Langage, Devon to build an 885MW gas-fired plant on ourconsented site. The total investment is expected to be around £400 million andcommercial operations are due to start during winter 2008/09. This will be thefirst power station to be built in the UK for five years. In November weannounced the acquisition of 85% of Coastal Energy Limited who are seekingplanning permission to build the UK's first Integrated Gas Combined Cycle (IGCC)power plant which would incorporate pre-combustion carbon capture technology,with the result of producing the lowest carbon emissions of any fossil fuelplant in the UK. We also acquired an interest in a company developing a carbonsequestration business. Renewables In March we produced the first green power from our 90MW joint venture Barrowoffshore wind farm. In November, Airtricity started commissioning the 72MW Braesof Doune wind farm and subject to successful testing and handover from theconstruction contractor, we will acquire 50% of the equity from Airtricity for£42 million. The award of the main construction contracts for the two 90MW windfarms at Inner Dowsing and Lynn is almost complete. First power from thisproject is expected to be delivered in late 2008. We also submitted anapplication for planning consent for the 250MW Round Two Lincs offshore windfarm. If successful, first power from the project could be delivered in 2010. Energy procurement In April 2006 we agreed an innovative coal-linked power purchase agreement withDrax for the supply of 600MW of baseload power over a 5£-year period startingOctober 2007, indexed to international traded coal prices and including a fixedclean seasonal dark spread. We also completed an innovative three-year winter super peak electricitygeneration tolling agreement with Rolls Royce Power Development to reduceCentrica's exposure to volatile short-term market prices during these periods.The contract commenced in October 2006, with a total capacity of 245MW fromseveral small independent energy projects. In the last quarter of the year two key pipeline projects, capable of meeting40% of the UK demand, underpinned by British Gas purchase contracts, werecommissioned. Langeled, underpinned by our 10 year 5.1BCM/year contract withStatoil, and BBL, underpinned by our 10 year 7.3BCM/year contract with Gasuniestarted to deliver significant amounts of gas to the UK. \* TFor the period ended 31 December FY 2006 FY 2005 ^% H2 2006 H2 2005 ^%--------------------------------------------------------------------------------------------------Gas Production:Gas production volumes (mmth) Morecambe 1,207 2,445 (51) 270 816 (67) Other 709 612 16 282 313 (10)-------------------------------------------------------------------------------------------------- Total 1,916 3,057 (37) 552 1,129 (51)--------------------------------------------------------------------------------------------------Average gas sales price (p/therm) 53.1 39.4 35 55.5 49.4 12Oil and condensate production volumes (MBOE) 5.6 3.8 47 2.8 2.0 40Average oil and condensate sales price (£/BOE) 33.8 28.7 18 32.8 34.2 (4.1)Turnover (£m) 1,291 1,365 (5) 360 659 (45)External turnover (£m) 323 183 77 171 113 51Operating costs (£m): Volume related production costs 293 215 36 142 107 33 Other production costs 139 130 7 63 72 (13)-------------------------------------------------------------------------------------------------- Total 432 345 25 205 179 15--------------------------------------------------------------------------------------------------Operating profit (£m)* 864 1,020 (15) 160 480 (67)--------------------------------------------------------------------------------------------------Power stationsPower generated (GWh) 10,541 11,641 (9) 6,123 6,423 (4.7)--------------------------------------------------------------------------------------------------Industrial & wholesale:External sales volumes (mmth) 2,667 3,081 (13) 1,135 1,467 (23)Average sales price (p/therm) 31.3 24.8 26 32.3 26.4 22Turnover (£m) 883 786 12 399 400 (0.3)Operating profit / (loss) (£m)* (210) (156) n/m (78) (136) n/m--------------------------------------------------------------------------------------------------AccordOperating profit (£m)* 32 39 (18) 25 16 56--------------------------------------------------------------------------------------------------Centrica Energy operating profit (£m)* 686 903 (24) 107 360 (70)--------------------------------------------------------------------------------------------------\* T Centrica Storage The main focus for Centrica Storage in 2006 was the recovery of operations afterthe explosion and fire which caused significant damage to the main offshoreplatform of the Rough storage facility in February. Despite extensive damage, it took only 16 weeks to recommission injection at thefacility. In restoring full production capability the processes offshore weresimplified to export wet gas rather than using offshore dehydration. Theproduction facilities were returned to operation less than 32 weeks after theoriginal incident. The force majeure notice was lifted on 20 November once finaloperational testing was complete. The restoration project involved approximately 500,000 man hours and wascompleted without any health and safety lost-time incidents. The two employeeshospitalised at the time of the incident have now recovered and are back workingon the platform. The cost of the repairs and payments made under the storage services contractresulted in an exceptional cash cost to the Group for the year of £48 million ofwhich £24 million is recognised in the books of Centrica Storage. Since recovery the reliability of the asset has been re-established. Bothinjection and production have experienced 99% availability, and the reservoirwas filled by early November well in advance of the winter production season. Operating profit* before the exceptional charge for the year was up 48% to £228million (2005: £154 million). This was mainly due to a rise of 62% in theaverage SBU price to 56.5 pence (2005: 34.8p) and an increase in the realisedprice of space sales, partially offset by the 2005 sales of native gas of £20million not being repeated in 2006. \* TFor the period ended 31 December FY 2006 FY 2005 ^% H2 2006 H2 2005 ^%--------------------------------------------------------------------------------------------------Average SBU price (calendar year) (pence) 56.5 34.8 62 65.6 37.8 74--------------------------------------------------------------------------------------------------Turnover (£m)Standard SBUs 254 159 60 147 87 69Extra space 30 19 58 17 13 31Native gas sales 0 20 (100) 0 20 (100)Gas sales 58 30 93 33 15 120Other 16 25 (36) 10 12 (17)--------------------------------------------------------------------------------------------------Total 358 253 42 207 147 41--------------------------------------------------------------------------------------------------External turnover (£m) 294 195 51 168 109 54Cost of gas (£m) 58 35 66 30 17 76--------------------------------------------------------------------------------------------------Operating profit (£m)* 228 154 48 135 97 39--------------------------------------------------------------------------------------------------\* T Centrica North America Our North American business has continued its strong growth. Overall turnovergrew by 15% to £4.1 billion (2005: £3.6 billion) driven primarily by thecontinued growth in business markets and the organic residential business inTexas. Operating profit* grew by 21% to £223 million (2005: £185 million)primarily due to higher profits* in Texas and the home services business withadverse exchange rate movements in the second half negating the positive impactin the first six months. Despite this strong overall growth, as part of a continual review of theefficiency of the business, decisive action was taken to reduce costs. Thisresulted in 450 job losses, 9% of the total, during the year, primarily inCanada and in US home services. Canada residential and small commercial energy Turnover decreased by 7% to £1,425 million (2005: £1,533 million) with increasesin the deregulated business being more than offset by reductions in theregulated Alberta business. Operating profit* reduced by 11% to £42 million(2005: £47 million) as a result of the removal of the business protection planrebate (BPPR) in Ontario, partially offset by increased profits* from equity gasproduction and a significant reduction in employee numbers. Our Alberta business moved into profit* for the first time, although thecompetitive market is growing slowly. Here the regulated business hasexperienced a net customer decline to date of only 8%. We now have around 95,000competitive customer accounts on-supply. Recognising the need for greaterincentives on power procurement, we have agreed a package with the regulatorthat now enables us to earn a return on the regulated electricity supplybusiness. Texas residential and small commercial energy Turnover grew by 18% to £1,120 million (2005: £953 million). This was largelydriven by growth in our organic customer base in areas of Texas outside ourincumbent territory. In April we acquired approximately 100,000 customers fromEntergy. In July, as part of a wider agreement with the Public UtilityCommission we implemented a 5% discount to our residential customers in CPL/WTUwhich effectively removed those customers from Price-to-Beat (PtB), and thenreduced prices by a further 6% at the start of 2007. The growth in scale of theorganic business, allied with effective procurement across both businesses,including the positive impact of the three power stations, increased operatingprofit* by 63% to £117 million (2005: £72 million). In February we acquired the Paris power station in northern Texas and wecompleted three new wind power purchasing agreements, which together with theone signed in 2005, increased our total contractual wind power capacity to643MW. Other USA residential and small commercial energy Turnover grew by 19% to £247 million (2005: £208 million) due to increasedcustomer numbers and higher retail prices. We made encouraging progress ingrowing the customer base by 5%, with a strong performance in the New Yorkmarket. This combination of rising prices and growing customer numbers wasoffset by expenditure on growth and lower consumption due to very warm weatherat the end of 2006, resulting in a lower operating profit* of £12 million (2005:£16 million). Home services Home services performed well during the year with a 33% growth in operatingprofit* to £68 million (2005: £51 million) on a turnover increase of 3%. Thiswas achieved primarily in Canada through increased margins on heating,ventilation and air conditioning sales and ongoing operational efficiencies. TheUS home services business remained stable despite the backdrop of a severedownturn in the US housing market. In June we disposed of our remaining 19.9% holding in The Consumers' WaterheaterIncome Fund for £65 million, recording a one-off pre-tax gain of £7 million.Although we no longer have an equity share in the fund, we are still required toconsolidate the full financial results of the fund owing to the continuing closecontractual relationship. Business markets We continue to invest heavily in this sector and have seen significant growthwith volumes sold in gas and electricity rising by 11% to 557mmth and 127% to11.2TWh respectively. Turnover grew by 88% to £902 million (2005: £481 million). During the year we successfully entered 12 new utility areas. The costs of doingthis, together with loss of the BPPR rebate in Ontario, caused an increasedoperating loss* of £21 million (2005: operating loss* of £8 million). However,underlying gross margins* remain healthy. This segment includes a servicesbusiness which has been loss-making* and a turn-around plan for the servicesbusiness has already been executed. Energy wholesale and trading During 2006 we widened the remit of our existing wholesale and trading businessto encompass taking future capacity in natural gas transportation and storageand wind power contracts, so as to exploit the expert resources already in placeto support retail procurement across the US and Canada. We will continue todevelop these activities in the future. This segment registered an operatingprofit* of £5 million (2005: £7 million). \* TFor the period ended 31 December FY 2006 FY 2005 ^% H2 2006 H2 2005 ^%--------------------------------------------------------------------------------------------------Customer numbers (period end):Canada energy ('000) 2,090 2,118 (1.3) 2,090 2,118 (1.3)Texas energy ('000) 948 897 6 948 897 6Other USA energy ('000) 348 331 5 348 331 5Home services ('000) 1,964 1,885 4.2 1,964 1,885 4.2--------------------------------------------------------------------------------------------------Volumes:Gas production (mmth) 304 308 (1.3) 155 153 1.3Electricity generation (GWh) 4,450 3,212 39 2,192 1,770 24--------------------------------------------------------------------------------------------------Turnover (£m):Canada residential & small commercial energy 1,425 1,533 (7) 624 827 (25)Texas residential & small commercial energy 1,120 953 18 578 543 6Other USA residential & small commercial energy 247 208 19 103 97 6Home services 371 360 3.1 184 197 (7)Business markets 902 481 88 506 282 79Energy wholesale and trading 32 17 88 14 6 133--------------------------------------------------------------------------------------------------Total 4,097 3,552 15 2,009 1,952 2.9--------------------------------------------------------------------------------------------------Operating profit/(loss) (£m)*:Canada residential & small commercial energy 42 47 (11) 23 18 28Texas residential & small commercial energy 117 72 63 53 47 13Other USA residential & small commercial energy 12 16 (25) (1) 7 n/mHome services 68 51 33 33 30 10Business markets (21) (8) n/m (9) (7) n/mEnergy wholesale and trading 5 7 (29) 3 3 0--------------------------------------------------------------------------------------------------Total 223 185 21 102 98 4.1--------------------------------------------------------------------------------------------------Operating margin (%)*Total North America 5.4 5.2 0.2ppt 5.1 5.0 0.1ppt--------------------------------------------------------------------------------------------------\* T Europe The industry continues to consolidate in Europe with evidence of support fornational champions in France, Spain and the Netherlands. While we continue toreview opportunities for developing our business in continental Europe, thisremains a challenge in the current climate and we will be robust in onlypursuing those opportunities which can deliver long-term shareholder value.During the year our European segment performed well, delivering a £7 millionoperating profit* (2005: operating loss* £9 million). In Belgium we achieved full integration of all previous businesses that made upSPE and we now operate nationally under the Luminus brand. We transferred500,000 Wallonian residential customers on 1 January 2007, opened a new callcentre in Li£ge and we approved investments in open cycle gas turbine (OCGT)generation in Ghent and two wind farms. In The Netherlands, we continued to grow our customer base through our Oxxiobrand. To support future growth we signed a tolling agreement with Intergen forthe output of a 400MW new build combined cycle gas turbine (CCGT) at Rijnmondwhich we expect to begin operations in 2009. We made significant progress on thedevelopment and installation of smart meters. Our Luseo operation in Spain reduced its supply operations due to the adverseregulatory environment in Spain. However, it continued to develop energymanagement services to special regime (renewable) generators and exploited otherprofitable energy management activities. We continued to grow our footprint in Europe by creating a German subsidiary,Centrica Energie GmbH, based in Dusseldorf and recruited key staff. This is inresponse to positive developments in the legal and regulatory framework forcompetition in German energy markets. We are positioned to begin selling energyto the commercial supply market in 2007. @ from continuing operations * including joint ventures and associates net of interest and taxation, andbefore exceptional items and certain re-measurements Group Income Statement \* T 2006 2005 ----------------------------------- --------------------------------------- Results for Results for the year the year before before exceptional Exceptional exceptional Exceptional items and items and items and items and certain certain certain certain Results re- re- Results re- re- for measurements measurements for measurements measurements the (i) (i) the year (i) (i) yearYear ended 31 December Notes £m £m £m £m £m £m-------------------------------------- ----- ------------- ------------ -------- ------------- ------------- -----------Continuing operationsGroup revenue 2 16,450 - 16,450 13,448 - 13,448Cost of sales (12,649) - (12,649) (9,793) - (9,793)Re-measurement of energy contracts (i) 2,3 - (916) (916) - 456 456-------------------------------------- ----- ------------- ------------ -------- ------------- ------------- -----------Gross profit 3,801 (916) 2,885 3,655 456 4,111 ------------- ------------ -------- ------------- ------------- ----------- Operating costs before exceptional items (2,362) - (2,362) (2,180) - (2,180) Systems write-down 3 - (196) (196) - - - Business restructuring costs 3 - (87) (87) - (100) (100) Rough storage incident 3 - (48) (48) - - - Profit on disposal of British Gas Connections Limited 3 - - - - 47 47 Contract renegotiation 3 - - - - 42 42 ------------- ------------ -------- ------------- ------------- -----------Operating costs (2,362) (331) (2,693) (2,180) (11) (2,191)Share of profits / (losses) in joint ventures and associates, net of interest and taxation (i) 2 3 (15) (12) 38 (1) 37-------------------------------------- ----- ------------- ------------ -------- ------------- ------------- -----------Group operating profit 2 1,442 (1,262) 180 1,513 444 1,957 ------------- ------------ -------- ------------- ------------- ----------- Interest income (i) 4 103 37 140 102 - 102 Interest expense 4 (286) - (286) (247) - (247) ------------- ------------ -------- ------------- ------------- -----------Net interest expense 4 (183) 37 (146) (145) - (145)-------------------------------------- ----- ------------- ------------ -------- ------------- ------------- -----------Profit from continuing operations before taxation 1,259 (1,225) 34 1,368 444 1,812Taxation on profit from continuing operations 5 (543) 363 (180) (706) (138) (844)-------------------------------------- ----- ------------- ------------ -------- ------------- ------------- -----------Profit / (loss) from continuing operations after taxation 716 (862) (146) 662 306 968 ------------- ------------ -------- ------------- ------------- ----------- Profit from discontinued operations - - - 11 - 11 (Loss) / gain on disposal of discontinued operations (8) - (8) - 34 34 ------------- ------------ -------- ------------- ------------- -----------Discontinued operations (8) - (8) 11 34 45-------------------------------------- ----- ------------- ------------ -------- ------------- ------------- -----------Profit / (loss) for the year 708 (862) (154) 673 340 1,013-------------------------------------- ----- ------------- ------------ -------- ------------- ------------- -----------Attributable to: Equity holders of the parent 707 (862) (155) 672 340 1,012 Minority interests 1 - 1 1 - 1-------------------------------------- ----- ------------- ------------ -------- ------------- ------------- ----------- 708 (862) (154) 673 340 1,013-------------------------------------- ----- ------------- ------------ -------- ------------- ------------- ----------- Pence Pence Pence Pence-------------------------------------- ----- ------------- ------------ -------- ------------- ------------- -----------(Loss) / earnings per ordinary shareFrom continuing and discontinued operations: Basic 7 (4.3) 27.4 Adjusted basic 7 19.4 18.2 Diluted 7 (4.3) 27.0From continuing operations: Basic 7 (4.1) 26.2 Adjusted basic 7 19.6 17.9 Diluted 7 (4.1) 25.8 Interim dividend paid per share 6 3.15 3.10Final dividend proposed per share 6 8.00 7.40-------------------------------------- ----- ------------- ------------ -------- ------------- ------------- -----------\* T (i) Certain re-measurements (note 1) included within operating profit comprisere-measurement arising on our energy procurement activities and re-measurementof proprietary trades in relation to cross-border transportation or capacitycontracts. Certain re-measurements included within interest comprisere-measurement of the publicly traded units of The Consumers' Waterheater IncomeFund. All other re-measurement is included within results before exceptionalitems and certain re-measurements. Group Balance Sheet \* T 2006 200531 December Notes £m £m--------------------------------------------------------------------------------------------------------Non-current assetsGoodwill 1,055 1,170Other intangible assets 422 569Property, plant and equipment 3,679 3,670Interests in joint ventures and associates 220 223Deferred tax assets 226 296Trade and other receivables 16 25Financial assets: Derivative financial instruments 8 17 231 Other financial assets 37 45-------------------------------------------------------------------------------------------------------- 5,672 6,229--------------------------------------------------------------------------------------------------------Current assetsInventories 270 196Current tax assets 98 -Trade and other receivables 3,590 3,421Financial assets: Derivative financial instruments 8 760 2,159 Other financial assets 49 46Cash and cash equivalents 9 640 1,239-------------------------------------------------------------------------------------------------------- 5,407 7,061--------------------------------------------------------------------------------------------------------Total assets 11,079 13,290--------------------------------------------------------------------------------------------------------Current liabilitiesTrade and other payables (3,291) (3,541)Current tax liabilities (180) (269)Financial liabilities: Bank overdrafts and loans 10 (181) (655) Derivative financial instruments 8 (1,737) (1,787)Provisions for other liabilities and charges (130) (143)-------------------------------------------------------------------------------------------------------- (5,519) (6,395)--------------------------------------------------------------------------------------------------------Net current (liabilities) / assets (112) 666--------------------------------------------------------------------------------------------------------Non-current liabilitiesTrade and other payables (55) (102)Financial liabilities: Bank loans and other borrowings 10 (2,555) (2,267) Derivative financial instruments 8 (220) (52)Deferred tax liabilities (241) (743)Retirement benefit obligation 13 (296) (807)Provisions for other liabilities and charges (551) (482)-------------------------------------------------------------------------------------------------------- (3,918) (4,453)--------------------------------------------------------------------------------------------------------Net assets 1,642 2,442--------------------------------------------------------------------------------------------------------EquityCalled up share capital 11 226 224Share premium account 11 657 595Merger reserve 11 467 467Capital redemption reserve 11 16 15Other reserves 11 219 1,085--------------------------------------------------------------------------------------------------------Shareholders' equity 11 1,585 2,386Minority interests in equity 11 57 56--------------------------------------------------------------------------------------------------------Total minority interests and shareholders' equity 11 1,642 2,442--------------------------------------------------------------------------------------------------------\* T Group Statement of Recognised Income and Expense \* T 2006 2005Year ended 31 December Notes £m £m--------------------------------------------------------------------------------------------------------(Loss) / profit for the year (154) 1,013 ---------- ---------- Gains on revaluation of acquired assets - 14 Gains on revaluation of available-for-sale investments - 2 (Losses) / gains on cash flow hedges 11 (645) 408 Exchange differences on translation of foreign operations 11 (23) 13 Actuarial gains / (losses) on defined benefit pension schemes 13 475 (126) Tax on items taken directly to equity 11 73 (109) ---------- ----------Net (expense) / income recognised directly in equity (120) 202 ---------- ---------- Transferred to income and expense on cash flow hedges 11 (294) (74) Tax on items transferred from equity 11 96 25 ---------- ----------Transfers (198) (49)--------------------------------------------------------------------------------------------------------Total recognised income and expense for the year (472) 1,166Change in accounting policy: adoption of IAS 39 and IAS 32 - (343)--------------------------------------------------------------------------------------------------------Total recognised income and expense recognised since last report (472) 823--------------------------------------------------------------------------------------------------------Total income and expense recognised in the year is attributable to: Equity holders of the parent (473) 1,165 Minority interests 1 1-------------------------------------------------------------------------------------------------------- (472) 1,166--------------------------------------------------------------------------------------------------------\* T Group Cash Flow Statement \* T 2006 2005Year ended 31 December Notes £m £m--------------------------------------------------------------------------------------------------------Operating cash flows before movements in working capital 12 1,965 1,936Increase in inventories (83) (22)Increase in receivables (260) (269)(Decrease) / increase in payables (149) 299--------------------------------------------------------------------------------------------------------Cash generated from continuing operations 1,473 1,944Interest received 13 16Interest paid (9) (13)Tax paid (627) (768)Payments relating to exceptional charges (113) (48)--------------------------------------------------------------------------------------------------------Net cash flow from continuing operating activities 12 737 1,131Net cash flow from discontinued operating activities 12 - 13--------------------------------------------------------------------------------------------------------Net cash flow from operating activities 12 737 1,144--------------------------------------------------------------------------------------------------------Purchase of interests in subsidiary undertakings and businesses net of cash and cash equivalents acquired (97) (130)Disposal of interests in subsidiary undertakings and businesses net of cash and cash equivalents disposed (6) 184Purchase of intangible assets (144) (160)Disposal of intangible assets 13 36Purchase of property, plant and equipment (537) (593)Disposal of property, plant and equipment 18 13Dividends received from joint ventures and associates - 16Investments in joint ventures and associates (16) (122)Disposal of interests in associates and other investments 4 11Interest received 40 70Net sale of other financial assets 5 146--------------------------------------------------------------------------------------------------------Net cash flow from investing activities 12 (720) (529)--------------------------------------------------------------------------------------------------------Re-purchase of ordinary share capital (23) (388)Issue of ordinary share capital 56 17 ---------- ---------- Interest paid in respect of finance leases (43) (95) Other interest paid (151) (66) Distribution to unit holders of The Consumers' Waterheater Income Fund (27) (20) ---------- ----------Interest paid (221) (181) ---------- ---------- Cash inflow from additional debt 897 799 Cash outflow from payment of capital element of finance leases (21) (50) Cash outflow from repayment of other debt (880) (126) ---------- ----------Net cash flow from (decrease) / increase in debt (4) 623Realised net foreign exchange loss on cash settlement of derivative contracts (21) (66)Equity dividends paid (384) (340)--------------------------------------------------------------------------------------------------------Net cash flow from financing activities 12 (597) (335)--------------------------------------------------------------------------------------------------------Net (decrease) / increase in cash and cash equivalents (580) 280Cash and cash equivalents at 1 January (i) 1,177 885Effect of foreign exchange rate changes (5) 12--------------------------------------------------------------------------------------------------------Cash and cash equivalents at 31 December (i) 9 592 1,177--------------------------------------------------------------------------------------------------------\* T (i) Cash and cash equivalents are stated net of overdrafts of £48 million (2005:£62 million). 1 Basis of preparation The preliminary results for the year ended 31 December 2006 have been extractedfrom audited accounts which have not yet been delivered to the Registrar ofCompanies. The financial information set out in this announcement does notconstitute statutory accounts for the year ended 31 December 2006 or 31 December2005. The financial information for the year ended 31 December 2005 is derivedfrom the statutory accounts for that year. The report of the auditors on thestatutory accounts for the year ended 31 December 2006 was unqualified and didnot contain a statement under Section 237 of the Companies Act 1985. The Group's Income Statement and segmental note separately identifies theeffects of re-measurement of certain financial instruments, and items which areexceptional, in order to provide readers with a clear and consistentpresentation of the Group's underlying performance, as described below. Certain re-measurements As part of its energy procurement activities the Group enters into a range ofcommodity contracts designed to achieve security of energy supply. Thesecontracts comprise both purchases and sales and cover a wide range of volumes,prices and timescales. The majority of the underlying supply comes fromhigh-volume long-term contracts which are complemented by shorter-termarrangements. These short-term contracts are entered into for the purpose ofbalancing energy supplies and customer demand and to optimise the price paid bythe Group. Short-term demand can vary significantly as a result of factors suchas weather, power generation profiles and short-term movements in market prices. Many of the energy procurement contracts are held for the purpose of receipt ordelivery of commodities in accordance with the Group's purchase, sale or usagerequirements and are therefore out of scope of IAS 39. However, a number ofcontracts are considered to be derivative financial instruments and are requiredto be fair valued under IAS 39, primarily because their terms include theability to trade elements of the contracted volumes on a net-settled basis. The Group has shown the fair value adjustments arising on these contractsseparately in the certain re-measurements column. This is because the intentionof management is, subject to short-term demand balancing, to use these energysupplies to meet customer demand. Accordingly management believe the ultimatenet charge to cost of sales will be consistent with the price of energy agreedin these contracts and that the fair value adjustments will reverse as theenergy is supplied over the life of the contract. This makes the fair valuere-measurements very different in nature from costs arising from the physicaldelivery of energy in the period. At the balance sheet date the fair value represents the difference between theprices agreed in the respective contracts and the actual or anticipated marketprice of acquiring the same amount of energy on the open market. The movement inthe fair value taken to certain re-measurements in the Income Statementrepresents the unwind of the contracted volume delivered or consumed during theperiod, combined with the change in fair value of future contracted energy as aresult of movements in forward energy prices during the year. These adjustments represent the significant majority of the items included incertain re-measurements. In addition to these however the Group has identified anumber of comparable contractual arrangements where the difference between theprice which the Group expects to pay or receive under a contract and the marketprice is required to be fair valued by IAS 39. These additional items relate tocross-border transportation or transmission capacity, storage capacity andcontracts relating to the sale of energy bi-products on which economic value hasbeen created, which is not wholly recognised under the requirements of IAS 39.For these arrangements the related fair value adjustments are also includedunder certain re-measurements. These arrangements are managed separately from proprietary energy tradingactivities where trades are entered into speculatively for the purpose of makingprofits in their own right. These proprietary trades are included in the resultsbefore certain re-measurements. Certain re-measurements included within interest comprise re-measurements of thepublicly traded units of The Consumers' Waterheater Income Fund. Exceptional items As permitted by IAS 1 'Presentation of Financial Statements', certain items arepresented separately as exceptional, where they are material to the result forthe period and are of a non-recurring nature. Items which may be consideredmaterial and non-recurring in nature include disposals of businesses, businessrestructuring, the renegotiation of significant contracts and asset write-downs.We intend to follow such a presentation on a consistent basis in future periods.Items are considered material if their omission or misstatement could, in theopinion of the Directors, individually or collectively, affect the true and fairpresentation of the Financial Statements. 2 Segmental analysis \* T 2006 2005 (restated) ------------------------------------------------------------------------ Less Less inter- inter- Gross segment Gross segment segment revenue Group segment revenue Group revenue (i) revenue revenue (i) revenue(a) Revenue £m £m £m £m £m £m--------------------------------------------------------------------------------------------------------------------Continuing operations: British Gas Residential 7,112 - 7,112 6,032 - 6,032 British Gas Business 2,303 - 2,303 1,510 - 1,510 British Gas Services 1,104 - 1,104 1,024 - 1,024 -------------------------------- --------------------------------------- Industrial sales and wholesaling 1,035 (152) 883 871 (85) 786 Gas production 1,291 (968) 323 1,365 (1,182) 183 Accord energy trading (ii) 39 - 39 42 - 42 -------------------------------- --------------------------------------- Centrica Energy 2,365 (1,120) 1,245 2,278 (1,267) 1,011 Centrica Storage 358 (64) 294 253 (58) 195 North American Energy and Related Services 4,097 - 4,097 3,552 - 3,552 European Energy 295 - 295 119 - 119 Other operations - - - 5 - 5-------------------------------------------------------------------------------------------------------------------- 17,634 (1,184) 16,450 14,773 (1,325) 13,448--------------------------------------------------------------------------------------------------------------------Discontinued operations: Onetel - - - 344 (2) 342-------------------------------------------------------------------------------------------------------------------- - - - 344 (2) 342--------------------------------------------------------------------------------------------------------------------\* T (i) Accord energy trading carries out certain sales transactions on behalf ofthe Group's Industrial sales and wholesaling segment. The Group considers thatit is not reflective of the trading relationship between the segments to presentthese transactions as inter-segment revenue within the Industrial sales andwholesaling segment. The comparative information has been restated accordingly.The effect of the restatement is to reduce gross segment revenue andinter-segment revenue for Industrial sales and wholesaling by £589 million forthe year ended 31 December 2005. There is no effect on Group revenue or segmentoperating profit. (ii) The revenue presented for Accord energy trading comprises net gains andlosses (both realised and unrealised/fair value changes) from trading inphysical and financial energy contracts. Included within its net gains andlosses is £18 million arising on fees charged to other Group segments (2005: £8million). It is not representative of the transactions to present this amountwithin inter-segment revenue because the result is stated net within revenue. \* T Operating profit/(loss) Operating before profit/(loss) exceptional after exceptional items and Certain re- items and certain re- Exceptional items measurements certain re- measurements (note 3) (note 3) measurements year ended year ended year ended year ended(b) Operating profit 31 December 31 December 31 December 31 December --------------- ----------------- ----------------- ----------------- 2006 2005 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m £m £m-----------------------------------------------------------------------------------------------------Continuing operations: British Gas Residential 95 90 (214) (14) (724) 584 (843) 660 British Gas Business 87 77 - (1) (408) 167 (321) 243 British Gas Services 102 111 (66) (15) - - 36 96 ------ -------- -------- -------- -------- -------- -------- -------- Industrial sales and wholesaling (210) (156) - 42 440 (424) 230 (538) Gas production 864 1,020 - - 32 (28) 896 992 Accord energy trading 32 39 - - 6 17 38 56 ------ -------- -------- -------- -------- -------- -------- -------- Centrica Energy 686 903 - 42 478 (435) 1,164 510 Centrica Storage 228 154 (24) - 2 1 206 155 North American Energy and Related Services 223 185 - - (264) 138 (41) 323 European Energy 7 (9) - - (15) - (8) (9) Other operations 14 2 (27) (23) - - (13) (21)----------------------------------------------------------------------------------------------------- 1,442 1,513 (331) (11) (931) 455 180 1,957-----------------------------------------------------------------------------------------------------Discontinued operations: The AA - - - 39 - - - 39 Onetel (11) 12 - (5) - - (11) 7----------------------------------------------------------------------------------------------------- (11) 12 - 34 - - (11) 46-----------------------------------------------------------------------------------------------------\* T \* T Share of results of joint ventures and associates, Depreciation of net of interest property, plant Amortisation and taxation and equipment of intangibles(c) Included within operating year ended year ended year ended profit 31 December 31 December 31 December ----------------- ------------------ -------------- 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m-----------------------------------------------------------------------------------------------------Continuing operations: British Gas Residential - 2 17 16 35 48 British Gas Business - - 1 5 14 1 British Gas Services - - 13 16 - 4 ------ ---------- ------ ----------- ----- -------- Industrial sales and wholesaling - 29 95 81 1 - Gas production - - 252 193 - - Accord energy trading - - - - - - ------ ---------- ------ ----------- ----- -------- Centrica Energy - 29 347 274 1 - Centrica Storage - - 23 19 - 1 North American Energy and Related Services - - 87 76 10 13 European Energy (12) 6 1 - 10 9 Other operations - - 17 - 3 ------------------------------------------------------------------------------------------------------ (12) 37 506 406 73 76-----------------------------------------------------------------------------------------------------Discontinued operations: Onetel - - - 6 - 1----------------------------------------------------------------------------------------------------- - - - 6 - 1-----------------------------------------------------------------------------------------------------\* T 3 Exceptional items and certain re-measurements \* T 2006 2005(a) Exceptional items £m £m------------------------------------------------------------------------------------Exceptional items recognised in continuing operations Systems write-down (i) (196) - Business restructuring costs (ii),(iii) (87) (100) Rough storage incident (iv) (48) - Profit on disposal of British Gas Connections Limited - 47 Contract renegotiation (v) - 42------------------------------------------------------------------------------------Total exceptional items recognised in continuing operations (331) (11)------------------------------------------------------------------------------------Exceptional items recognised in discontinued operations Adjustment to profit on disposal of the AA - 39 Loss on disposal of Onetel - (5)------------------------------------------------------------------------------------Total exceptional items recognised in discontinued operations - 34------------------------------------------------------------------------------------(i) The Group has written down certain of its recent major systems developments following a review of their existing and required future functionality. The cost comprises write-downs in British Gas Residential (£178 million) and British Gas Services (£18 million). A tax credit of £59 million was recognised in respect of these costs.(ii) Business restructuring costs comprise £67 million from staff reductions at the corporate centre (£3 million), British Gas Residential (£16 million), and British Gas Services (£48 million), and £20 million relating to the closure of the head office of British Gas Residential. A tax credit of £20 million was recognised in respect of these costs.(iii) Business restructuring costs in 2005 comprised £100 million resulting from staff reductions at the corporate centre (£23 million), British Gas Residential (£43 million), British Gas Services (£15 million), British Gas Business (£1 million) and £18 million relating to changes to the property portfolio. A tax credit of £23 million was recognised in respect of these costs.(iv) Centrica Storage operations at Rough suffered a major interruption caused by a fire in February 2006. Our investment in new emergency shutdown systems and prompt management action mitigated the damage to ensure no loss of life. Following a full assessment of the work needed to restore operations, the costs of the incident have resulted in an exceptional charge before taxation of £48 million (of which £24 million is recognised within Other operations). A tax credit of £14 million has been recognised in respect of the charge.(v) The profit in 2005 arose on the renegotiation of certain long-term take-or-pay contracts during the period.------------------------------------------------------------------------------------ 2006 2005(b) Certain re-measurements (note 1) £m £m------------------------------------------------------------------------------------Certain re-measurement recognised in relation to energy contracts (iv) Net (losses) / gains arising on delivery of contracts (i) (287) 140 Net (losses) / gains arising on market price movements and new contracts (ii) (623) 299 Net (losses) / gains arising on proprietary trades in relation to cross-border transportation or capacity contracts (iii) (6) 17------------------------------------------------------------------------------------Net re-measurement of energy contracts included within gross profit (916) 456------------------------------------------------------------------------------------Net losses arising on re-measurement of joint ventures' energy contracts (v) (15) (1)------------------------------------------------------------------------------------Net re-measurement included within Group operating profit (931) 455------------------------------------------------------------------------------------Gains arising on re-measurement of the publicly traded units ofThe Consumers' Waterheater Income Fund (iv), (v) (note 4) 37 -------------------------------------------------------------------------------------Total certain re-measurements (894) 455------------------------------------------------------------------------------------(i) As energy is delivered or consumed from previously contracted positions, the related fair value recognised in the opening balance sheet (representing the difference between forward energy prices at the opening balance sheet date, and the contract price of energy to be delivered) is charged or credited to the Income Statement.(ii) Represents fair value (losses) / gains arising from the change in fair value of future contracted sales and purchase contracts as a result of changes in forward energy prices between reporting dates (or date of inception and the reporting date, where later).(iii) Comprises movements in fair value arising on proprietary trades in relation to cross-border transportation or storage capacity, on which economic value has been created which is not wholly accounted for under the provisions of IAS 39.(iv) A tax credit of £284 million has been recognised in respect of re-measurement of energy contracts. A tax charge of £14 million has been recognised in respect of re-measurement of the units of The Consumers' Waterheater Income Fund.(v) Certain re-measurements included within Group operating profit also include the Group's share of the certain re-measurements relating to the energy procurement activities of joint ventures. Certain re-measurements included within interest comprise re-measurement of the publicly traded units of The Consumers' Waterheater Income Fund. All other re-measurement is included within results before exceptional items and certain re-measurements.\* T 4 Net interest \* T 2006 2005 -------------------------------- -------------------------------- Interest Interest Interest Interest expense income Total expense income Total £m £m £m £m £m £m-------------------------------------------------------------------------------------------------------Cost of servicing net debt (excluding non-recourse debt) ---------- ---------- ---------- ---------- ---------- ----------Interest income - 38 38 - 60 60Interest expense on bank loans and overdrafts (175) - (175) (87) - (87)Interest expense on finance leases (including tolling agreements) (47) - (47) (97) - (97)Fair value (losses) / gains on hedges (1) 3 2 (5) 5 -Fair value (losses) / gains on other derivatives (8) 25 17 (11) 25 14 ---------- ---------- ---------- ---------- ---------- ---------- (231) 66 (165) (200) 90 (110)Interest arising on non-recourse debt ---------- ---------- ---------- ---------- ---------- ----------Interest expense on non-recourse debt (13) - (13) (11) - (11)Distributions to unit holders of The Consumers' Waterheater Income Fund (27) - (27) (20) - (20)Fair value gains arising on Units of The Consumers' Waterheater Income Fund - 37 37 - - - ---------- ---------- ---------- ---------- ---------- ---------- (40) 37 (3) (31) - (31)Other interest ---------- ---------- ---------- ---------- ---------- ----------Notional interest arising on discounted items (15) 26 11 (14) - (14)Interest on supplier early payment arrangements - 11 11 - 12 12Interest on customer finance arrangements - - - (2) - (2) ---------- ---------- ---------- ---------- ---------- ---------- (15) 37 22 (16) 12 (4)-------------------------------------------------------------------------------------------------------Interest (expense) / income (286) 140 (146) (247) 102 (145)-------------------------------------------------------------------------------------------------------\* T 5 Taxation \* T 2006 2005Analysis of tax charge for the year £m £m--------------------------------------------------------------------------------------------------------The tax charge comprises:Current taxUK corporation tax 199 368UK petroleum revenue tax 234 400Tax on exceptional items and certain re-measurements (i), (ii), (iii), (iv), (vi) (20) (23)Foreign tax 51 22Adjustments in respect of prior years (25) (62)--------------------------------------------------------------------------------------------------------Total current tax 439 705--------------------------------------------------------------------------------------------------------Deferred taxCurrent year 79 10Prior year 10 (22)Change in UK tax rate(v) 9 -Tax on exceptional items and certain re-measurements (i), (ii), (iii), (iv), (vi) (343) 161UK petroleum revenue tax (7) (27)Foreign deferred tax (7) 17--------------------------------------------------------------------------------------------------------Total deferred tax (259) 139--------------------------------------------------------------------------------------------------------Total tax on profit from continuing operations 180 844--------------------------------------------------------------------------------------------------------\* T (i) The tax credit arising on the systems write-down in 2006 was £59 million(note 3 (a) (i)). (ii) The tax credit arising on the business restructuring costs in 2006 was £20million (note 3 (a) (ii)). (iii) The tax credit arising on costs related to the Rough storage incident was£14 million (note 3 (a) (iv)). (iv) The tax credit arising on certain re-measurements was £284 million. The taxcharge relating to gains arising on re-measurement of the publicly traded unitsof The Consumers' Waterheater Income Fund was £14 million (note 3 (b) (iv)). (v) The effect of the increase of 10% to the UK supplementary charge from 1January 2006 on the relevant temporary differences at 31 December 2005 was £9million. (vi) In 2005 tax credits relating to exceptional items amounted to £11 millionand the tax charge relating to certain re-measurements amounted to £149 million. 6 Dividends \* T 2006 2005 £m £m------------------------------------------------------------------------------------------------------------Prior year final dividend of 7.4p (2005: 6.1p) per ordinary share (paid on 14 June 2006) 269 220Interim dividend of 3.15p (2005: 3.1p) per ordinary share (paid on 15 November 2006) 115 120------------------------------------------------------------------------------------------------------------ 384 340------------------------------------------------------------------------------------------------------------\* T The Directors propose a final dividend of 8.0 pence per share (totalling £293million) for the year ended 31 December 2006. The dividend will be submitted forformal approval at the Annual General Meeting to be held on 14 May 2007. TheseFinancial Statements do not reflect this dividend payable, which will beaccounted for in shareholders' equity as an appropriation of retained earningsin the year ending 31 December 2007. 7 Earnings per ordinary share Basic earnings per ordinary share has been calculated by dividing the lossattributable to equity holders of the parent Company for the year of £155million (2005: earnings of £1,012 million) by the weighted average number ofordinary shares in issue during the year of 3,643 million (2005: 3,688 million).2005 excluded 3 million ordinary shares, being the weighted average number ofthe Company's own shares held in the employee share trust which were treated astreasury shares. The Directors believe that the presentation of an adjusted basic earnings perordinary share, being the basic earnings per ordinary share adjusted for certainre-measurements and exceptional items assists with understanding the underlyingperformance of the Group. The reconciliation of basic to adjusted basic earningsper ordinary share is as follows: \* T 2006 2005 ----------------- ----------------- Pence Pence per per ordinary ordinary(a) Continuing and discontinued operations £m share £m share-------------------------------------------------------------------------------------(Loss) / earnings - basic (155) (4.3) 1,012 27.4Net exceptional items after tax (note 3) 238 6.6 (34) (0.9)Certain re-measurement gains and losses after tax (note 3) 624 17.1 (306) (8.3)-------------------------------------------------------------------------------------Earnings - adjusted basic 707 19.4 672 18.2------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------(Loss) / earnings - diluted (155) (4.3) 1,012 27.0------------------------------------------------------------------------------------- 2006 2005 ----------------- ----------------- Pence Pence per per ordinary ordinary(b) Continuing operations £m share £m share-------------------------------------------------------------------------------------(Loss) / earnings - basic (147) (4.1) 967 26.2Net exceptional items after tax (note 3) 238 6.6 - -Certain re-measurement gains and losses after tax (note 3) 624 17.1 (306) (8.3)-------------------------------------------------------------------------------------Earnings - adjusted basic 715 19.6 661 17.9------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------(Loss) / earnings - diluted (147) (4.1) 967 25.8------------------------------------------------------------------------------------- 2006 2005 ----------------- ----------------- Pence Pence per per ordinary ordinary(c) Discontinued operations £m share £m share-------------------------------------------------------------------------------------(Loss) / earnings - basic (8) (0.2) 45 1.2------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------(Loss) / earnings - diluted (8) (0.2) 45 1.2-------------------------------------------------------------------------------------\* T Certain re-measurements (note 1) included within operating profit comprisere-measurement arising on our energy procurement activities and re-measurementof proprietary trades in relation to cross-border transportation or capacitycontracts. Certain re-measurements included within interest comprisere-measurement of the publicly traded units of The Consumers' Waterheater IncomeFund. All other re-measurement is included within results before exceptionalitems and certain re-measurements. In addition to basic and adjusted earnings per ordinary share, information ispresented for diluted earnings per ordinary share. Under this presentation, noadjustments are made to the reported earnings for either 2006 or 2005, but theweighted average number of shares used as the denominator is adjusted forpotentially dilutive ordinary shares. In 2006, no outstanding awards or optionsare considered to be potentially dilutive, because they would decrease the lossper share. \* T 2006 2005 million million shares shares---------------------------------------------------------------------------------------------------------Weighted average number of shares used in the calculation of basic earnings per ordinary share 3,643 3,688---------------------------------------------------------------------------------------------------------Weighted average number of shares used in the calculation of diluted earnings per ordinary share 3,643 3,751---------------------------------------------------------------------------------------------------------\* T 8 Derivative financial instruments The Group enters into derivative financial instruments to reduce exposure tofluctuations in commodity prices, interest rates and foreign exchange rates,which arise in the normal course of business. The Group also enters intoderivative financial instruments for trading purposes. Detailed disclosuresexplaining the nature of the risks that the Group is exposed to, and thefinancial instruments entered into by the Group, are provided in the AnnualReport and Accounts for the years ended 31 December 2005 and 2006. There hasbeen no significant change to the nature of the Group's derivative contractswhich have been accounted for in accordance with IAS 39 in the year ended 31December 2006. The fair values recorded in the Group Balance Sheet only concernthose contracts entered into which are within the scope of IAS 39 and should notbe construed as a measure of the Group's exposure to cash flow risk resultingfrom changes in commodity prices. 9 Cash and cash equivalents \* T 2006 2005 £m £m---------------------------------------------------------------------------------------------------------Cash at bank, in transit and in hand 29 21Short-term deposits 611 1,218---------------------------------------------------------------------------------------------------------Cash and cash equivalents 640 1,239---------------------------------------------------------------------------------------------------------\* T 10 Bank overdrafts and loans \* T 2006 2005 --------------------- --------------------- Non- Non- Current current Current currentAmounts falling due: £m £m £m £m-----------------------------------------------------------------------------------------------------------(a) Businesses' recourse borrowingsBank overdrafts and loans 56 105 259 504Other bank loans: Bonds - 1,181 - 422 Commercial paper 100 - 377 - Loan notes - 3 - -Obligations under finance leases(including tolling arrangements) 25 783 19 809----------------------------------------------------------------------------------------------------------- 181 2,072 655 1,735(b) Businesses' non-recourse borrowingsCanadian dollar bonds - 218 - 250Units of The Consumers' Waterheater Income Fund - 265 - 282----------------------------------------------------------------------------------------------------------- 181 2,555 655 2,267-----------------------------------------------------------------------------------------------------------\* T 11 Reserves \* T Attributable to equity holders of the Company ----------------------------------------------------------------- Capital Share Share Merger redemption Other Minority Total capital premium reserve reserve reserves Total interest equity £m £m £m £m £m £m £m £m----------------------------------------------------------------------------------------------------------------31 December 2005 224 595 467 15 1,085 2,386 56 2,442Exchange differences on translation of foreign operations - - - - (23) (23) - (23)Actuarial gains on defined benefit pension schemes - - - - 475 475 - 475Cash flow hedges: Net fair value losses - - - - (645) (645) - (645) Transfers to Income Statement - - - - (294) (294) - (294)Tax on items taken directly to / from equity - - - - 169 169 - 169---------------------------------------------------------------------------------------------------------------- 224 595 467 15 767 2,068 56 2,124Loss for the year - - - - (155) (155) 1 (154)Employee share option schemes: Share issue 3 62 - - - 65 - 65 Exercise of awards - - - - (9) (9) - (9) Value of services provided - - - - 23 23 - 23Repurchase of shares (1) - - 1 (23) (23) - (23)Dividends - - - - (384) (384) - (384)----------------------------------------------------------------------------------------------------------------31 December 2006 226 657 467 16 219 1,585 57 1,642----------------------------------------------------------------------------------------------------------------\* T 12 Notes to the Group Cash Flow Statement \* T(a) Reconciliation of Group operating profit to net cash flow from operating 2006 2005 activities £m £m--------------------------------------------------------------------------------------------------------Continuing operationsGroup operating profit including share of result of joint ventures and associates 180 1,957Less share of losses / (profits) of joint ventures and associates 12 (37)--------------------------------------------------------------------------------------------------------Group operating profit before share of result of joint ventures and associates 192 1,920Add back: Amortisation of intangible assets 73 76 Depreciation of property, plant and equipment 506 406 Systems write-down 196 - Employee share scheme costs 23 17 Profit on sale of businesses (3) (53) Profit on sale of property, plant and equipment, and other intangible assets (17) (17) Movement in provisions 84 42 Re-measurement of energy contracts (i) 911 (455)--------------------------------------------------------------------------------------------------------Operating cash flows before movements in working capital 1,965 1,936Increase in inventories (83) (22)Increase in receivables (260) (269)(Decrease) / increase in payables (149) 299--------------------------------------------------------------------------------------------------------Cash generated from continuing operations 1,473 1,944Income taxes paid (311) (320)Petroleum revenue tax paid (316) (448)Net interest received 4 3Payments relating to exceptional charges (113) (48)--------------------------------------------------------------------------------------------------------Net cash flow from continuing operating activities 737 1,131--------------------------------------------------------------------------------------------------------(i) Includes net £5 million (2005: £nil) unrealised losses / (profits) arising from re-measurement ofcontracts, including those relating to proprietary trading and North American storage activities. 2006 2005 £m £m--------------------------------------------------------------------------------------------------------Discontinued operationsOperating profit before share of result of joint ventures and associates - 12Add back: Amortisation of intangible assets - 1 Depreciation of property, plant and equipment - 6 Employee share scheme costs - 1 Movement in provisions - (4)--------------------------------------------------------------------------------------------------------Operating cash flows before movements in working capital - 16Increase in receivables - (3)--------------------------------------------------------------------------------------------------------Cash generated from discontinued operations - 13--------------------------------------------------------------------------------------------------------Net cash flow from discontinued operating activities - 13--------------------------------------------------------------------------------------------------------Net cash flow from operating activities 737 1,144-------------------------------------------------------------------------------------------------------- 2006 2005(b) Net cash flow from investing activities £m £m--------------------------------------------------------------------------------------------------------Continuing operations (717) (520)Discontinued operations (3) (9)--------------------------------------------------------------------------------------------------------Net cash flow from investing activities (720) (529)-------------------------------------------------------------------------------------------------------- 2006 2005(c) Net cash flow from financing activities £m £m--------------------------------------------------------------------------------------------------------Continuing operations (597) (356)Discontinued operations - 21--------------------------------------------------------------------------------------------------------Net cash flow from financing activities (597) (335)-------------------------------------------------------------------------------------------------------- 2006 2005(d) Net debt £m £m--------------------------------------------------------------------------------------------------------Non-current assets - other financial assets 37 45Current assets - other financial assets 49 46Current assets - cash and cash equivalents 640 1,239Current liabilities - bank overdrafts and loans (181) (655)Non-current liabilities - bank loans and other borrowings (2,555) (2,267)--------------------------------------------------------------------------------------------------------Net debt including non-recourse borrowings (2,010) (1,592)Less non-recourse borrowings (note 10) 483 532--------------------------------------------------------------------------------------------------------Net debt excluding non-recourse borrowings (1,527) (1,060)--------------------------------------------------------------------------------------------------------\* T 13 Pensions Substantially all of the Group's UK employees at 31 December 2006 were membersof one of the three main schemes: the Centrica Pension Scheme (formerly theCentrica Staff Pension Scheme), the Centrica Engineers' Pension Scheme and theCentrica Management Pension Scheme (the approved pension schemes). The CentricaPension Scheme (final salary section) and the Centrica Management Pension Scheme(a final salary scheme) were closed to new members from 1 April 2003. TheCentrica Pension Scheme has an open career average salary section. The CentricaEngineers' Pension Scheme (final salary section) was closed to new members from1 April 2006, and a career average salary section was added to the scheme atthat date. These schemes are defined benefit schemes, and are tax-approvedfunded arrangements. They are subject to independent valuations at least everythree years, on the basis of which the qualified actuary certifies the rate ofemployers' contributions which, together with the specified contributionspayable by the employees and proceeds from the schemes' assets, are expected tobe sufficient to fund the benefits payable under the schemes. The Centrica Unapproved Pension Scheme is an unfunded arrangement which providesbenefits to certain employees whose benefits under the main schemes wouldotherwise be limited by the earnings cap. The Group also has a commitment toprovide certain pension and post retirement benefits to employees of DirectEnergy Marketing Limited (Canada). The latest full actuarial valuations were carried out at the following dates:the approved pension schemes at 31 March 2004, the Centrica Unapproved PensionScheme at 6 April 2005 and the Direct Energy Marketing Limited pension plan at14 June 2005. These have been updated to 31 December 2006 for the purposes ofmeeting the requirements of IAS 19. Investments have been valued, for thispurpose, at market value. At 31 December 2006, all of the schemes reporteddeficits when valued for the purposes of IAS 19. \* T 31 31 December December 2006 2005Major assumptions used for the actuarial valuation % %----------------------------------------------------------------------------------------------------------Rate of increase in employee earnings 4.00 4.35Rate of increase in pensions in payment and deferred pensions 3.00 2.85Discount rate 5.00 4.85Inflation assumption 3.00 2.85----------------------------------------------------------------------------------------------------------\* T The assumptions relating to longevity underlying the pension liabilities at thebalance sheet date have been based on a combination of standard actuarialmortality tables, scheme experience and other relevant data, and include amedium cohort allowance for future improvements in longevity, as published bythe Institute of Actuaries. The assumptions are equivalent to future longevityfor members in normal health approximately as follows: \* T 31 December 2006 31 December 2005 ---------------------- ----------------------- Male Female Male FemaleLife expectancy at age 65 for a member: years years years years----------------------------------------------------------------------------------- -----------------------Currently aged 65 20.2 21.7 18.8 22.7Currently aged 45 21.3 22.9 20.6 24.5-----------------------------------------------------------------------------------------------------------\* T At the most recent actuarial review of the schemes there were approximately20,850 male (2005: 19,850) and 11,050 female (2005:11,050) members andbeneficiaries. The other demographic assumptions have been set having regard to the latesttrends in scheme experience and other relevant data. The assumptions arereviewed and updated as necessary as part of the periodic actuarial valuation ofthe pension schemes. \* T Indicative effect onImpact of changing material assumptions Change in assumption scheme liabilities---------------------------------------------------------------------------------------------------------------------Rate of increase in employee earnings Increase / decrease by 0.25% Increase / decrease by 2%Rate of increase in pensions in payment and deferred pensions Increase / decrease by 0.25% Increase / decrease by 4%Discount rate Increase / decrease by 0.25% Decrease / increase by 6%Inflation assumption Increase / decrease by 0.25% Increase / decrease by 6%Longevity assumption Increase / decrease by 1 year Increase / decrease by 2%---------------------------------------------------------------------------------------------------------------------\* T The market value and expected rate of return of the assets and the present valueof the liabilities in the schemes at 31 December were: \* T Expected Expected rate rate of return of return per annum Valuation per annum Valuation 2006 2006 2005 200531 December % £m % £m--------------------------------------------------------------------------------------------------------------UK equities 7.8 1,486 7.9 1,182Non-UK equities 7.8 857 8.0 841Fixed-interest bonds 5.3 312 4.7 241Interest-linked bonds 4.3 213 4.1 150Property 6.2 68 6.3 83Cash and other assets 5.0 52 3.7 73--------------------------------------------------------------------------------------------------------------Total fair value of plan assets 7.2 2,988 7.3 2,570Present value of defined benefit obligation (3,284) (3,390)--------------------------------------------------------------------------------------------------------------Net liability recognised in the Balance Sheet (i) (296) (820)Associated deferred tax asset recognised in the Balance Sheet 89 249--------------------------------------------------------------------------------------------------------------Net pension liability (207) (571)--------------------------------------------------------------------------------------------------------------\* T (i) £17 million of the liability relates to loss on curtailments included withinexceptional restructuring costs arising in the year (2005: £13 million). In2005, this amount was reflected in restructuring provisions within the BalanceSheet. In 2006 it has been included with the pension liability. The overall expected rate of return on assets is a weighted average based on theactual plan assets held and the respective expected returns on separate assetclasses. The return on separate asset classes were derived as follows: theexpected rate of return on equities is based on the expected median return overa ten year period, as calculated by the independent company actuary. The medianreturn over a longer period than ten years was not expected to be materiallydissimilar. The expected rate of return on bonds was measured directly fromactual market yields for UK gilts and corporate bond stocks. The rate abovetakes into account the actual mixture of UK gilts, UK corporate bonds andoverseas bonds held at the balance sheet date. The expected rate of return onproperty takes into account both capital growth and allowance for expenses,rental growth and depreciation. The expected rate of return on cash iscomparable to current bank interest rates. Included within schemes' liabilities above are £27 million (2005: £32 million)relating to unfunded pension arrangements. Included within other non-currentfinancial assets are £29 million (2005: £31 million) of money marketinvestments, held by the Law Debenture Trust on behalf of the Company, assecurity in respect of the Centrica Unapproved Pension Scheme. \* T 2006 2005Analysis of the amount charged to operating profit £m £m----------------------------------------------------------------------------------------------------------Current service cost 143 122Plan amendment (i) (20) -Loss on curtailment 18 14----------------------------------------------------------------------------------------------------------Net charge to operating profit 141 136----------------------------------------------------------------------------------------------------------\* T (i) The schemes' rules were amended from 1 April 2006 to allow employees tocommute a larger amount of their pension to a cash lump sum on retirement, inline with changes in the Finance Act. Accordingly, the assumptions made incalculating the Group's defined benefit pension liability have been revised, anda gain of £20 million has been recognised in Group operating profit beforeexceptional items and certain re-measurements. Future revisions to theassumption will be reflected within the Statement of Recognised Income andExpense. \* T 2006 2005Analysis of the amount (credited) / charged to notional interest £m £m----------------------------------------------------------------------------------------------------------Expected return on pension scheme assets (194) (153)Interest on pension scheme liabilities 168 150----------------------------------------------------------------------------------------------------------Net credit to notional interest (26) (3)----------------------------------------------------------------------------------------------------------\* T \* TAnalysis of the actuarial gain / (loss) recognised in the Statement of Recognised 2006 2005 Income and Expense £m £m----------------------------------------------------------------------------------------------------------Actual return less expected return on pension scheme assets 95 307Experience gains and losses arising on the schemes' liabilities 145 21Changes in assumptions underlying the present value of the schemes' liabilities 235 (454)----------------------------------------------------------------------------------------------------------Actuarial gain / (loss) to be recognised in the Statement of Recognised Income and Expense before adjustment for tax 475 (126)----------------------------------------------------------------------------------------------------------Cumulative actuarial gains and losses recognised in reserves at 31 December 439 (36)----------------------------------------------------------------------------------------------------------\* T 14 Events after the balance sheet date The Directors propose a final dividend of 8.0 pence per share (totalling £293million) for the year ended 31 December 2006. The dividend will be submitted forformal approval at the Annual General Meeting to be held on 14 May 2007. TheseFinancial Statements do not reflect this dividend payable, which will beaccounted for in shareholders' equity as an appropriation of retained earningsin the year ending 31 December 2007. On 8 February 2007 the Group's subsidiary The Consumers' Waterheater Income Fundacquired the water heater rental business of Toronto Hydro Energy Services Incfor consideration of C$41 million (£18 million) in cash. Management considers itimpracticable to disclose information about the fair value of the net assetsacquired since the findings of the valuation exercise are not yet available. In January 2007 the Group was awarded participation in four exploration licenceslocated in the Norwegian Sea and Northern North Sea. The Group will have anoperated interest in three licences, with non-operatorship in one block. Inaddition the Group has been awarded two exploration licences located in the EastIrish Sea, adjacent to Centrica's Morecambe fields. Group Income Statement for the six months ended 31 December \* T 2006 2005 ----------------------------------- ---------------------------------------- Results for Results for the period the period before before exceptional Exceptional exceptional Exceptional items and items and items and items and certain certain Results certain certain Results re- re- for re- re- for measurements measurements the measurements measurements the (i) (i) period (i) (i) period Notes £m £m £m £m £m £m------------------------------------------------------------------------------------------------------------------------Continuing operationsGroup revenue 15 7,722 - 7,722 6,832 - 6,832Cost of sales (5,801) - (5,801) (5,175) - (5,175)Re-measurement of energy contracts (i) 16 - (423) (423) - (20) (20)------------------------------------------------------------------------------------------------------------------------Gross profit 1,921 (423) 1,498 1,657 (20) 1,637 ----------------------------------- ---------------------------------------- Operating costs before exceptional items (1,174) - (1,174) (1,127) - (1,127) Systems write-down 16 - (196) (196) - - - Business restructuring costs 16 - (87) (87) - (100) (100) Rough storage incident 16 - (6) (6) - - - ----------------------------------- ----------------------------------------Operating costs (1,174) (289) (1,463) (1,127) (100) (1,227)Share of profits / (losses) in joint ventures and associates, net of interest and taxation (i) 3 (15) (12) 14 - 14------------------------------------------------------------------------------------------------------------------------Group operating profit 15 750 (727) 23 544 (120) 424 ----------------------------------- ---------------------------------------- Interest income (i) 33 3 36 55 - 55 Interest expense (i) (93) - (93) (125) 4 (121) ----------------------------------- ----------------------------------------Net interest expense (60) 3 (57) (70) 4 (66)------------------------------------------------------------------------------------------------------------------------Profit / (loss) from continuing operations before taxation 690 (724) (34) 474 (116) 358Taxation on profit from continuing operations (252) 199 (53) (260) 23 (237)------------------------------------------------------------------------------------------------------------------------Profit / (loss) from continuing operations after taxation 438 (525) (87) 214 (93) 121 ----------------------------------- ---------------------------------------- Profit from discontinued operations - - - 13 - 13 (Loss) / gain on disposal of discontinued operations (8) - (8) - 8 8 ----------------------------------- ----------------------------------------Discontinued operations (8) - (8) 13 8 21------------------------------------------------------------------------------------------------------------------------Profit / (loss) for the period 430 (525) (95) 227 (85) 142------------------------------------------------------------------------------------------------------------------------Attributable to: Equity holders of the parent 430 (525) (95) 227 (85) 142 Minority interests - - - - - ------------------------------------------------------------------------------------------------------------------------- 430 (525) (95) 227 (85) 142------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------(Loss) / earnings per ordinary shareFrom continuing and discontinued operations: Basic 17 (2.6) 4.1 Adjusted basic 17 11.8 6.3 Diluted 17 (2.6) 4.1------------------------------------------------------------------------------------------------------------------------\* T (i) Certain re-measurements (note 1) included within operating profit comprisere-measurement arising on our energy procurement activities and re-measurementof proprietary trades in relation to cross-border transportation or capacitycontracts. Certain re-measurements included within interest comprisere-measurement of the publicly traded units of The Consumers' Waterheater IncomeFund. All other re-measurement is included within results before exceptionalitems and certain re-measurements. Group Cash Flow Statement for the six months ended 31 December \* T 2006 2005 Notes £m £m--------------------------------------------------------------------------------------------------------Operating cash flows before movements in working capital 18 1,018 752Increase in inventories (60) (26)Increase in receivables (691) (1,084)Increase in payables 1,078 1,096--------------------------------------------------------------------------------------------------------Cash generated from continuing operations 1,345 738Interest received 6 5Interest paid (3) (9)Tax paid (463) (473)Payments relating to exceptional charges (52) (11)--------------------------------------------------------------------------------------------------------Net cash flow from continuing operating activities 18 833 250Net cash flow from discontinued operating activities 18 - 16--------------------------------------------------------------------------------------------------------Net cash flow from operating activities 18 833 266--------------------------------------------------------------------------------------------------------Purchase of interests in subsidiary undertakings and businesses net of cash and cash equivalents acquired (5) (35)Disposal of interests in subsidiary undertakings and businesses net of cash and cash equivalents disposed (26) 84Purchase of intangible assets (94) (90)Disposal of intangible assets 13 26Purchase of property, plant and equipment (252) (451)Disposal of property, plant and equipment - 14Dividends received from joint ventures and associates - 1Investments in joint ventures and associates (2) (104)Disposal of interests in associates and other investments 4 11Interest received 23 48Net sale / (purchase) of other financial assets - (16)--------------------------------------------------------------------------------------------------------Net cash flow from investing activities 18 (339) (512)--------------------------------------------------------------------------------------------------------Re-purchase of ordinary share capital - (156)Issue of ordinary share capital 14 1 ---------- ---------- Interest paid in respect of finance leases (24) (40) Other interest paid (47) (50) Distribution to unit holders of The Consumers' Waterheater Income Fund (14) (11) ---------- ----------Interest paid (85) (101) ---------- ---------- Cash inflow from additional debt 489 638 Cash outflow from payment of capital element of finance leases (8) (23) Cash outflow from repayment of other debt (726) (126) ---------- ----------Net cash flow from (decrease) / increase in debt (245) 489Realised net foreign exchange gain / (loss) on cash settlement of derivative contracts 21 (35)Equity dividends paid (115) (120)--------------------------------------------------------------------------------------------------------Net cash flow from financing activities 18 (410) 78--------------------------------------------------------------------------------------------------------Net increase / (decrease) in cash and cash equivalents 84 (168)Cash and cash equivalents at 1 July (i) 511 1,335Effect of foreign exchange rate changes (3) 10--------------------------------------------------------------------------------------------------------Cash and cash equivalents at 31 December (i) 592 1,177--------------------------------------------------------------------------------------------------------(i) Cash and cash equivalents are stated net of overdrafts of £48 million (2005: £62 million).\* T 15 Segmental analysis for the six months ended 31 December \* T 2006 2005 (restated) -------------------------------- --------------------------------------- Less Less inter- inter- Gross segment Gross segment segment revenue Group segment revenue Group revenue (i) revenue revenue (i) revenue(a) Revenue £m £m £m £m £m £m--------------------------------------------------------------------------------------------------------------------Continuing operations: British Gas Residential 3,074 - 3,074 2,813 - 2,813 British Gas Business 1,134 - 1,134 785 - 785 British Gas Services 583 - 583 528 - 528 -------------------------------- --------------------------------------- Industrial sales and wholesaling 466 (67) 399 453 (53) 400 Gas production 360 (189) 171 659 (546) 113 Accord energy trading 30 - 30 21 - 21 -------------------------------- --------------------------------------- Centrica Energy 856 (256) 600 1,133 (599) 534 Centrica Storage 207 (39) 168 147 (38) 109 North American Energy and Related Services 2,009 - 2,009 1,952 - 1,952 European Energy 154 - 154 106 - 106 Other operations - - - 5 - 5-------------------------------------------------------------------------------------------------------------------- 8,017 (295) 7,722 7,469 (637) 6,832--------------------------------------------------------------------------------------------------------------------Discontinued operations: Onetel - - - 181 (1) 180-------------------------------------------------------------------------------------------------------------------- - - - 181 (1) 180--------------------------------------------------------------------------------------------------------------------\* T (i) Accord energy trading carries out certain sales transactions on behalf ofthe Group's Industrial sales and wholesaling segment. The Group considers thatit is not reflective of the trading relationship between the segments to presentthese transactions as inter-segment revenue within the Industrial sales andwholesaling segment. The comparative information has been restated accordingly.The effect of the restatement is to reduce gross segment revenue andinter-segment revenue for Industrial sales and wholesaling by £431 million forthe six months ended 31 December 2005. There is no effect on Group revenue orsegment operating profit. \* T Operating profit/(loss) Operating before profit/(loss) exceptional items after exceptional and certain items and re- Certain re- certain re-(b) Operating profit measurements Exceptional items measurements measurements ----------------- ----------------- ----------------- ----------------- 2006 2005 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m £m £m-----------------------------------------------------------------------------------------------------Continuing operations: British Gas Residential 238 (75) (214) (61) (415) 124 (391) (12) British Gas Business 76 22 - (1) (282) 62 (206) 83 British Gas Services 58 52 (66) (15) - - (8) 37 -------- -------- -------- -------- -------- -------- -------- -------- Industrial sales and wholesaling (78) (136) - - 278 (272) 200 (408) Gas production 160 480 - - 18 (23) 178 457 Accord energy trading 25 16 - - 9 40 34 56 -------- -------- -------- -------- -------- -------- -------- -------- Centrica Energy 107 360 - - 305 (255) 412 105 Centrica Storage 135 97 - - 2 (2) 137 95 North American Energy and Related Services 102 98 - - (33) 51 69 149 European Energy 11 (12) - - (15) - (4) (12) Other operations 23 2 (9) (23) - - 14 (21)----------------------------------------------------------------------------------------------------- 750 544 (289) (100) (438) (20) 23 424-----------------------------------------------------------------------------------------------------Discontinued operations: The AA - - - 12 - - - 12 Onetel (11) 14 - (4) - - (11) 10----------------------------------------------------------------------------------------------------- (11) 14 - 8 - - (11) 22-----------------------------------------------------------------------------------------------------\* T \* T 16 Exceptional items and certain re-measurements for the six months ended 31 December 2006\* T \* T 2006 2005(a) Exceptional items £m £m------------------------------------------------------------------------------------------Exceptional items recognised in continuing operations Systems write-down (i) (196) - Business restructuring costs (ii) (87) (100) Rough storage incident (iii) (6) -------------------------------------------------------------------------------------------Total exceptional items recognised in continuing operations (289) (100)------------------------------------------------------------------------------------------Exceptional items recognised in discontinued operations Adjustment to profit on disposal of the AA - 13 Loss on disposal of Onetel - (5)------------------------------------------------------------------------------------------Total exceptional items recognised in discontinued operations - 8------------------------------------------------------------------------------------------(i) The Group has written down certain of its recent major systems developmentsfollowing a review of their existing and required future functionality. The costcomprises write-downs in British Gas Residential (£178 million) and British GasServices (£18 million). A tax credit of £59 million was recognised in respect ofthese costs.(ii) Business restructuring costs comprise £67 million from staff reductions at thecorporate centre (£3 million), British Gas Residential (£16 million), and BritishGas Services (£48 million), and £20 million relating to the closure of the headoffice of British Gas Residential. A tax credit of £20 million was recognised inrespect of these costs. Business restructuring costs in 2005 comprised £100 millionresulting from staff reductions at the corporate centre (£23 million), British GasResidential (£43 million), British Gas Services (£15 million), British Gas Business(£1 million) and £18 million relating to changes to the property portfolio. A taxcredit of £23 million was recognised in respect of these costs.(iii) Centrica Storage operations at Rough suffered a major interruption caused by afire in February 2006. Our investment in new emergency shutdown systems and promptmanagement action mitigated the damage to ensure no loss of life. Following a fullassessment of the work needed to restore operations, the costs of the incident haveresulted in an exceptional charge before taxation of £48 million, of which £6million has arisen in the second half of the year. A tax credit of £14 million wasrecognised in respect of these costs, with £2 million arising in the second half ofthe year. 2006 2005(b) Certain re-measurements £m £m------------------------------------------------------------------------------------------ Net (losses) / gains arising on delivery of contracts (114) 57 Net (losses) / gains arising on market price movements and new contracts (333) (116) Net (losses) / gains arising on proprietary trades in relation to cross-border transportation or capacity contracts 24 39------------------------------------------------------------------------------------------Net re-measurement of energy contracts included within gross profit (423) (20)------------------------------------------------------------------------------------------Net losses arising on re-measurement of joint ventures' energy contracts (15) -------------------------------------------------------------------------------------------Net re-measurement included within Group operating profit (438) (20)------------------------------------------------------------------------------------------Gains arising on re-measurement of the publicly traded units of The Consumers' Waterheater Income Fund 3 4------------------------------------------------------------------------------------------Total certain re-measurements (435) (16)------------------------------------------------------------------------------------------\* T 17 Earnings per ordinary share for the six months ended 31 December \* T 2006 2005 --------------------- --------------------- Pence per Pence per ordinary ordinaryContinuing and discontinued operations £m share £m share--------------------------------------------------------------------------------------------------------(Loss) / earnings - basic (95) (2.6) 142 4.1Net exceptional items after tax 208 5.8 69 1.9Certain re-measurement gains and losses after tax 317 8.6 16 0.3--------------------------------------------------------------------------------------------------------Earnings - adjusted basic 430 11.8 227 6.3-------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------(Loss) / earnings - diluted (95) (2.6) 142 4.1--------------------------------------------------------------------------------------------------------\* T 18 Notes to the Group Cash Flow Statement for the six months ended 31 December \* T(a) Reconciliation of Group operating profit to net cash flow from operating 2006 2005 activities £m £m--------------------------------------------------------------------------------------------------------Continuing operationsGroup operating profit including share of result of joint ventures and associates 23 424Less share of profits / (losses) of joint ventures and associates 12 (14)--------------------------------------------------------------------------------------------------------Group operating profit before share of result of joint ventures and associates 35 410Add back: Amortisation of intangible assets 47 51 Depreciation of property, plant and equipment 260 206 Systems write-down 196 - Employee share scheme costs 12 8 Profit on sale of businesses (4) (6) Profit on sale of property, plant and equipment, and other intangible assets (7) (17) Movement in provisions 58 79 Re-measurement of energy contracts (i) 421 21--------------------------------------------------------------------------------------------------------Operating cash flows before movements in working capital 1,018 752Increase in inventories (60) (26)Increase in receivables (691) (1,084)Increase in payables 1,078 1,096--------------------------------------------------------------------------------------------------------Cash generated from continuing operations 1,345 738Income taxes paid (192) (181)Petroleum revenue tax paid (271) (292)Net interest received / (paid) 3 (4)Payments relating to exceptional charges (52) (11)--------------------------------------------------------------------------------------------------------Net cash flow from continuing operating activities 833 250--------------------------------------------------------------------------------------------------------(i) Includes net £2 million unrealised losses / (profits) arising from re-measurement of contracts, including those relating to proprietary trading and North American storage activities. 2006 2005 £m £m--------------------------------------------------------------------------------------------------------Discontinued operationsOperating profit before share of result of joint ventures and associates - 14Add back: Depreciation of property, plant and equipment - 2 Employee share scheme costs - 1 Movement in provisions - (2)--------------------------------------------------------------------------------------------------------Operating cash flows before movements in working capital - 15Increase in receivables - (1)Increase in payables - 2--------------------------------------------------------------------------------------------------------Cash generated from discontinued operations - 16--------------------------------------------------------------------------------------------------------Net cash flow from discontinued operating activities - 16--------------------------------------------------------------------------------------------------------Net cash flow from operating activities 833 266-------------------------------------------------------------------------------------------------------- 2006 2005(b) Net cash flow from investing activities £m £m--------------------------------------------------------------------------------------------------------Continuing operations (336) (495)Discontinued operations (3) (17)--------------------------------------------------------------------------------------------------------Net cash flow from investing activities (339) (512)-------------------------------------------------------------------------------------------------------- 2006 2005(c) Net cash flow from financing activities £m £m--------------------------------------------------------------------------------------------------------Continuing operations (410) 64Discontinued operations - 14--------------------------------------------------------------------------------------------------------Net cash flow from financing activities (410) 78--------------------------------------------------------------------------------------------------------\* T Disclaimers This announcement does not constitute an invitation to underwrite, subscribefor, or otherwise acquire or dispose of any Centrica shares or other securities. This announcement contains certain forward-looking statements with respect tothe financial condition, results, operations and businesses of Centrica plc.These statements and forecasts involve risk and uncertainty because they relateto events and depend on circumstances that will occur in the future. There are anumber of factors that could cause actual results or developments to differmaterially from those expressed or implied by these forward looking statementsand forecasts. Past performance is no guide to future performance and persons needing adviceshould consult an independent financial adviser. For further information: Centrica will hold its 2006 Preliminary Results presentation for analysts andinstitutional investors at 9.30am (GMT) on Thursday 22 February 2007. There willbe a live webcast of the presentation and slides from 9.30am atwww.centrica.com/investors. The live broadcast of the presentation will be available by dialling in usingthe following numbers: \* TFrom the UK 0845 245 3471From overseas +44 1452 561 394\* T The call title is "2006 Preliminary Results Announcement" and the pass-code is7492782. An archived webcast and full transcript of the presentation and the question andanswer session will be available on the website on Monday 26 February 2007. Enquiries \* TInvestors and Analysts: Kieran McKinney Director of Investor Relations Telephone: 01753 494 900 email: [email protected] Media: Mish Tullar Head of Media Relations Telephone: 01753 494 085 email: [email protected]\* T Financial Calendar \* T Ex-dividend date for 2006 final dividend 25 April 2007 Record date for 2006 final dividend 27 April 2007 Annual General Meeting 14 May 2007 2006 final dividend payment date 13 June 2007 Pre-close Trading Update 15 June 2007 2007 interim results announcement 2 August 2007\* T Registered Office \* TMillstreamMaidenhead RoadWindsorBerkshireSL4 5GD\* T Copyright Business Wire 2007

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