Final Results

21st Feb 2008 07:00

Centrica plc Preliminary results for the year ended 31 December 2007 Financial overview: -- Group results in line with trading update in December 2007 -- Revenue^ down 0.4% at £16.3bn -- Operating profit*^ up 40% to £1,949m -- Earnings*^ up 60% to £1,121m -- Adjusted basic earnings per share up 58% to 30.6p -- Recommended final dividend of 9.65p/share, full year dividend of 13p/share, up 17% Operating overview: -- Growth in Group profits driven by strong first six months -- British Gas Residential customer service significantly improved. Over 200,000 customers returned to British Gas in the second half -- Gas production volumes up 18% on prior year -- Investment in upstream asset base up 71% on prior year at £801m -- Growth businesses all produced record profits "2007 was a year of substantial achievement for Centrica during which we madefurther progress on addressing the key priorities for the business. This willenable us to move forward with a leaner and more focused business and toconcentrate on securing growth in the competitive markets in which we operate". Sam Laidlaw, Chief Executive * including joint ventures and associates net of interest and taxation, andbefore exceptional items and certain re-measurements ^ from continuing operations 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 £2,184m (2006: £130m) -- Earnings £1,505m (2006: Loss of £155m) -- Basic earnings per ordinary share 41.0p (2006: Basic loss per ordinary share 4.3p) Chairman's Statement Performance review Centrica delivered very strong financial results during another challenging yearfor UK energy retailers. New pipelines from Norway and the Netherlands, which were underpinned by longterm gas contracts with British Gas, began to bring additional gas to the UK andhelped to bring down wholesale gas prices at the start of the year. This allowedus to show leadership in the market by passing reductions in the wholesale priceon to our customers by reducing our retail prices in March and April.Unfortunately the spectre of high wholesale energy prices appeared again in thesecond half of the year as global oil prices reached record highs and this hascontinued into the start of 2008. As a result it was necessary for us to raisecustomer tariffs last month. Management worked diligently through 2007 to minimise the impact of risingwholesale energy prices, making substantial inroads into the operating cost baseof British Gas and extracting efficiencies where possible. At the same time wemust continue to invest in high quality energy assets to serve our UK andinternational customers and this reinvestment in our business can only be fundedthrough the consistent delivery of reasonable and sustainable profits. In February last year Sam Laidlaw clearly set out four priorities for Centricaand I believe that management has made some real progress against theseobjectives. Sam reports on this progress in detail in his review of the year. British Gas delivered strong financial returns in a year when it also reversedthe decline in the size of its customer base. This was achieved not only throughlower commodity costs in the first half but also through lower pricing, thecontinued removal of excess costs, the launch of more innovative propositionsand a dedication to improving customer service. During the year Centrica Energycompleted a gas acquisition in the North Sea and acquired additional gasexploration acreage with strong future potential. We continue to look foropportunities to acquire more substantial gas assets. Our growth businesses performed very strongly in 2007. British Gas Business andBritish Gas Services delivered record results, underpinned by ongoing growth incustomer numbers. In North America, Direct Energy also delivered record profitsagainst the backdrop of a weakening housing market, early signs of an economicdownturn in the United States and adverse exchange rate movements. It was alsoanother year of record profits in Centrica Storage. In Europe however, while theCommission remains supportive of real network unbundling, meaningful progress onmarket deregulation was limited. Dividend The Board is proposing a final dividend of 9.65 pence (2006: 8.0 pence) forpayment in June 2008 bringing our full-year dividend to 13 pence (2006: 11.15pence). This represents an 17% year-on-year increase, in line with our policyand commitment to sustained real growth in the ordinary dividend. Board changes Early in the year we changed the structure of our executive management team,with Phil Bentley assuming the role of Managing Director of British Gas, JakeUlrich adding Europe to his responsibilities as Managing Director of ourupstream activities and Nick Luff joining Centrica from P&O as Group FinanceDirector. I believe that under the leadership of Sam Laidlaw the team hasalready begun to make a real difference to both the short-term performance andthe long-term prospects of Centrica. Our employees In a business such as Centrica, people are central to the delivery of betterservice and improving financial results. Our employees have worked hard tosupport the change in systems, working practices, organisation structure andmanagement within the Company. I thank them all for their loyalty, hard work anddedication. It is a credit to them that British Gas Business and British GasServices were both recognised in the Financial Times Top 50 "Best Workplaces for2007." The future Wholesale energy prices remain extremely volatile and the high gas price at thestart of 2008 has squeezed retail supply margins in the UK. In thesecircumstances retail price increases have been necessary in order to restorereasonable margins. We will, however, continue to take all possible actions tominimise the impact to our customers whilst delivering the level ofprofitability required to underpin the investments necessary to secureadditional high quality upstream assets. We have set out a clear agenda for Centrica in the form of four strategicpriorities and we will continue to focus on these as we move forward. In doingthis we will seek to strike the appropriate balance between driving increasedefficiencies in the current core UK energy business, providing growth across theGroup and evaluating and securing additional quality upstream assets to reduceexposure to short-term commodity price movements. Only by delivering against ourpriorities will we be able to satisfy our customers and reward our employeeswhile maximising returns for our shareholders. \* TRoger CarrChairman 21 February 2008\* 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 December2007. All references to 'the prior-period', 'the prior-year', '2006' and 'lastyear' mean the 12 months ended 31 December 2006 unless otherwise specified. Chief Executive's Review Overview of 2007 Centrica delivered a very strong set of financial results during a year of twovery distinct periods. In the first half of the year the UK experienced benignwholesale energy prices as a result of increased gas supply through new gaspipelines from Norway and The Netherlands and additional Liquefied Natural Gasfacilities which coincided with lower demand due to warmer weather than normal.During the second half of the year the day ahead wholesale gas price rosesharply, averaging 56% higher than during the first half. This meant that overtwo thirds of Group earnings* were delivered in the first six months of theyear. It also created a much more difficult environment for all energy retailersin the UK towards the end of 2007 and into the early part of 2008 whichmaterially impacted margins in the residential energy supply business. In February we laid out the four priorities that formed the management agendathrough 2007 and will continue to shape our actions as we move Centrica forward.We set out to: -- Transform British Gas -- Sharpen the organisation and reduce cost -- Reduce risk through increased integration -- Build on our growth platforms On the first of our priorities, in British Gas we led residential prices loweras we reduced prices twice for our credit customers, in March and April, by atotal of 20% in gas and 17% in electricity. We also established the lowestdual-fuel tariff in the UK through our internet offering Click Energy. Havingcompleted the migration of all of our customer accounts to the new billingsystem in March we concentrated on improving the service delivered to ourcustomers, which had suffered during the migration process. Our efforts began tomake a real difference towards the end of the year. By the end of the year, fromour highest point in April, we had reduced the time taken to answer customercalls in the second half by 75%, eliminated the entire correspondence backlogand reduced the level of monthly complaints by over 80%. We also continued toreduce the operating costs within British Gas, removing £139 million from the2006 baseline. To further improve service levels remains a key deliverable for2008. Combined with the fall in commodity prices in the first six months, theseachievements helped deliver an excellent operating profit* result for the yearand recover the market share which we had lost during the first quarter tofinish 2007 with 16 million customer accounts. To begin to address our second priority we made several changes to the structureof our business during the year. We began to measure the profitability of ourpower generation fleet separately. We created three distinct profit centreswithin British Gas Residential to better address the different requirements ofdifferent customers and increase the accountability for profitability. A newcapital allocation framework requiring increasingly rigorous and consistentassessment of each opportunity is now helping us to direct our capital to theareas of highest potential return. We made further inroads into our operatingcosts with the outsourcing of parts of our Human Resources, Finance andInformation Systems functions and rationalisation of the corporate centre,removing over £30 million of annual costs. Direct Energy was also reorganised toincrease focus on customer service and accelerate growth in new business areas. On our third priority, although progress has not been as rapid as we had hoped,we did take some important steps during the year. We want to be able to providea greater proportion of our gas requirements from our own resources through amixture of equity production and new differentially indexed contracts and tocontinue to develop our electricity generation capability. Late in the year weacquired Newfield UK Holdings Limited for £242 million. This brought us aproducing gas field, two development prospects and interests in six licenceswith the potential to add around 300 billion cubic feet (bcf) of gas reserves inthe North Sea. We also acquired interests in licences in Norway and Trinidadbringing our total at the end of the year to 19. From the winter of 2010/11 wewill now have access to an additional 2.4 billion cubic metres (BCM) of LNGimport capacity at the Isle of Grain terminal to add to the 3.4BCM we will haveavailable from October 2008. In November we bid for Rockyview Energy Inc in Alberta and completed the dealearly in 2008. This adds an additional 43bcf of gas to our Direct Energybusiness. In Centrica Storage the creation of an innovative virtual storageproduct helped to drive a year of record profitability. We also made goodprogress on new power generation assets in the UK and remain on schedule to havethe 885Megawatt (MW) Langage gas-fired power station project operational in thefirst quarter of 2009. We also expect to be ready to generate the first powerfrom the 180MW offshore wind farm at Lynn and Inner Dowsing in the third quarterof 2008. We currently have a portfolio of 430MW of offshore wind projects in theconstruction or early planning stage which will keep us at the forefront ofrenewable generation. Late in the year, due to ongoing delays in the granting ofplanning permission, we withdrew from the consortium which is assessing theviability of constructing an LNG terminal at Canvey Island. We were alsodisappointed by the omission of pre-combustion carbon removal projects frompotential government financial support. This is likely to affect our EstonGrange clean coal power generation project on Teesside. We made strong progress during the year on our fourth priority, to build ourgrowth businesses more rapidly. British Gas Business delivered a record year ofprofitability with a growing customer base and improving levels of customersatisfaction. In British Gas Services we grew operating profit by 48% over 2006with continued growth of 7% in the number of customer relationships and afundamental turnaround in service levels compared to the early part of 2006. InDirect Energy, before exchange rate movements, we grew operating profit by 18%.The second half of the year was weaker against the backdrop of increasingcompetition in our key residential energy market of Texas and a slowing USproperty market which restricted growth in the services business. We also madefurther progress in improving the balance of the business with the Commercialand Industrial energy business moving into profit for the first time andUpstream and Wholesale Energy more than doubling its contribution. In March welaunched British Gas New Energy to build on our leading position in energyefficiency in the UK and to maximise the potential to Centrica of the growingconsumer awareness of climate change. In summary, 2007 was a year of considerable change and substantial achievementfor Centrica during which we made some strong progress in addressing the keypriorities for our business. This will enable us to move forward with a leanerand more focused business and continue to concentrate on those things which makeus increasingly competitive in the markets in which we operate. Business outlook We will continue to focus our efforts on making progress against the fourpriorities which we set out early in 2007. On our first priority of transformingBritish Gas, our main focus will continue to be the improvement of customerservice while delivering sustainable returns. We are striving to return to thetop of the league table for customer service and we will measure our progress inline with the rest of the industry by tracking the drop in the number ofcomplaints made by our customers. Longer term we believe that for all energysuppliers to substantially improve customer service requires a nationwideinvestment in smart metering technology. We continue to focus on costs and in2008 we expect to remove from the operating cost base the additional £60 millionwhich was delayed in 2007 as improving customer service became an even greaterpriority. We will also increase our investment in the British Gas brand as weseek to rebuild its relevance to consumers, not only as a provider of energy butof energy efficiency advice and services. On our second priority we will be relentless in our efforts to remove excesscost from our entire business and identify and re-engineer any remainingoutdated processes and procedures. In the pursuit of value we will concentrateon driving inefficiencies out of the business, maximising our growth potentialand generating appropriate returns on the capital we invest. In doing this wewill establish and report on a package of performance measures which will helpinvestors understand the shifting dynamics of each of our businesses. Priority three, to reduce risk through increased integration, will be at the topof our agenda in 2008. We intend to build on the successes of 2007 and to deploycapital here even more rapidly while retaining the same focus on value creation.Good quality power generation and gas assets that fit our profile, both in theUK and internationally, will continue to be a focus for us. During 2008 we willassess further opportunities in gas storage and develop our gas explorationprospects in the UK, Norway and Nigeria. Last month's European Commissionannouncement of draft legislation also set new renewables targets for the UKover the period to 2020. Given our position as the largest residentialelectricity supplier in Great Britain with the lowest carbon intensity, we willevaluate our options to contribute further to what needs to be a very largescale UK offshore renewables project. In delivering our fourth priority of building on our growth platforms we willcontinue to drive both top and bottom line improvement. In British Gas Businesswe will seek to maintain our current growth trajectory on customer numbersthrough ongoing development of our routes to market while focusing also onfurther enhancing the service we deliver. In British Gas Services we willcontinue to improve service levels, particularly in the busy winter months, growour customer base by developing new care and on-demand propositions and furtherimprove the operational efficiency of the business. British Gas New Energy willbe increasingly important in 2008, leading the way in responding to the risingdemand among consumers for products and services which deliver energy efficiencyand reduce carbon emissions. Last month we announced a stronger contractualrelationship with Ceres Power around the development of a domestic Combined Heatand Power boiler using ground-breaking fuel cell technology, supported by a £20million equity investment. We will seek to identify more ways to move theclimate change agenda forward and to keep British Gas at the forefront of thismovement. In Direct Energy there is real potential to grow this business bothorganically and through acquisition. Near term prospects here will be affectedby the depth and length of any economic downturn but we will seek to minimiseany impact through the increasing diversity of our business streams and thebuilding of more material businesses in upstream and wholesale energy and incommercial and industrial energy. Europe remains challenging. This year we willconcentrate on simplifying the ownership structure of SPE in Belgium as themerger of Suez and Gaz de France proceeds. We will also continue to grow ourBelgian, Dutch and Spanish businesses and establish ourselves firmly in theindustrial and commercial market in Germany. Trading outlook At the start of 2008 high wholesale energy prices once again challenged shortterm operating margins for UK energy retailers. In British Gas Residential thisleft us no option but to raise tariffs to our customers by 15% in January.Although this was disappointing, retail prices are still lower than at the sametime last year. The favourable commodity picture we experienced in the first half of the year,which drove higher profits in the residential supply business and which wasbehind the stronger 2007 earnings, is unlikely to be repeated in 2008. While thecurrent forward market gas price provides a more positive outlook for our gasproduction business it would make the legacy industrial and commercial contractsloss making. A greater proportion of upstream profits in the year would increasethe Group effective tax rate. We will, however, be steering the same course in 2008 as we have in 2007, guidedby the priorities that I set out a year ago. The UK market is challenged by highwholesale energy prices which appear to be taking their lead from the oil-linkedgas markets of continental Europe and our other markets are feeling the effectsof weakening economic conditions. In this environment it is important that weremain single-minded in making our operations leaner and more efficient to giveus the maximum chance of success both in the UK and internationally. \* TSam LaidlawChief Executive 21 February 2008\* T Group Financial Summary Group revenue from continuing operations remained broadly flat at £16.3 billion(2006: £16.4 billion). Increases in British Gas Services and British GasBusiness as well as the first reported revenues from our Power Generationbusiness were offset by the reduction seen in British Gas Residential due tolower gas and power consumption levels. Group operating profit* from continuing operations was up 40% at £1,949 million(2006: £1,392 million). The year-on-year movement was primarily due to theturnaround in the profitability of British Gas Residential and the industrialand commercial gas supply contracts due to the reduction in the wholesale gasprice in the first half of 2007. Record operating profits* were also made inBritish Gas Business, British Gas Services, Centrica Storage and Direct Energy. The statutory profit for the year was £1,505 million (2006: loss of £155million). The reconciling items between adjusted Group profit* and the statutoryprofit are exceptional items and certain re-measurements and discontinuedoperations that are explained below. Group earnings* on a continuing basis were up by 60% to £1,121 million (2006:£701 million). This growth in earnings* came from the higher operating profit*combined with a significant change in profit mix towards greater downstreamcontributions, resulting in a lower effective group tax rate of 40% in the year(2006: 44%). Interest payments were also lower, at £73 million (2006: £141million), following the favourable cashflow position held for most of the year.The interest charge includes a one-off charge of £40 million relating to theearly repayment of the finance lease on the Humber power station, which helpssimplify the Group's debt structure. Group operating cash flow before movements in working capital was up from £1,892million in 2006 to £2,494 million. After working capital adjustments,operational interest, tax, exceptional charges and discontinued items this stoodat £2,357 million (2006: £737 million). This increase in operating cash flow isprimarily due to increased earnings and a decrease in the amount of tax paid.The net cash outflow from investing activities increased to £964 million (2006:£720 million), 34% higher than last year due to the Group's acquisition ofNewfield UK Holdings Limited and a 50% share in the Braes of Doune wind farm.The net cash outflow from financing activities increased to £888 million (2006:£597 million), an increase of 49% on 2006, due mainly to the prepayment of theHumber finance lease resulting in a net cash outflow of £368 million related toprincipal and £54 million related to interest. The Group's net recourse debt level at 31 December 2007 was £795 million (2006:£1,527 million). This was down from 2006 due primarily to the improved operatingcash flow. This debt includes £417 million of finance lease commitments on theSpalding power station. As a result of changes in the relationship with The Consumers' WaterheaterIncome Fund, with effect from 1 December 2007 we no longer consolidate theperiod results and the balance sheet of the Fund in Centrica's Group accounts.This has reduced the Group's net borrowings by £573 million. These borrowingswere previously classified as non-recourse and hence not included in netrecourse debt. During the year net assets increased to £3,382 million from £1,642 million as at31 December 2006. In addition to the retained earnings, net assets wereincreased by positive movements on the mark-to-market of the Group's financialinstruments as detailed below. Exceptionals There were no exceptional items reported in continuing operations in 2007,(2006: pre-tax charge of £331 million). Discontinued operations The Consumers' Waterheater Income Fund was deconsolidated on 1 December 2007,the closing date of an Internalisation Agreement entered into between DirectEnergy and the Fund which materially altered the relationship between the twoentities. Details of the impact of the deconsolidation are included in note 1(d)and note 14(ii). 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 credits to operating profit relating to thesere-measurements of £235 million (2006: net charge of £931 million), primarilyfrom marking-to-market some contracts relating to our energy procurementactivities. As gas and power were delivered under these contracts, the netout-of-the-money mark-to-market positions were unwound generating a net creditto the Income Statement in the period of £352 million (2006: net charge of £287million). As the forward prices increased in 2007 the portfolio of contractsfair valued under IAS 39 reported a net charge on revaluation of £104 million(2006: charge of £638 million). The remaining charge of £13 million (2006:charge of £6 million) reflects the proprietary trading positions relating tocross border capacity and storage contracts. British Gas Residential Overall 2007 was a strong year for British Gas as we delivered an excellentfinancial result, with margins above our long run expectations. We also madeconsiderable progress in improving customer service and stabilising the size ofour customer base. The commodity price environment during the year was extremely volatile, with afall in wholesale gas prices early in the year leading to a rapid expansion inmargins and enabling British Gas to be the first energy supplier to announcereduced prices for customers. In March we lowered prices for credit customers ingas by 17% and in electricity by 11% and followed this up in April with afurther 3% reduction in gas prices and 6% in electricity prices. However,wholesale gas and power prices rose through the second half of the year andsqueezed margins in this period to just above breakeven. The quality of our customer service had suffered through 2006 and into the earlypart of 2007 as we migrated all of our customers to a new billing system. Sincecompleting this migration operational exceptions have been running at a higherlevel. We have continued to improve the data quality in our systems and havefocused on the overall service levels we provide to our customers. In the secondhalf of the year we improved the time taken to answer inbound customer telephonecalls by 75% from its highest point in April and we eliminated the entirebacklog of customer email and written correspondence. The results of ourimproving service were reflected in the level of customer complaints toenergywatch which had fallen from the high point in April by over 80% byDecember. Our more competitive pricing and the improvements we've made to customer servicehelped us to stabilise our customer base in 2007. From a low point in April of15.8 million energy accounts we have returned once again to serving just over 16million accounts. As part of the transformation of British Gas we have improved accountability forthe customer experience and the operating performance by reorganising into threeseparate lines of business. This resulted in the creation of a dedicated "pay asyou go" business to focus directly on customers who use prepayment meters, wherefundamentally different processes are required. We have also split the remainingbusiness between the lower volume customers and those who make up the highestvalue segment. Revenue for the year decreased by 9% to £6,457 million (2006: £7,112 million)due to lower average customer numbers across the year and lower average energyconsumption levels as a result of unusually warm weather, particularly in theearly part of the year. Operating profit* however increased to £571 million (2006: £95 million) with themajority delivered in the first half of the year, £533 million (2006: a loss of£143 million). This was due to lower commodity costs and lower controllableoperating costs. Commodity costs were down by just over £1 billion to £3.2 billion, more thanoffsetting the revenue reduction. This net benefit was partially offset by theongoing increases in energy transportation and distribution costs which were upby £92 million over 2006. The cost of delivering our Energy EfficiencyCommitment (EEC) in the year was £91 million (2006: £90 million). As EEC is amandatory cost of supply for all the major energy suppliers we now account forthis cost within cost of goods rather than operating expenses and have restatedthe comparable figures for 2006 accordingly. Operating costs decreased by £139 million to £800 million (2006: £939 million).While we continued our drive to reduce costs there was a delay in this reductionin 2007 as we placed an even greater priority on the improvement in customerservice. We expect to remove an additional £60 million of operating costs in2008, achieving the full £200 million of targeted savings against the 2006baseline. \* TFor the period ended 31 December FY 2007 FY 2006 ^% H2 2007 H2 2006 ^%--------------------------------------------------------------------------------------------------Customer numbers (period end):Residential gas ('000) 10,018 10,263 (2.4) 10,018 10,263 (2.4)Residential electricity ('000) 6,019 5,759 4.5 6,019 5,759 4.5--------------------------------------------------------------------------------------------------Total ('000) 16,037 16,022 0.1 16,037 16,022 0.1--------------------------------------------------------------------------------------------------Estimated market share (%):Residential gas# 46.4 47.9 (1.5ppts) 46.4 47.9 (1.5ppts)Residential electricity# 22.4 21.6 0.8ppts 22.4 21.6 0.8ppts--------------------------------------------------------------------------------------------------Average consumption:Residential gas (therms) 541 569 (4.9) 248 205 21Residential electricity (kWh) 3,945 4,069 (3.0) 1,990 1,940 2.6--------------------------------------------------------------------------------------------------Total consumption:Residential gas (mmth) 5,443 6,120 (11) 2,477 2,158 15Residential electricity (GWh) 23,001 23,842 (3.5) 11,765 11,268 4.4--------------------------------------------------------------------------------------------------Transportation & distribution costs (£m):Residential gas 1,172 1,110 6 566 472 20Residential electricity 541 511 6 273 257 6--------------------------------------------------------------------------------------------------Total 1,713 1,621 6 839 729 15--------------------------------------------------------------------------------------------------Energy Efficiency Commitment (£m):EEC 91 90 1.1 48 45 7--------------------------------------------------------------------------------------------------Operating costs (£m):British Gas Residential 800 939 (15) 387 496 (22)--------------------------------------------------------------------------------------------------Revenue (£m):Residential gas 4,296 4,832 (11) 1,849 1,948 (5)Residential electricity 2,161 2,280 (5) 1,111 1,126 (1.3)--------------------------------------------------------------------------------------------------Total 6,457 7,112 (9) 2,960 3,074 (3.7)--------------------------------------------------------------------------------------------------Operating profit/(loss) (£m)*British Gas Residential 571 95 501 38 238 (84)--------------------------------------------------------------------------------------------------Operating margin (%)British Gas Residential 8.8 1.3 7.5ppts 1.3 7.7 (6.4ppts)--------------------------------------------------------------------------------------------------\* T # Market shares for 2006 are based on a gas market size of 21,403,959 and anelectricity market size of 26,695,229, as stated by Ofgem in its Domestic MarketRetail Report - March 2006. # Market shares for 2007 are based on a gas market size of 21,567,261 and anelectricity market size of 26,917,561, as stated by Ofgem in its Domestic MarketRetail Report - June 2007. British Gas Business British Gas Business performed well during the year. Against a backdrop ofvolatility in commodity markets we delivered a record financial result and grewour customer base while continuing to improve our customer satisfactionmeasures. Revenue increased by 6% to £2,431 million (2006: £2,303 million) due to the netpositive impact of price changes during 2006 and 2007, higher customer numbersin both fuels and higher average consumption in electricity driven by theincrease in the number of large corporate customers. This was only partiallyoffset by the lower average consumption in gas which resulted from warm weatherprimarily in the first half of the year. Customer supply point numbers increasedby 2% to 954,000 (2006: 932,000) on strong sales performance and the maintenanceof high contract renewal rates particularly in our SME business. Operating profit* was up 38% to £120 million (2006: £87 million). This includeda contribution of £38 million (2006: £29 million) from a favourable historicelectricity procurement contract. This contract will also provide a smallbenefit in 2008 before it expires. The primary drivers of the year-on-yearuplift were the widening of margins during the contract renewal process and thepositive effect of the lower commodity prices on the tariff book. These positiveimpacts on gross margin enabled us to lift operating margins in the year to 4.9%(2006: 3.8%). In customer service we are beginning to see positive results from ourimplementation of a differentiated service model based on dedicated accountmanagers. During the year, while migrating the majority of our gas customeraccounts to our new gas billing system, we improved the level of customersatisfaction across the business. \* TFor the period ended 31 December FY 2007 FY 2006 ^% H2 2007 H2 2006 ^%-------------------------------------------------------------------------------------------------Customer supply points (period end):Gas ('000) 412 400 3.0 412 400 3.0Electricity ('000) 542 532 1.9 542 532 1.9-------------------------------------------------------------------------------------------------Total ('000) 954 932 2.4 954 932 2.4-------------------------------------------------------------------------------------------------Average consumption:Gas (therms) 3,729 4,015 (7) 1,602 1,707 (6)Electricity (kWh) 32,644 30,464 7 16,750 15,455 8-------------------------------------------------------------------------------------------------Total consumption:Gas (mmth) 1,524 1,597 (4.6) 665 682 (2.5)Electricity (Gwh) 17,356 15,864 9 9,056 8,095 12-------------------------------------------------------------------------------------------------Transportation & distribution costs (£m):Gas 174 149 17 89 71 25Electricity 298 261 14 156 137 14-------------------------------------------------------------------------------------------------Total 472 410 15 245 208 18-------------------------------------------------------------------------------------------------Revenue (£m):Gas 1,037 1,115 (7) 441 492 (10)Electricity 1,394 1,188 17 723 642 13-------------------------------------------------------------------------------------------------Total 2,431 2,303 6 1,164 1,134 2.6-------------------------------------------------------------------------------------------------Operating profit (£m)*British Gas Business 120 87 38 72 76 (5)-------------------------------------------------------------------------------------------------Operating margin (%)British Gas Business 4.9 3.8 1.1ppts 6.2 6.7 (0.5ppts)-------------------------------------------------------------------------------------------------\* T British Gas Services British Gas Services performed strongly in 2007 both financially andoperationally. This was supported by the improvements made to customer service,engineer deployment and system stability, which provide us with a strongplatform for continued growth. Revenue was up by 16% at £1,279 million (2006: £1,104 million) as the totalnumber of customer product relationships increased by 7% to 7.6 million (2006:7.1 million). During the year we increased the number of customers who take ourHomecare Flexi product, which provides the customer with a lower price entrypoint to our services, we enhanced our online offerings and continued to promoteour wider product range through cross-selling. We also strengthened our presencein the on-demand market through our central heating repair service fornon-contract customers, with our number of repairs increasing by 19% to 414,000(2006: 347,000). Operating profit* increased by 48% to £151 million (2006: £102 million), aheadof revenue growth, due to the strong growth in higher margin care productsoutside the core Central Heating range, combined with the continued focus oncost control and overhead savings. In addition, profitability in the centralheating installation business grew as the number of installations, includingthose for the Scottish Executive, increased by 24% to 113,000 (2006: 91,000). \* TFor the period ended 31 December FY 2007 FY 2006 ^% H2 2007 H2 2006 ^%--------------------------------------------------------------------------------------------------Customer product holdings (period end):Central heating service contracts ('000) 4,525 4,392 3.0 4,525 4,392 3.0Kitchen appliances care (no. of customers) ('000) 414 387 7 414 387 7Plumbing and drains care ('000) 1,536 1,384 11 1,536 1,384 11Home electrical care ('000) 1,173 986 19 1,173 986 19--------------------------------------------------------------------------------------------------Total holdings ('000) 7,648 7,149 7 7,648 7,149 7--------------------------------------------------------------------------------------------------Central heating installations ('000) 113 91 24 58 49 18--------------------------------------------------------------------------------------------------Revenue (£m)Central heating service contracts 688 614 12 352 316 11Central heating installations 348 264 32 187 150 25Other 243 226 8 124 117 6--------------------------------------------------------------------------------------------------Total 1,279 1,104 16 663 583 14--------------------------------------------------------------------------------------------------Engineering staff employed 9,209 8,676 6 9,209 8,676 6--------------------------------------------------------------------------------------------------Operating profit (£m)*British Gas Services 151 102 48 88 58 52--------------------------------------------------------------------------------------------------Operating margin (%)British Gas Services 11.8 9.2 2.6 ppts 13.3 9.9 3.4 ppts--------------------------------------------------------------------------------------------------\* T Centrica Energy Centrica Energy performed well during a difficult year for our upstream businesswhen the Day Ahead wholesale gas price in the UK fluctuated between a low of 13pence per therm (p/th) in April to a high of 59p/th in December. The operatingprofitability of Centrica Energy was adversely affected by the low wholesale gasprices in the first quarter of the year which reduced the Gas Productionresults. This was partially offset by improved profitability in the legacyindustrial and commercial contracts resulting in overall operating profit* beingdown just 3% to £663 million (2006: £686 million). The segmental reporting disclosure for Centrica Energy now includes the resultsfrom our UK power generation assets as a separate segment, with sales from thissegment to the downstream business based on market prices for power. Theoperating costs of Centrica Energy that were previously held within theindustrial sales and wholesaling segment have been allocated across theappropriate business areas. As the power stations were managed on a differentbasis in 2006, prior period figures have not been restated and no result isreported for the power generation segment for 2006. Gas production and development Gas production and development includes all of the activities relating toproducing gas, oil and condensates and the related exploration and developmentactivities. It contains both our fully owned assets and our share of jointventure assets. Operating profit* for gas production and development was down by 50% to £429million (2006: £864 million). The total hydrocarbon volume produced during theyear was up 17% on the previous year after a difficult first half, with arecovery of production levels in the second half of the year as the wholesaleprice rose and the newly acquired Grove field came on-stream. The low wholesalegas price which affected the first half production levels brought down theaverage price achieved for the gas produced by 43% at 30.4 p/th (2006: 53.1p/th). Oil and condensate production volumes were in line with 2006 at 5.6million barrels of oil equivalent (Mboe). The rate of variable operating costs per Mboe produced decreased year-on-year by5% due to proportionately higher production levels from Morecambe. Otherproduction costs increased due to the inclusion in the 2006 result of profits ondisposal and the underlying cost inflation across the industry whichparticularly affected our joint venture operations. During the year we added an additional 114 billion cubic feet equivalent (bcfe)to our proven and probable gas and liquids reserve base, of which 67bcfe camefrom the acquisition of Newfield UK Holdings Limited in October. We alsoinvested £154 million in developing our current portfolio of upstream assets,primarily on the development of the Maria field, which is currently beingcommissioned, and on the depressurisation of the Statfjord field to bringforward gas recovery. Following additional capital spend we expect to realise a further 238bcfe fromthe Newfield acquisition. During the year we also acquired seven licenceinterests in Norway and one in Trinidad to add to our existing acreage in theUK, Egypt and Nigeria. In November we signed a memorandum of understanding withStatoil and Consolidated Contractors Company to assess the feasibility ofdeveloping LNG projects with our joint Nigerian assets and we commenced seismicactivities on one of these assets. Industrial and commercial The industrial and commercial segment contains the results from the long-termlegacy gas sales contracts. These delivered a profit* of £179 million in theyear, of which £148 million was in the first half, primarily due to the fall ingas prices in the early part of the year and the rising average selling price.The volume of gas delivered reduced by 15% as three contracts ended in September2006. Power generation This segment contains the results from all of the generation assets includingthe Spalding power station which is recognised on the Group Balance Sheet. Totaloperating profit* for the year was £46 million. All of the profit was deliveredin the first half of the year when the low gas prices pushed up spark spreads,making it profitable to run some of our gas-fired stations at baseload anddisplacing competitors' coal stations in the merit order. In the year we generated 19.8TWh (2006: 14.6TWh) from our 4.1GW fleet ofgas-fired power stations and our 107MW of wind assets, up by 36% as the overallload factor in the conventional fleet increased to 55% (2006: 40%). The averageload factor for the fleet was lower in the second half of the year due toplanned and unplanned outages which also coincided with periods of high sparkspreads. In July, we acquired a 50% ownership in the 72MW Braes of Doune wind farm fromAirtricity for £42 million. We spent £104 million in the ongoing development ofthe two 90MW wind farms at Lynn and Inner Dowsing, currently the world's largestoffshore wind construction project. The onshore cabling and the turbinefoundations are in place and we expect to generate the first power from theseassets in the third quarter of 2008. In January 2007 we also submitted aplanning application for the 250MW Round Two Lincs offshore wind farm. We made good progress with our 885MW gas-fired plant at Langage in Devon. Thisyear we spent £143 million of the anticipated £400 million budget and expect tocommence operations in the first quarter of 2009. We continued our feasibilitystudy at Eston Grange on Teesside for the potential development of an IntegratedGasification Combined Cycle (IGCC) power station with the ability to sequestratecarbon. However the government's decision to provide economic support for only apost-combustion technology station has made further material investment hereless likely. Energy procurement In May we secured further gas import capacity at the Isle of Grain allowing usto import an additional 2.4BCM per annum for 19 years from 2010/11. Thisincreases our total capacity at the Isle of Grain terminal to 5.8BCM per year.Late in the year, due to continued planning delays, we announced our withdrawalfrom the consortium planning to construct an LNG terminal at Canvey Island. Accord trading Accord delivered a reduced profit in the year, down 72% at £9 million (2006: £32million) as a result of volatile trading conditions during the second half. \* TFor the period ended 31 December FY 2007 FY 2006 ^% H2 2007 H2 2006 ^%--------------------------------------------------------------------------------------------------Gas Production:Gas production volumes (mmth) Morecambe 1,574 1,207 30 832 270 208 Other 686 709 (3.2) 374 282 33-------------------------------------------------------------------------------------------------- Total 2,260 1,916 18 1,206 552 118--------------------------------------------------------------------------------------------------Average gas sales price (p/therm) 30.4 53.1 (43) 36.5 38.1 (4.2)Oil and condensate production volumes (Mboe) 5.6 5.6 - 2.6 2.9 (10)Average oil and condensate sales price (£/boe) 33.3 33.8 (1.5) 33.6 32.7 2.8Revenue (£m) 923 1,291 (29) 557 360 55External revenue (£m) 299 323 (7) 162 171 (5)Operating costs (£m): Volume related production costs 291 262 11 163 111 47 Other production costs 203 165 23 88 89 (1.1)-------------------------------------------------------------------------------------------------- Total 494 427 16 251 200 26--------------------------------------------------------------------------------------------------Operating profit (£m)* 429 864 (50) 306 160 91--------------------------------------------------------------------------------------------------Power generationPower generated (GWh) 19,845 14,567 36 8,122 8,079 0.5Operating profit (£m)* 46 n/a - (1) n/a ---------------------------------------------------------------------------------------------------Industrial & commercial:External sales volumes (mmth) 2,260 2,667 (15) 1,202 1,135 6Average sales price (p/therm) 35.7 31.3 14 35.3 32.3 9Revenue (£m) 838 n/a - 443 n/a -Operating profit / (loss) (£m)* 179 n/a - 31 n/a ---------------------------------------------------------------------------------------------------Industrial sales & wholesale:Operating profit/loss) (£m)* n/a (210) - n/a (78) ---------------------------------------------------------------------------------------------------AccordOperating profit (£m)* 9 32 (72) (10) 25 n/m--------------------------------------------------------------------------------------------------Centrica Energy operating profit (£m)* 663 686 (3.4) 326 107 205--------------------------------------------------------------------------------------------------\* T Centrica Storage Centrica Storage delivered a strong financial and operational result, reportinga record operating profit* of £240 million (2006: £228 million). Thisimprovement reflects both the increase in the average Standard Bundled Unit(SBU) price for the year, up 1.6% to 57.4p (2006: 56.5p) driven by a widerspread between summer and winter forward gas prices, and the continued growth innon-SBU revenue. A subsequent narrowing of the summer/winter gas price spreadreduced the average SBU price for the 2007/08 storage year to 53.4p (2006/07:65.6p). Ongoing investment in Rough to improve its injection and withdrawal capabilitiesenabled us both to continue to sell significant volumes of additional space,172mmth in 2007 (2006: 157mmth), and generate additional revenue, particularlyfrom the new virtual storage product, V Store. Launched in May 2007 this producthas the equivalent rights to an SBU but delivery of gas is guaranteed to theNational Balancing Point. This guarantee meant that this product sold at asubstantial premium to the price of an SBU. Operationally the Rough field performed well, delivering injection andproduction availability of more than 98%. This was achieved whilst also securingand improving our health and safety performance. A recent review undertaken bythe Health and Safety Executive, into systems to ensure asset integrity, placedRough in the top quartile of all North Sea installations surveyed. \* TFor the period ended 31 December FY 2007 FY 2006 ^% H2 2007 H2 2006 ^%--------------------------------------------------------------------------------------------------Average SBU price (calendar year) (pence) 57.4 56.5 1.6 53.4 65.6 (19)--------------------------------------------------------------------------------------------------Revenue (£m)Standard SBUs 261 254 2.8 122 147 (17)Extra space 28 30 (7) 11 17 (35)Gas sales 77 58 33 49 33 48Other 37 16 131 25 10 150--------------------------------------------------------------------------------------------------Total 403 358 13 207 207 ---------------------------------------------------------------------------------------------------External turnover (£m) 340 294 16 178 168 6Cost of gas (£m) 87 58 50 58 30 93--------------------------------------------------------------------------------------------------Operating profit (£m)* 240 228 5 112 135 (17)--------------------------------------------------------------------------------------------------\* T Direct Energy Direct Energy, our North American business, performed well during a year inwhich we continued to develop our activities beyond the mass markets energysupply operations. We also restructured the business into four pan-NorthAmerican lines of business. This enables greater focus on key groups ofcustomers to drive growth and efficiencies of scale through shared operations.The description of each line of business is included in the commentary for theperiod. Due to changes during the year in the relationship with the Consumers'Waterheater Income Fund, which are explained in more detail under DiscontinuedOperations on page 19, the decision was taken to deconsolidate the Fund'sresults with effect from 1 December 2007. This commentary covers the results ofthe remaining Direct Energy operations. Excluding the negative impact of exchange rate movements, Direct Energydelivered top and bottom line underlying growth. The reported results wereadversely impacted by the weakness of the US dollar against sterling through theyear and, to a lesser extent, the Canadian dollar in the first half of the year.Whilst reported revenue was down 1.4% at £3.99 billion (2006: £4.05 billion),underlying revenue was up 4.9%. This was driven by strong growth both incommercial and industrial energy and in upstream and wholesale energy, whichoffset lower revenues in mass markets energy and in home and business services. Reported operating profit* was up 8% at £187 million (2006: £173 million), withunderlying profit* before exchange rate movements up more than 15%. Thesignificant fall in profits* in mass markets energy was more than offset byimprovements in other areas of the business. Mass markets energy Mass markets energy comprises natural gas and electricity sales to residentialand small commercial customers across North America. Mass markets energy experienced difficult trading conditions during the year,particularly the second half, following the expiry of five year electricitycontracts in Ontario, signed at market opening in 2002, combined with theexpected competitive pressures in our Texas business following the expiry ofPrice to Beat regulation and the impact on margins of the takeover of TXU. Thesefactors resulted in a fall in customer numbers. However by the year end thisposition had stabilised and we were once again growing the overall customer basein the last two months of the year. Reported revenue was down 12% to £2,437 million (2006: £2,765 million) andreported operating profit* was down 22% at £123 million (2006: £157 million).Before the impact of exchange rate movements underlying revenue was down 6% withoperating profit* down 15%. Commercial and industrial energy Commercial and industrial energy comprises natural gas and electricity sales tomedium and large-sized businesses, public institutions and government. Rapid growth in this segment continued during the year with volumes up 13% and24% in gas and electricity respectively. Reported revenue was up 15% to £978million (2006: £847 million), with underlying revenues up 24%. The businessmoved into profit during the second half as volumes grew and it recorded a £1million profit* for the full year (2006: loss* of £12 million) with profits*in the more mature Canadian and Texas businesses offset by the costs ofcontinued rapid growth in the North Eastern US. Home and business services This line of business comprises home and business services across North America. Services had a good year despite challenging market conditions, with continueddeepening of the housing recession in the US. During the year we grew ourcustomer numbers by 3.5% to over two million for the first time. In the US, ourmainly residential new construction business weathered the housing marketdownturn well, gained market share in a shrinking market and expanded itsconsumer service business. The acquisition in January of MABE, a serviceprovider for white goods, enabled us to launch an appliance protection andrepair business across Canada. Reported revenue was down 7% to £351 million (2006: £378 million), althoughremained flat on an underlying basis. Following the restructuring of thebusiness services operation and the increased focus on cost control to improvecompetitiveness, this has resulted in a near doubling of operating profit to £17million (2006: £9 million). Upstream and wholesale energy This business unit comprises our upstream and midstream activities which includeupstream gas, power generation, gas storage and transportation leases, wholesalepower and gas transactions, wind power purchase agreements and proprietarytrading. This business delivered operating profit* of £46 million, up 142% on the prioryear (2006: £19 million) with strong contributions from our power stations andwind power contracts as 433MW of new capacity came on stream, wholesale energyauctions and proprietary trading. Power generated increased by 14% to 5.1TWh,whilst gas production was broadly unchanged at 297 million therms. During theyear, through our ongoing drilling programme, we replaced 117% of the gas weproduced. In November we announced an agreed offer to acquire Rockyview Energy Inc. foraround £57 million including debt. On successful completion in January 2008,this added 2,700boe per day to our hydrocarbon production, largely as naturalgas. This acquisition is in line with our strategy of increasing the overalllevel of vertical integration and further developing this revenue stream. \* TFor the period ended 31 December FY 2007 FY 2006 ^% H2 2007 H2 2006 ^%------------------------------------------------------------------------------------------------Customer numbers (period end):Mass markets energy ('000) 3,005 3,386 (11) 3,005 3,386 (11)Home and business services ('000) 2,033 1,964 3.5 2,033 1,964 3.5------------------------------------------------------------------------------------------------Volumes:C&I gas sales (mmth) 627 557 13 271 257 5C&I electricity sales (GWh) 13,925 11,221 24 7,372 6,981 6Gas production (mmth) 297 304 (2.3) 147 155 (5)Power generation (GWh) 5,053 4,450 14 2,504 2,192 14------------------------------------------------------------------------------------------------Revenue (£m):Mass market energy 2,437 2,765 (12) 1,098 1,297 (15)Commercial and industrial energy 978 847 15 495 477 3.8Home and business services 351 378 (7) 182 189 (3.7)Upstream and wholesale energy 226 60 277 144 23 526------------------------------------------------------------------------------------------------Total 3,992 4,050 (1.4) 1,919 1,986 (3.4)------------------------------------------------------------------------------------------------Operating profit/(loss) (£m)*:Mass market energy 123 157 (22) 35 68 (49)Commercial and industrial energy 1 (12) n/m 2 (6) n/mHome and business services 17 9 89 14 10 40Upstream and wholesale energy 46 19 142 26 9 189------------------------------------------------------------------------------------------------Total excluding income fund 187 173 8 77 81 (5)------------------------------------------------------------------------------------------------The Consumers' Waterheater Income Fund^ 39 50 (22) 17 21 (19)------------------------------------------------------------------------------------------------Operating margin (%)*Total Direct Energy 4.7 4.3 0.4ppts 4.0 4.1 (0.1ppt)------------------------------------------------------------------------------------------------\* T European Energy Our European business performed well in 2007, more than doubling its operatingprofit* to £17 million (2006: £7 million). In Belgium in January 2007 we completed the transfer of around 500,000 Wallonianresidential customer accounts to our SPE business, increasing our total energycustomer base to 1.4 million. As part of the remedies required to enable themerger of Gaz de France (GdF) and Suez, GdF must dispose of their 25.5% holdingin SPE. Centrica has pre-emption rights over this stake. In The Netherlands we continued to grow our customer base through the Oxxiobrand and now supply approximately 754,000 customer accounts. During the year weinstalled around 75,000 smart meters and are working with the regulator toensure Oxxio's meters are compatible with future industry standards. We alsoentered into a 20 year tolling contract with Intergen for a 400MW gas firedpower station in Rijnmond, near Rotterdam, which is expected to be commerciallyoperational by summer 2010. In January 2007 we rebranded our Spanish operation from Luseo to CentricaEnergia. As market conditions improved we successfully re-entered theelectricity supply market and have already contracted 0.9TWh of annualconsumption. We also grew our portfolio of energy managed on behalf of "specialregime" generators to 650MW. As a result of the positive developments in the legal and regulatory frameworkfor competition within the German energy market we opened an operation inDusseldorf selling to the commercial supply market through Centrica EnergieGmbH. * including joint ventures and associates stated net of interest and taxation,and before exceptional items and certain re-measurements Discontinued operations The Consumers' Waterheater Income Fund was deconsolidated on 1 December 2007,the date of an Internalisation Agreement entered into between Direct Energy andthe Fund which materially altered the relationship between the two entities.Details of the impact of the deconsolidation are included in note 1(d) and note14(ii). Financial information Group Income Statement \* T 2007 2006 (restated) (ii)---------------------------------------------------------------------------------------------------------------- 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 16,342 - 16,342 16,403 - 16,403Cost of sales (ii) (12,217) -(12,217) (12,764) - (12,764)Re-measurement of energy contracts (i) 2,3 - 244 244 - (916) (916)----------------------------------------------------------------------------------------------------------------Gross profit 4,125 244 4,369 3,639 (916) 2,723 ---------------------------------- ------------------------------------- Operating costs before exceptional items (ii) (2,190) - (2,190) (2,250) - (2,250) Systems write-down 3 - - - - (196) (196) Business restructuring costs 3 - - - - (87) (87) Rough storage incident 3 - - - - (48) (48) ---------------------------------- -------------------------------------Operating costs (ii) (2,190) - (2,190) (2,250) (331) (2,581)Share of profits/(losses) in joint ventures and associates, net of interest and taxation (i) 2 14 (9) 5 3 (15) (12)----------------------------------------------------------------------------------------------------------------Group operating profit 2 1,949 235 2,184 1,392 (1,262) 130 ---------------------------------- ------------------------------------- Interest income 4 258 - 258 105 - 105 Interest expense 4 (331) - (331) (246) - (246) ---------------------------------- -------------------------------------Net interest expense 4 (73) - (73) (141) - (141)----------------------------------------------------------------------------------------------------------------Profit from continuing operationsbefore taxation 1,876 235 2,111 1,251 (1,262) (11)Taxation on profit from continuing operations 5 (753) (60) (813) (549) 363 (186)----------------------------------------------------------------------------------------------------------------Profit/(loss) from continuing operationsafter taxation 1,123 175 1,298 702 (899) (197) ---------------------------------- ------------------------------------- Profit/(loss) from discontinued operations (i) 14 1 (19) (18) 14 37 51 Gain/(loss) on disposal of discontinued operations 14 - 227 227 (8) - (8) ---------------------------------- -------------------------------------Discontinued operations 1 208 209 6 37 43----------------------------------------------------------------------------------------------------------------Profit/(loss) for the year 1,124 383 1,507 708 (862) (154)----------------------------------------------------------------------------------------------------------------Attributable to: Equity holders of the parent 1,122 383 1,505 707 (862) (155) Minority interests 2 - 2 1 - 1---------------------------------------------------------------------------------------------------------------- 1,124 383 1,507 708 (862) (154)---------------------------------------------------------------------------------------------------------------- Pence Pence Pence Pence----------------------------------------------------------------------------------------------------------------Earnings/(loss) per ordinary shareFrom continuing and discontinued operations: Basic 7 41.0 (4.3) Adjusted basic 7 30.6 19.4 Diluted 7 40.3 (4.3)From continuing operations: Basic 7 35.3 (5.4) Adjusted basic 7 30.5 19.2 Diluted 7 34.7 (5.4) Interim dividend paid per share 6 3.35 3.15Final dividend proposed per share 6 9.65 8.00----------------------------------------------------------------------------------------------------------------\* T (i) Certain re-measurements (notes 1 and 3) included within operating profitcomprise re-measurement arising on our energy procurement activities andre-measurement of proprietary trades in relation to cross-border transportationor capacity contracts. Certain re-measurements included within profit fromdiscontinued operations comprise re-measurement of the publicly traded units ofThe Consumers' Waterheater Income Fund. All other re-measurement is includedwithin results before exceptional items and certain re-measurements. (ii) Restated to present costs incurred under the energy savings programmes incost of sales and to present The Consumers' Waterheater Income Fund as adiscontinued operation. Note 1 details the change of accounting presentation andthe deconsolidation of The Consumers' Wateheater Income Fund. Financial information Group Balance Sheet \* T 2006 (restated) 2007 (i)31 December Notes £m £m-----------------------------------------------------------------------------------------------------Non-current assetsGoodwill 1,074 1,055Other intangible assets 465 446Property, plant and equipment 3,910 3,655Interests in joint ventures and associates 285 220Deferred tax assets 27 226Trade and other receivables 33 16Derivative financial instruments 8 72 17Available-for-sale financial assets 39 37Retirement benefit assets 13 152 ------------------------------------------------------------------------------------------------------ 6,057 5,672-----------------------------------------------------------------------------------------------------Current assetsInventories 241 270Current tax assets 40 98Trade and other receivables 3,423 3,590Derivative financial instruments 8 914 760Available-for-sale financial assets 50 49Cash and cash equivalents 9 1,130 640----------------------------------------------------------------------------------------------------- 5,798 5,407-----------------------------------------------------------------------------------------------------Total assets 11,855 11,079-----------------------------------------------------------------------------------------------------Current liabilitiesTrade and other payables (3,371) (3,291)Current tax liabilities (281) (180)Bank overdrafts, loans and other borrowings 10 (221) (181)Derivative financial instruments 8 (1,404) (1,737)Provisions for other liabilities and charges (140) (130)----------------------------------------------------------------------------------------------------- (5,417) (5,519)-----------------------------------------------------------------------------------------------------Net current assets/(liabilities) 381 (112)-----------------------------------------------------------------------------------------------------Non-current liabilitiesTrade and other payables (20) (55)Bank loans and other borrowings 10 (1,793) (2,555)Derivative financial instruments 8 (11) (220)Deferred tax liabilities (596) (241)Retirement benefit obligations 13 (55) (296)Provisions for other liabilities and charges (581) (551)----------------------------------------------------------------------------------------------------- (3,056) (3,918)-----------------------------------------------------------------------------------------------------Net assets 3,382 1,642-----------------------------------------------------------------------------------------------------EquityCalled up share capital 11 227 226Share premium account 11 685 657Merger reserve 11 467 467Capital redemption reserve 11 16 16Other reserves 11 1,928 219-----------------------------------------------------------------------------------------------------Shareholders' equity 11 3,323 1,585Minority interests in equity 11 59 57-----------------------------------------------------------------------------------------------------Total minority interests and shareholders' equity 11 3,382 1,642-----------------------------------------------------------------------------------------------------\* T (i) Restated to present exploration and evaluation expenditure, previouslyreported in property, plant and equipment, in other intangible assets on theBalance Sheet. Note 1 details the change of accounting presentation. Financial information Group Statement of Recognised Income and Expense \* T 2007 2006Year ended 31 December Notes £m £m---------------------------------------------------------------------------------------------------Profit/(loss) for the year 1,507 (154) --------- --------- Gains on revaluation of available-for-sale investments 11 1 - Gains/(losses) on cash flow hedges 11 169 (645) Exchange differences on translation of foreign operations 11 15 (23) Actuarial gains on defined benefit pension schemes 13 284 475 Tax on items taken directly to equity 11 (120) 73 --------- ---------Net income/(expense) recognised directly in equity 349 (120) --------- --------- Transferred to income and expense on cash flow hedges 11 382 (294) Exchange differences transferred to income and expense on disposal of subsidiaries 11,14 (4) - Tax on items transferred from equity 11 (128) 96 --------- ---------Transfers 250 (198)---------------------------------------------------------------------------------------------------Total recognised income and expense for the year 2,106 (472)---------------------------------------------------------------------------------------------------Total income and expense recognised in the year is attributable to: Equity holders of the parent 2,104 (473) Minority interests 2 1--------------------------------------------------------------------------------------------------- 2,106 (472)---------------------------------------------------------------------------------------------------\* T Financial information Group Cash Flow Statement \* T 2006 (restated) 2007 (i)Year ended 31 December Notes £m £m-----------------------------------------------------------------------------------------------------Operating cash flows before movements in working capital 12 2,494 1,892Decrease/(increase) in inventories 38 (83)Decrease/(increase) in receivables 181 (259)Increase/(decrease) in payables 44 (150)-----------------------------------------------------------------------------------------------------Cash generated from continuing operations 2,757 1,400Interest received 27 13Interest paid (3) (9)Tax paid (401) (627)Payments relating to exceptional charges (90) (113)-----------------------------------------------------------------------------------------------------Net cash flow from continuing operating activities 12 2,290 664Net cash flow from discontinued operating activities 12 67 73-----------------------------------------------------------------------------------------------------Net cash flow from operating activities 2,357 737-----------------------------------------------------------------------------------------------------Purchase of interests in subsidiary undertakings and businesses net of cash andcash equivalents acquired 14 (262) (97)Disposal of interests in subsidiary undertakings and businesses net of cash andcash equivalents disposed - (3)Purchase of intangible assets (i) (185) (167)Disposal of intangible assets 14 13Purchase of property, plant and equipment (i) (563) (489)Disposal of property, plant and equipment 76 15Investments in joint ventures and associates (45) (16)Disposal of interests in associates and other investments - 4Interest received 63 40Net (purchase)/sale of other financial assets (2) 5-----------------------------------------------------------------------------------------------------Net cash flow from continuing investing activities (904) (695)Net cash flow from discontinued investing activities (60) (25)-----------------------------------------------------------------------------------------------------Net cash flow from investing activities (964) (720)-----------------------------------------------------------------------------------------------------Re-purchase of ordinary share capital - (23)Issue of ordinary share capital 22 56Purchase of treasury shares (2) - --------- ----------- Interest paid in respect of finance leases (110) (43) Other interest paid (114) (136) --------- -----------Interest paid (224) (179) --------- ----------- Cash inflow from additional debt 256 838 Cash outflow from payment of capital element of finance leases (383) (21) Cash outflow from repayment of other debt (107) (880) --------- -----------Net cash flow from decrease in debt (234) (63)Realised net foreign exchange loss on cash settlement of derivative contracts (8) (21)Equity dividends paid (417) (384)-----------------------------------------------------------------------------------------------------Net cash flow from continuing financing activities (863) (614)Net cash flow from discontinued financing activities (25) 17-----------------------------------------------------------------------------------------------------Net cash flow from financing activities (888) (597)-----------------------------------------------------------------------------------------------------Net increase/(decrease) in cash and cash equivalents 505 (580)Cash and cash equivalents at 1 January (ii) 592 1,177Effect of foreign exchange rate changes 3 (5)-----------------------------------------------------------------------------------------------------Cash and cash equivalents at 31 December (ii) 9 1,100 592-----------------------------------------------------------------------------------------------------\* T (i) Restated to present exploration and evaluation expenditure, previouslyreported in property, plant and equipment, in other intangible assets on theBalance Sheet and to present The Consumers' Waterheater Income Fund as adiscontinued operation. Note 1 details the change of accounting presentation andthe deconsolidation of The Consumers' Waterheater Income Fund. (ii) Cash and cash equivalents are stated net of overdrafts of £30 million(2006: £48 million). Notes to the financial information 1. Basis of preparation and accounting policies Basis of preparation The preliminary results for the year ended 31 December 2007 have been extractedfrom audited accounts (with the exception of notes 16 to 21 which have not beenaudited) which have not yet been delivered to the Registrar of Companies. Thefinancial information set out in this announcement does not constitute statutoryaccounts for the year ended 31 December 2007 or 31 December 2006. The financialinformation for the year ended 31 December 2006 is derived from the statutoryaccounts for that year. The report of the auditors on the statutory accounts forthe year ended 31 December 2007 was unqualified and did not contain a statementunder Section 237 of the Companies Act 1985. (a) Standards, amendments and interpretations effective in 2007 In the current year the Group has adopted IFRS 7, Financial Instruments:Disclosures, which is effective for annual reporting periods beginning on orafter 1 January 2007, and the related amendments to IAS 1, Presentation ofFinancial Statements. The impact of the adoption of IFRS 7 and the changes toIAS 1 has been to expand the disclosures provided in the Annual Report andAccounts for the year ended 31 December 2007 regarding the Group's financialinstruments and management of capital. Four interpretations issued by the International Financial ReportingInterpretations Committee are effective for the current period. These are IFRIC7, Applying the Restatement Approach under IAS 29, Financial Reporting inHyperinflationary Economies; IFRIC 8, Scope of IFRS 2; IFRIC 9, Re-assessment ofEmbedded Derivatives; and IFRIC 10, Interim Financial Reporting and Impairment.The adoption of these interpretations has not led to any changes in the Group'saccounting policies. (b) Changes of accounting presentation The Group has adopted the following changes in accounting presentation in theyear: Domestic energy suppliers are given energy savings targets by the Governmentrelated to the size of their customer base. Costs incurred by British GasResidential under energy savings programmes are presented as part of cost ofsales in the Income Statement. Previously such costs were presented as operatingcosts. The Directors consider the change in accounting presentation betterreflects the nature of the costs as a direct cost of supplying energy todomestic customers. The impact of the change in accounting presentation is toreport £91 million of costs in the year within cost of sales. The impact oncomparatives is to reclassify £90 million from operating costs to cost of sales. Capitalised exploration and evaluation costs associated with oil and gasactivities, such as licence acquisition costs, exploratory drilling costs,trenching and sampling costs, are presented as intangible assets. Previously theGroup presented such capitalised costs as property, plant and equipment. TheDirectors consider the change of accounting presentation better reflects thenature of such costs. The impact of the change in accounting presentation is toreport £41 million of exploration and evaluation costs within intangible assetsas at 31 December 2007 and £29 million in investing cash outflows relating topurchases of intangible assets for the year ended 31 December 2007. The impacton comparatives is to reclassify £24 million of capitalised costs from property,plant and equipment to intangible assets as at 31 December 2006 and toreclassify £23 million of investing cash outflows from purchases of property,plant and equipment to purchases of intangible assets for the period ended 31December 2006. (c) Change to reported segments In 2007 the Group changed its reportable segments creating a Power generationsegment and an Industrial and commercial reportable segment. Prior to 2007 thesetwo segments were reported together as Industrial sales and wholesaling. The new Power generation segment comprises the Group's UK generation assetsincluding the Spalding power station, associated emissions activity, as well asflexible volume power procurement contracts. Beginning in 2007, sales ofgenerated power from Centrica Energy to other Group segments is transferred andreported at fair value. Prior to 2007, the sale of generated power from CentricaEnergy to other Group segments was transferred and reported at cost. As a resultof the change, Power generation and Industrial and commercial are now reportedseparately. Consequently, the basis on which operating costs are allocated toother Group segments has also changed. Prior period comparatives have not beenrestated as it is impracticable to provide this information on an equivalentbasis. For the purpose of comparison, had the Group continued with its previousbasis of segmental reporting with inter-segment transfers of power reported on acost basis, and operating costs allocated to segments with reference to the costmethodology, the Power generation and Industrial and commercial segmentstogether would have reported gross segment revenues of £1,027 million,inter-segment revenue of £185 million and externally reported segment revenue of£842 million and an operating profit before exceptional items and certainre-measurements of £130 million (loss of £8 million after exceptional items andcertain re-measurements) for the year ended 31 December 2007. In addition forthe year ended 31 December 2007, British Gas Residential would have reported anincrease to operating profit of £61 million, British Gas Business would havereported an increase to operating profit of £9 million, Gas production anddevelopment would have reported an increase in operating profit of £24 millionand Accord energy trading would have reported an increase in operating profit of£1 million, all before exceptional items and certain re-measurements. (d) The Consumers' Waterheater Income Fund The Group has deconsolidated The Consumers' Waterheater Income Fund (the Fund)with effect from 1 December 2007, the date of an Internalisation Agreemententered into between Centrica and the Fund and the date of the resultant loss ofcontrol. Centrica created the Fund in 2002 to refinance the water heater assetsacquired with the Enbridge Services acquisition and consolidated the Fund as thesubstance of the agreements put in place by Centrica indicated that the Fund wascreated for and on behalf of the Group. These agreements both predetermined theFund's activities and provided Centrica with operational control, viaresponsibilities for servicing the Fund's assets portfolio and administering theFund's activities. In October 2006 the Trustees of the Fund appointed an independent ChiefExecutive Officer. The activities undertaken by the Fund started to changefollowing this appointment through the independent acquisition of an immaterialbusiness in late 2006, and the independent acquisition of the Toronto Hydrowater heater rental business in February 2007, which provided the Fund with alimited number of rental customers held outside of the original contractualarrangements entered into with Centrica. Almost all the significant parts of therelationship, however, remained predetermined or controlled by Centrica. Thesechanges in the conduct of the Fund were judged not to be sufficiently materialto alter the Fund's status as a subsidiary in the 2006 Group accounts. However, in 2007 the Trustees of the Fund have sought further changes in theconduct of the Fund. The Fund has recruited an independent Chief FinancialOfficer and has made further small acquisitions outside of the originalcontractual arrangements entered into with Centrica. On 1 December 2007, theexisting Administration Agreement was replaced, at the instigation of the Fund,by a new Internalisation Agreement, which provides the Fund with access rightsto key operational data and provides a basis for employees and businessinfrastructure to transfer to the Fund, such that it is capable of independentoperation from Centrica. Subsequent to this Agreement the Fund has independentlyre-financed its activities. The Directors believe that the InternalisationAgreement represents a change to the original contractual arrangements with theFund, and demonstrates that the Fund has both the desire and the ability tomanage its own affairs. Accordingly, in 2007 the Directors judge that the Fund'sactivities are no longer predetermined such that its activities are beingconducted on behalf of Centrica, and thus the Fund ceases to represent asubsidiary of the Centrica group. The Group has deconsolidated the Fund with effect from 1 December 2007, the datethe Internalisation Agreement became effective, recognising an exceptionalprofit on disposal amounting to £227 million. The Fund's activities represent aseparate major line of business of the Direct Energy segment, and contributedmaterially to Group borrowings. In order to provide a clear presentation of theimpact of deconsolidating the Fund, the results in the current year and prioryear have been presented as a discontinued operation distinct from continuingoperations within the Group Income Statement. The details of the disposal anddiscontinued results are provided in note 14. (e) Income statement presentation The Group's Income Statement and segmental note separately identify the effectsof 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 from highvolume long-term contracts which are complemented by short-term arrangements.These short-term contracts are entered into for the purpose of balancing energysupplies and customer demand and to optimise the price paid by the Group.Short-term demand can vary significantly as a result of factors such as 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, Financial Instruments:Recognition and Measurement. However, a number of contracts are considered to bederivative financial instruments and are required to be fair valued under IAS39, primarily because their terms include the ability to trade elements of thecontracted 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 identifieda number 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 by-products, on which economic valuehas been created which is not wholly recognised under the requirements of IAS39. 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. Exceptional items As permitted by IAS 1, Presentation of Financial Statements, certain items arepresented separately. The items that the Group separately presents asexceptional are items which are of a non-recurring nature and, in the judgementof the Directors, need to be disclosed separately by virtue of their nature,size or incidence in order to obtain a clear and consistent presentation of theGroup's underlying business performance. Items which may be consideredexceptional in nature include disposals of businesses, business restructurings,the renegotiation of significant contracts and asset write-downs. 2. Segmental analysis \* T 2006 (restated) 2007 (v),(vii)--------------------------------------------------------------------------------------------------------------------- Less inter- Gross segment Gross Less inter-segment segment revenue Group segment revenue Group revenue(i),(ii),(iii),(v) revenue revenue(i),(ii),(iii),(v) revenue(a) Revenue £m £m £m £m £m £m---------------------------------------------------------------------------------------------------------------------Continuing operations: British Gas Residential 6,457 - 6,457 7,112 - 7,112 British Gas Business 2,431 - 2,431 2,303 - 2,303 British Gas Services 1,279 - 1,279 1,104 - 1,104 ------------------------------------ -------------------------------------- Gas production and development (i) 923 (624) 299 1,291 (968) 323 Power generation (ii),(iv) 880 (578) 302 - - - Industrial and commercial (iv) 838 - 838 - - - Industrial sales and wholesaling (ii), (iv) - - - 1,035 (152) 883 Accord energy trading (v) 24 (12) 12 57 (18) 39 ------------------------------------ -------------------------------------- Centrica Energy 2,665 (1,214) 1,451 2,383 (1,138) 1,245 Centrica Storage (iii) 403 (63) 340 358 (64) 294 Direct Energy (vi),(vii) 3,992 - 3,992 4,050 - 4,050 European Energy 395 (3) 392 295 - 295--------------------------------------------------------------------------------------------------------------------- 17,622 (1,280) 16,342 17,605 (1,202) 16,403---------------------------------------------------------------------------------------------------------------------Discontinued operations: The Consumers' Waterheater Income Fund (vii) (note 14) 42 - 42 47 - 47--------------------------------------------------------------------------------------------------------------------- 42 - 42 47 - 47---------------------------------------------------------------------------------------------------------------------\* T (i) Inter-segment revenue arising in Gas production and development is derivedfrom sales of gas produced for other Group segments. (ii) Beginning in 2007, sales of generated power from Power generation to otherGroup segments is transferred and reported at fair value. Prior to 2007, thesale of generated power from Centrica Energy to other Group segments wastransferred and reported at cost. (iii) Inter-segment revenue arising within Centrica Storage represents theprovision of storage facilities to other Group companies, on an arm's lengthbasis. (iv) In 2007, the Group changed its reportable segments creating a Powergeneration reportable segment and an Industrial and commercial reportablesegment. Prior to 2007, these two segments were reported together as Industrialsales and wholesaling. The change to reported segments is detailed in note 1.Prior period comparatives have not been restated as it is impracticable toprovide this information on an equivalent basis. (v) The external revenue presented for Accord energy trading comprises bothrealised (settled) and unrealised (fair value changes) from trading in physicaland financial energy contracts. Inter-segment revenue arising in Accordrepresents the recharge of brokerage fees to other Group segments. Gross segmentrevenue and inter-segment revenue for Accord have both been increased by £18million in 2006 to reflect the recharge of brokerage fees as inter-segmentrevenue to be consistent with the presentation provided in 2007. (vi) Direct Energy was disclosed as North American Energy and Related Servicesin the 2006 Annual Report and Accounts. This change was made to align withinternal management reporting. (vii) Restated to present The Consumers' Waterheater Income Fund as adiscontinued operation. Discontinued operations previously formed part of theDirect Energy segment. Direct Energy gross segment revenue inclusive of grossrevenue from discontinued operations amounted to £4,034 million (2006: £4,097million). \* T Operating Operating profit/(loss) profit/(loss) before exceptional after exceptional items and Certain re- items and certain re- Exceptional items measurements certain re- measurements (note 3) (note 3) measurements year ended 31 year ended 31 year ended 31 year ended 31 December December December December----------------------------------------------------------------------------------------------------------- 2006 2006 (restated) (restated) 2007 (iii) 2007 2006 2007 2006 2007 (iii)(b) Operating profit £m £m £m £m £m £m £m £m-----------------------------------------------------------------------------------------------------------Continuing operations: British Gas Residential 571 95 - (214) 39 (724) 610 (843) British Gas Business 120 87 - - 317 (408) 437 (321) British Gas Services 151 102 - (66) - - 151 36 -------- ----------- -------- -------- -------- -------- -------- ----------- Gas production and development 429 864 - - (16) 32 413 896 Power generation (i) 46 - - - (43) - 3 - Industrial and commercial (i) 179 - - - (95) - 84 - Industrial sales and wholesaling (i) - (210) - - - 440 - 230 Accord energy trading 9 32 - - (3) 6 6 38 -------- ----------- -------- -------- -------- -------- -------- ----------- Centrica Energy 663 686 - - (157) 478 506 1,164 Centrica Storage 240 228 - (24) (8) 2 232 206 Direct Energy (ii),(iii) 187 173 - - 53 (264) 240 (91) European Energy 17 7 - - (9) (15) 8 (8) Other operations (iv) - 14 - (27) - - - (13)----------------------------------------------------------------------------------------------------------- 1,949 1,392 - (331) 235 (931) 2,184 130-----------------------------------------------------------------------------------------------------------Discontinued operations: The Consumers' Waterheater Income Fund (iii) (note 14) 39 50 227 - - - 266 50 OneTel (note 14) - (11) - - - - - (11)----------------------------------------------------------------------------------------------------------- 39 39 227 - - - 266 39-----------------------------------------------------------------------------------------------------------\* T (i) In 2007, the Group changed its reportable segments creating a Powergeneration reportable segment and an Industrial and commercial reportablesegment. Prior to 2007, these two segments were reported together as Industrialsales and wholesaling. The change to reported segments is detailed in note 1.Prior period comparatives have not been restated as it is impracticable toprovide this information on an equivalent basis. (ii) Direct Energy was disclosed as North American Energy and Related Servicesin the 2006 Annual Report and Accounts. This change was made to align withinternal management reporting. (iii) Restated to present The Consumers' Waterheater Income Fund as adiscontinued operation as explained in note 3. Discontinued operationspreviously formed part of the Direct Energy segment. Direct Energy segmentresult inclusive of the result from discontinued operations amounted to a profitof £226 million (2006: £223 million) before exceptional items and certainre-measurements and £506 million after exceptional items and certainre-measurements (2006: £41 million loss). Exceptional items and certainre-measurements of the Direct Energy segment inclusive of discontinuedoperations amounted to a credit of £280 million (2006: £264 million charge). (iv) In 2006, operating profit before exceptional items and certainre-measurements includes a £20 million gain arising on revisions to theassumptions made in calculating the Group's defined benefit pension liability.The Schemes' rules were amended from 1 April 2006 to allow employees to commutea larger amount of their pension to a cash lump sum on retirement, in line withchanges in the Finance Act. \* T Share of results of joint ventures and associates Depreciation of Amortisation and net of interest property, write-downs of and taxation plant and equipment intangibles year ended 31 year ended 31 year ended 31 December December December---------------------------------------------------------------------------------------------------------- 2006 2006 (restated) (restated)(c) Included within operating 2007 2006 2007 (ii) 2007 (ii) profit £m £m £m £m £m £m----------------------------------------------------------------------------------------------------------Continuing operations: British Gas Residential - - 16 17 27 35 British Gas Business - - 3 1 19 14 British Gas Services - - 13 13 4 - -------- -------- -------- ----------- -------- ----------- Gas production and development (ii) - - 250 235 8 17 Power generation (i) 4 - 93 - 1 - Industrial and commercial (i) - - 1 - - - Industrial sales and wholesaling (i) - - - 95 - 1 Accord energy trading - - - - - - -------- -------- -------- ----------- -------- ----------- Centrica Energy 4 - 344 330 9 18 Centrica Storage - - 24 23 - - Direct Energy (ii),(iii),(iv) - - 62 61 15 13 European Energy 1 (12) 2 1 10 10 Other operations (v) - - 9 17 8 3---------------------------------------------------------------------------------------------------------- 5 (12) 473 463 92 93----------------------------------------------------------------------------------------------------------Discontinued operations:The Consumers' Waterheater Income Fund (ii) (note 14) - - 21 23 1 ----------------------------------------------------------------------------------------------------------- - - 21 23 1 -----------------------------------------------------------------------------------------------------------\* T (i) In 2007, the Group changed its reportable segments creating a Powergeneration reportable segment and an Industrial and commercial reportablesegment. Prior to 2007, these two segments were reported together as Industrialsales and wholesaling. The change to reported segments is detailed in note 1.Prior period comparatives have not been restated as it is impracticable toprovide this information on an equivalent basis. (ii) Restated to present exploration and evaluation expenditure, previouslyreported in property, plant and equipment, in other intangible assets on theBalance Sheet and to present The Consumers' Waterheater Income Fund as adiscontinued operation. Note 1 details the change of accounting presentation andthe deconsolidation of The Consumers' Waterheater Income Fund. (iii) Direct Energy was disclosed as North American Energy and Related Servicesin the 2006 Annual Report and Accounts. This change was made to align withinternal management reporting. (iv) Discontinued operations previously formed part of the Direct Energysegment. (v) Depreciation of property, plant and equipment and amortisation andwrite-downs of intangibles in the Other operations segment are charged out toother Group segments. 3. Exceptional items and certain re-measurements \* T 2007 2006(a) Exceptional items (note 1) £m £m----------------------------------------------------------------------------------------------------Exceptional items recognised in continuing operations Systems write-down (i) - (196) Business restructuring costs (ii) - (87) Rough storage incident (iii) - (48)----------------------------------------------------------------------------------------------------Total exceptional items recognised in continuing operations - (331)Tax credit on exceptional items (i),(ii),(iii) - 93----------------------------------------------------------------------------------------------------Total exceptional items recognised in continuing operations after taxation - (238)Discontinued operations: Profit on disposal of The Consumers' Waterheater Income Fund (note 14) 227 -----------------------------------------------------------------------------------------------------Total exceptional items recognised 227 (238)----------------------------------------------------------------------------------------------------\* T (i) Systems write-down costs in 2006 comprised the write-down of certain majorsystems developments following a review of their existing and required futurefunctionality. The cost comprises write-downs in British Gas Residential (£178million) and British Gas Services (£18 million). A tax credit of £59 million wasrecognised in respect of these costs. (ii) Business restructuring costs in 2006 comprised £67 million from staffreductions at the corporate centre (£3 million), British Gas Residential (£16million), and British Gas Services (£48 million), and £20 million related to theclosure of the head office of British Gas Residential. A tax credit of £20million was recognised in respect of these costs. (iii) Centrica Storage operations at Rough suffered a major interruption causedby a fire in February 2006. Our investment in emergency shutdown systems andprompt management action mitigated the damage to ensure no loss of life.Following a full assessment of the work needed to restore operations, the costsof the incident resulted in an exceptional charge before taxation of £48 million(of which £24 million was recognised within Other operations). A tax credit of£14 million was recognised in respect of the charge. \* T 2007 2006(b) Certain re-measurements (note 1) £m £m----------------------------------------------------------------------------------------------------Certain re-measurements recognised in relation to energy contracts Net gains/(losses) arising on delivery of contracts (i) 352 (287) Net losses arising on market price movements and new contracts (ii) (95) (623) Net losses arising on proprietary trades in relation to cross-border transportation or capacity contracts (iii) (13) (6)----------------------------------------------------------------------------------------------------Net re-measurement of energy contracts included within gross profit 244 (916)Net losses arising on re-measurement of joint ventures' energy contracts (iv) (9) (15)----------------------------------------------------------------------------------------------------Net re-measurement included within Group operating profit 235 (931)Taxation on certain re-measurements (60) 270----------------------------------------------------------------------------------------------------Net re-measurement after taxation 175 (661)Discontinued operations: Fair value (losses)/gains arising on re-measurement of the publicly traded units of The Consumers' Waterheater Income Fund (v) (19) 37----------------------------------------------------------------------------------------------------Total certain re-measurements 156 (624)----------------------------------------------------------------------------------------------------\* T (i) As energy is delivered or consumed from previously contracted positions, therelated fair value recognised in the opening balance sheet (representing thedifference between forward energy prices at the opening balance sheet date, andthe contract price of energy to be delivered) is charged or credited to theIncome Statement. (ii) Represents fair value losses arising from the change in fair value offuture contracted sales and purchase contracts as a result of changes in forwardenergy prices between reporting dates (or date of inception and the reportingdate, where later). (iii) Comprises movements in fair value arising on proprietary trades inrelation to cross-border transportation or storage capacity, on which economicvalue has been created which is not wholly accounted for under the provisions ofIAS 39. (iv) Certain re-measurements included within Group operating profit also includethe Group's share of the certain re-measurements relating to the energyprocurement activities of joint ventures. (v) Certain re-measurements included within discontinued operations comprisere-measurement of the publicly traded units of The Consumers' Waterheater IncomeFund. All other re-measurements are included within results before exceptionalitems and certain re-measurements. 4. Net interest \* T 2006 (restated) 2007 (i)--------------------------------------------------------------------------------------------------- Interest Interest Interest Interest expense income Total expense income Total £m £m £m £m £m £m---------------------------------------------------------------------------------------------------Continuing operationsCost of servicing net debt --------- --------- --------- --------- --------- -----------Interest income - 83 83 - 40 40Interest expense on bank loans and overdrafts (ii) (92) - (92) (155) - (155)Interest expense on finance leases(including tolling agreements) (iii) (87) - (87) (47) - (47) --------- --------- --------- --------- --------- ----------- (179) 83 (96) (202) 40 (162)Gains/(losses) on revaluation --------- --------- --------- --------- --------- -----------Fair value (losses)/gains on hedges (6) 5 (1) (1) 3 2Fair value (losses)/gains on other derivatives (107) 42 (65) (8) 25 17Net foreign exchange translation of monetary assets and liabilities - 58 58 (20) - (20) --------- --------- --------- --------- --------- ----------- (113) 105 (8) (29) 28 (1)Other interest --------- --------- --------- --------- --------- -----------Notional interest arising on discounted items (20) 55 35 (15) 26 11Interest on supplier early payment arrangements - 15 15 - 11 11Other interest (iv) (19) - (19) - - - --------- --------- --------- --------- --------- ----------- (39) 70 31 (15) 37 22---------------------------------------------------------------------------------------------------Interest (expense)/income (331) 258 (73) (246) 105 (141)---------------------------------------------------------------------------------------------------\* T (i) Restated to present The Consumers' Waterheater Income Fund as a discontinuedoperation as explained in note 1. (ii) Includes £nil million (2006: £66 million) interest payable on borrowingsrelated to a bank's interest in Centrica Gas Production LP, a limitedpartnership, which was formed during 2005. The bank ceased to be a limitedpartner during 2006 and the arrangement with the bank was brought to an end on11 August 2006. (iii) Includes £40 million of net interest expense incurred on termination ofthe Humber finance lease. (iv) The Group has reached agreement with Her Majesty's Revenue and Customs(HMRC) on a technical matter concerning intra-group transfer pricing of gasproduced within the UK Continental Shelf dating back to 2000. The terms of thesettlement resulted in a net charge of £13 million, comprising finance costs of£19 million on corporation tax deemed to have been paid late net of anassociated £6 million tax credit. 5. Taxation \* T 2006 (restated) 2007 (i)Analysis of tax charge for the year £m £m------------------------------------------------------------------------------------------------------The tax charge comprises:Current taxUK corporation tax 309 199UK petroleum revenue tax 200 234Tax on exceptional items and certain re-measurements (note 3) 2 (20)Foreign tax 48 42Adjustments in respect of prior years 4 (25)------------------------------------------------------------------------------------------------------Total current tax 563 430------------------------------------------------------------------------------------------------------Deferred taxCurrent year 253 79Adjustments in respect of prior years (19) 10Change in tax rates (ii) (9) 9Tax on exceptional items and certain re-measurements (note 3) 58 (343)UK petroleum revenue tax (32) (7)Foreign deferred tax (1) 8------------------------------------------------------------------------------------------------------Total deferred tax 250 (244)------------------------------------------------------------------------------------------------------Total tax on profit from continuing operations 813 186------------------------------------------------------------------------------------------------------\* T (i) Restated to present The Consumers' Waterheater Income Fund as a discontinuedoperation as explained in note 1. (ii) The effect of the decrease of 2% to the standard rate of UK corporation taxfrom 1 April 2008 on the relevant temporary differences at 31 December 2007 wasa credit of £12 million. No other material amounts arose as a result of changesintroduced by the Finance Act 2007. The effect of changes to foreign tax rateson the relevant temporary differences at 31 December 2007 was a charge of £3million. 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 acharge of £9 million. (iii) Tax on items taken directly to equity is disclosed in note 11. 6. Dividends \* T 2007 2006 £m £m----------------------------------------------------------------------------------------------------Prior year final dividend of 8.00 pence (2006: 7.40 pence) per ordinary share 294 269Interim dividend of 3.35 pence (2006: 3.15 pence) per ordinary share 123 115---------------------------------------------------------------------------------------------------- 417 384----------------------------------------------------------------------------------------------------\* T The prior year final dividend was paid on 13 June 2007 (2006: 14 June). Theinterim dividend was paid on 14 November 2007 (2006: 15 November). The Directors propose a final dividend of 9.65 pence per share (totalling £355million) for the year ended 31 December 2007. The dividend will be submitted forformal approval at the Annual General Meeting to be held on 12 May 2008. 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 2008. 7. Earnings per ordinary share Basic earnings per ordinary share has been calculated by dividing the earningsattributable to equity holders of the Company for the year of £1,505 million(2006: loss of £155 million) by the weighted average number of ordinary sharesin issue during the year of 3,673 million (2006: 3,643 million). The Directors believe that the presentation of 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 2007 2006--------------------------------------------------------------------------------------------------- Pence per Pence per ordinary ordinary(a) Continuing and discontinued operations £m share £m share---------------------------------------------------------------------------------------------------Earnings/(loss) - basic 1,505 41.0 (155) (4.3)Net exceptional items after tax (notes 1 and 3) (227) (6.2) 238 6.6Certain re-measurement (gains) and losses after tax (notes 1 and 3) (156) (4.2) 624 17.1---------------------------------------------------------------------------------------------------Earnings - adjusted basic 1,122 30.6 707 19.4--------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------Earnings/(loss) - diluted 1,505 40.3 (155) (4.3)--------------------------------------------------------------------------------------------------- 2007 2006--------------------------------------------------------------------------------------------------- Pence per Pence per ordinary ordinary(b) Continuing operations £m share £m share---------------------------------------------------------------------------------------------------Earnings/(loss) - basic 1,296 35.3 (198) (5.4)Net exceptional items after tax (notes 1 and 3) - - 238 6.6Certain re-measurement (gains) and losses after tax (notes 1 and 3) (175) (4.8) 661 18.0---------------------------------------------------------------------------------------------------Earnings - adjusted basic 1,121 30.5 701 19.2--------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------Earnings/(loss) - diluted 1,296 34.7 (198) (5.4)--------------------------------------------------------------------------------------------------- 2007 2006--------------------------------------------------------------------------------------------------- Pence per Pence per ordinary ordinary(c) Discontinued operations £m share £m share---------------------------------------------------------------------------------------------------Earnings/(loss) - basic 209 5.7 43 1.1--------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------Earnings/(loss) - diluted 209 5.6 43 1.1---------------------------------------------------------------------------------------------------\* T Certain re-measurements (notes 1 and 3) included within operating profitcomprise re-measurement arising on our energy procurement activities andre-measurement of proprietary trades in relation to cross-border transportationor capacity contracts. Certain re-measurements included within discontinuedoperations comprise re-measurement of the publicly traded units of TheConsumers' Waterheater Income Fund. All other re-measurements are includedwithin results before exceptional items and certain re-measurements. 8. Derivative financial instruments Derivative financial instruments are generally held for the purposes ofproprietary energy trading, treasury management or energy procurement.Derivatives held for the purposes of proprietary energy trading are carried atfair value with changes in fair value recognised in the Group's results for theyear before exceptional items and certain re-measurements, with the exception ofcertain derivatives related to cross-border transportation and capacitycontracts (note 1). Derivative financial instruments held for the purposes oftreasury management or energy procurement are also carried at fair value withchanges in the fair value of derivatives related to treasury managementreflected in results for the year before exceptional items and certainre-measurements, and those related to energy procurement reflected inexceptional items and certain re-measurements. In cases where a derivative doesqualify for hedge accounting, derivatives are classified as fair value hedges,cash flow hedges or hedges of a net investment in a foreign operation. Energy contracts designated at fair value through profit and loss includecertain energy contracts that the Group has, at its option, designated at fairvalue through profit and loss under IAS 39 because the energy contract containsone or more embedded derivatives that significantly modify the cash flows underthe contract. The carrying values of derivative financial instruments by product type foraccounting purposes are as follows: \* T 2007 2006 £m £m-----------------------------------------------------------------------------------------------------Derivative financial instruments - held for proprietary energy trading Derivative financial instruments - held for trading under IAS 39 Energy derivatives - assets 44 225 Energy derivatives - liabilities (52) (199)----------------------------------------------------------------------------------------------------- (8) 26-----------------------------------------------------------------------------------------------------Derivatives financial instruments - held for the purposes of treasury management or energy procurement Derivative financial instruments - held for trading under IAS 39 Energy derivatives - assets 789 503 Energy derivatives - liabilities (1,100) (1,143) Interest rate derivatives - assets 2 2 Interest rate derivatives - liabilities (5) (4) Foreign exchange derivatives - assets 19 17 Foreign exchange derivatives - liabilities (80) (4)----------------------------------------------------------------------------------------------------- (375) (629)----------------------------------------------------------------------------------------------------- Energy contracts designated at fair value through profit and loss Energy derivatives - assets 9 3 Energy derivatives - liabilities (86) (57)----------------------------------------------------------------------------------------------------- (77) (54)----------------------------------------------------------------------------------------------------- Derivative financial instruments in hedge accounting relationships Energy derivatives - assets 123 16 Energy derivatives - liabilities (68) (500) Interest rate derivatives - liabilities (7) (40) Foreign exchange derivatives - assets - 11 Foreign exchange derivatives - liabilities (17) (10)----------------------------------------------------------------------------------------------------- 31 (523)-----------------------------------------------------------------------------------------------------Net total (429) (1,180)-----------------------------------------------------------------------------------------------------\* T 9. Cash and cash equivalents \* T 2007 2006 £m £m----------------------------------------------------------------------------------------------------Cash at bank, in transit and in hand 53 29Short-term deposits 1,077 611----------------------------------------------------------------------------------------------------Cash and cash equivalents 1,130 640----------------------------------------------------------------------------------------------------\* T Cash and cash equivalents includes £40 million (2006: £38 million) held by theGroup's insurance subsidiary undertakings that is not readily available to beused for other purposes within the Group. 10. Bank overdrafts, loans and other borrowings \* T 2007 2006---------------------------------------------------------------------------------------------------- Interest Non- Non- RatePrincipal Current current Total Current current Total % m £m £m £m £m £m £m----------------------------------------------------------------------------------------------------Recourse borrowingsBank overdrafts and loans 70 277 347 56 108 164Bonds (by maturity date) --------------------------- --------------------------- 25 July 2008 3.500 EUR 75 57 - 57 - - - 8 September 2008 Floating EUR 100 74 - 74 - 68 68 9 March 2009 4.129 £250 - 253 253 - 252 252 2 November 2012 6.103 £400 - 400 400 - 396 396 27 February 2013 1.045 £3,000 - 13 13 - 14 14 24 October 2016 5.706 £300 - 300 300 - 298 298 4 September 2026 Floating £150 - 153 153 - 153 153 --------------------------- --------------------------- 131 1,119 1,250 - 1,181 1,181Commercial paper - - - 100 - 100Obligations under finance leases(including power station tolling arrangements) 20 397 417 25 783 808---------------------------------------------------------------------------------------------------- 221 1,793 2,014 181 2,072 2,253Non-recourse borrowingsBonds (by maturity date) (i) --------------------------- --------------------------- 28 January 2013 4.700 C$275 - - - - 120 120 28 January 2015 5.245 C$225 - - - - 98 98 --------------------------- --------------------------- - - - - 218 218Units of The Consumers' Waterheater Income Fund (ii) - - - - 265 265---------------------------------------------------------------------------------------------------- 221 1,793 2,014 181 2,555 2,736----------------------------------------------------------------------------------------------------\* T (i) This debt is issued by The Consumers' Waterheater Income Fund (the Fund).The Group has deconsolidated the Fund with effect from 1 December 2007 asexplained in notes 1 and 14. (ii) Prior to the deconsolidation of the Fund with effect from 1 December 2007,units of the Fund were treated as debt in the Group Financial Statements. 11. Reserves \* T Attributable to equity holders of the Company ---------------------------------------------------------- Capital Share Share Mergerredemption Other Minority Total capital premium reserve reserve reserves Total interest equity £m £m £m £m £m £m £m £m---------------------------------------------------------------------------------------------------1 January 2007 226 657 467 16 219 1,585 57 1,642Exchange differences ontranslation of foreign operations - - - - 15 15 - 15Exchange differences transferred to Income Statement - - - - (4) (4) - (4)Actuarial gains on defined benefit pension schemes - - - - 284 284 - 284Gains on revaluation of available-for-sale assets - - - - 1 1 - 1Cash flow hedges: Net fair value gains - - - - 169 169 - 169 Transfers to Income Statement - - - - 382 382 - 382Tax on items taken directly to/from equity - - - - (248) (248) - (248)--------------------------------------------------------------------------------------------------- 226 657 467 16 818 2,184 57 2,241Profit for the year - - - - 1,505 1,505 2 1,507Employee share schemes: Purchase of treasury shares - - - - (2) (2) - (2) Share issue 1 28 - - - 29 - 29 Exercise of awards - - - - (7) (7) - (7) Value of services provided - - - - 31 31 - 31Dividends - - - - (417) (417) - (417)---------------------------------------------------------------------------------------------------31 December 2007 227 685 467 16 1,928 3,323 59 3,382---------------------------------------------------------------------------------------------------\* T 12. Notes to the Group Cash Flow Statement \* T 2006 (restated)Reconciliation of Group operating profit to net cash flow from operating 2007 (i) activities £m £m------------------------------------------------------------------------------------------------------Continuing operationsGroup operating profit including share of result of joint ventures and associates 2,184 130Less share of (profits)/losses of joint ventures and associates (5) 12------------------------------------------------------------------------------------------------------Group operating profit before share of joint ventures and associates 2,179 142Add back: Amortisation and write-down of intangible assets 92 93 Depreciation of property, plant and equipment 473 463 Systems write-down - 196 Employee share scheme costs 29 23 Profit on sale of businesses (2) (3) Loss/(profit) on sale of property, plant and equipment, and other intangible assets 7 (17) Movement in provisions (66) 84 Re-measurement of energy contracts (ii) (218) 911------------------------------------------------------------------------------------------------------Operating cash flows before movements in working capital 2,494 1,892Decrease/(increase) in inventories 38 (83)Decrease/(increase) in receivables 181 (259)Increase/(decrease) in payables 44 (150)------------------------------------------------------------------------------------------------------Cash generated from continuing operations 2,757 1,400Income taxes paid (341) (311)Net petroleum revenue tax paid (60) (316)Net interest received 24 4Payments relating to exceptional charges (90) (113)------------------------------------------------------------------------------------------------------Net cash flow from continuing operating activities 2,290 664------------------------------------------------------------------------------------------------------Discontinued operations (note 14)Group operating profit before share of joint ventures and associates 266 50Add back: Amortisation of intangible assets 1 - Depreciation of property, plant and equipment 21 23 Profit on disposal of subsidiary (227) - Loss on sale of property, plant and equipment, and other intangible assets 5 -------------------------------------------------------------------------------------------------------Operating cash flows before movements in working capital 66 73Decrease/(increase) in receivables 1 (1)Increase in payables - 1------------------------------------------------------------------------------------------------------Net cash flow from discontinued operating activities 67 73------------------------------------------------------------------------------------------------------Net cash flow from operating activities 2,357 737------------------------------------------------------------------------------------------------------\* T (i) Restated to present exploration and evaluation expenditure, previouslyreported in property, plant and equipment, in other intangible assets on theBalance Sheet and to present The Consumers' Waterheater Income Fund as adiscontinued operation. Note 1 details the change of accounting presentation andthe deconsolidation of The Consumers' Waterheater Income Fund. (ii) Adds back unrealised (profits)/losses arising from re-measurement of energycontracts including those related to proprietary trading activities. Cash and cash equivalents (which are presented as a single class of assets onthe face of the Balance Sheet) comprise cash at bank and other short-term highlyliquid investments with a maturity of three months or less. 13. Pensions Substantially all of the Group's UK employees at 31 December 2007 were membersof one of the three main schemes: the Centrica Pension Scheme, the CentricaEngineers' Pension Scheme and the Centrica Management Pension Scheme (togetherthe approved pension schemes). The Centrica Pension Scheme (final salarysection) and the Centrica Management Pension Scheme (a final salary scheme) wereclosed to new members from 1 April 2003. The Centrica Pension Scheme has an opencareer average salary section. The Centrica Engineers' Pension Scheme (finalsalary section) was closed to new members from 1 April 2006, and a careeraverage salary section was added to the scheme at that date. These schemes aredefined benefit schemes, and are tax-approved funded arrangements. They aresubject to independent valuations at least every three years, on the basis ofwhich the qualified actuary certifies the rate of employers' contributionswhich, together with the specified contributions payable by the employees andproceeds from the schemes' assets, are expected to be sufficient to fund thebenefits 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 2006, the Unapproved Pension Scheme at6 April 2005 and the Direct Energy Marketing Limited pension plan at 14 June2005. These have been updated to 31 December 2007 for the purposes of meetingthe requirements of IAS 19. Investments have been valued, for this purpose, atmarket value. \* T 31 31 December December 2007 2006Major assumptions used for the actuarial valuation % %----------------------------------------------------------------------------------------------------Rate of increase in employee earnings 4.40 4.00Rate of increase in pensions in payment and deferred pensions 3.40 3.00Discount rate 5.80 5.00Inflation assumption 3.40 3.00----------------------------------------------------------------------------------------------------\* 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 2007 2006----------------------------------------------------------------------------------------------------- Male Female Male FemaleLife expectancy at age 65 for a member: Years Years Years Years-----------------------------------------------------------------------------------------------------Currently aged 65 20.2 21.8 20.2 21.7Currently aged 45 21.4 22.9 21.3 22.9-----------------------------------------------------------------------------------------------------\* T At 31 March 2006, the date of the most recent actuarial review, the schemes hadapproximately 31,900 members and beneficiaries (20,850 male and 11,050 female). 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 2007 2006--------------------------------------------------------------------------------------------------------------------- Indicative Indicative effect on effect scheme on scheme Increase/decrease liabilities Increase/decrease liabilitiesImpact of changing material assumptions in assumption % in assumption %---------------------------------------------------------------------------------------------------------------------Rate of increase in employee earnings 0.25% +/-2 0.25% +/-2Rate of increase in pensions in payment and deferred pensions 0.25% +/-4 0.25% +/-4Discount rate 0.25% -/+6 0.25% -/+6Inflation assumption 0.25% +/-6 0.25% +/-6Longevity assumption 1 year +/-2 1 year +/-2---------------------------------------------------------------------------------------------------------------------\* T The expected rate of return and market value 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 Valuationper annum Valuation 2007 2007 2006 2006 % £m % £m-------------------------------------------------------------------------------------------------------UK equities 8.1 1,549 7.8 1,486Non-UK equities 8.1 931 7.8 857Fixed-interest bonds 5.8 412 5.3 312Index-linked bonds 4.5 351 4.3 213Property 6.8 50 6.2 68Cash and other assets 5.4 34 5.0 52-------------------------------------------------------------------------------------------------------Total fair value of plan assets 7.4 3,327 7.2 2,988Present value of defined benefit obligation (3,230) (3,284)-------------------------------------------------------------------------------------------------------Net asset/(liability) recognised in the Balance Sheet 97 (296)Associated deferred tax (liability)/asset recognised in the Balance Sheet (28) 89-------------------------------------------------------------------------------------------------------Net pension asset/(liability) 69 (207)-------------------------------------------------------------------------------------------------------Net asset/(liability) recognised in the Balance Sheet comprises: Surpluses 152 - Deficits (55) (296)------------------------------------------------------------------------------------------------------- 97 (296)-------------------------------------------------------------------------------------------------------\* T 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 £31 million (2006: £27 million)relating to unfunded pension arrangements. Included within non-currentavailable-for-sale financial assets are £30 million (2006: £29 million) ofinvestments, held by the Law Debenture Trust on behalf of the Company, assecurity in respect of the Centrica Unapproved Pension Scheme. \* T 2007 2006Analysis of the amount charged to operating profit £m £m----------------------------------------------------------------------------------------------------Current service cost 127 143Plan amendment (i) - (20)Loss on curtailment - 18----------------------------------------------------------------------------------------------------Net charge to operating profit 127 141----------------------------------------------------------------------------------------------------\* 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 to the Finance Act. Accordingly, the assumptions made incalculating the Group's defined benefit pension liability were revised, and again of £20 million was recognised in Group operating profit before exceptionalitems and certain re-measurements. Future revisions to the assumption will bereflected within the Statement of Recognised Income and Expense. \* T 2007 2006Analysis of the amount credited to notional interest £m £m----------------------------------------------------------------------------------------------------Expected return on pension scheme assets 221 194Interest on pension scheme liabilities (166) (168)----------------------------------------------------------------------------------------------------Net credit to notional interest income 55 26----------------------------------------------------------------------------------------------------\* T \* TAnalysis of the actuarial gain/(loss) recognised in the Statement 2007 2006of Recognised Income and Expense £m £m----------------------------------------------------------------------------------------------------Actual return less expected return on pension scheme assets (38) 95Experience gains and losses arising on the scheme liabilities (16) 145Changes in assumptions underlying the present value of the schemes' liabilities 338 235----------------------------------------------------------------------------------------------------Actuarial gain to be recognised in the Statement of Recognised Income andExpense before adjustment for tax 284 475Cumulative actuarial gains and losses recognised in reserves at 1 January 439 (36)----------------------------------------------------------------------------------------------------Cumulative actuarial gains and losses recognised in reserves at 31 December 723 439----------------------------------------------------------------------------------------------------\* T 14. Acquisitions and disposals (i) Acquisitions During the year the Group acquired 100% of the issued share capital of NewfieldUK Holdings Limited from Newfield International Holdings Inc for cashconsideration of £250 million (£242 million base consideration, plus adjustmentsfor working capital and indebtedness arising between the effective date and thecompletion date). \* T IFRS carrying values pre- Fair acquisition valueNewfield UK Holdings Limited £m £m-------------------------------------------------------------------------------------------------------Other intangible assets - 12Property, plant and equipment 97 244Inventory 2 2Trade and other receivables 4 4Cash and cash equivalents 3 3Trade and other payables (8) (8)Provisions for other liabilities and charges (14) (16)Deferred tax liabilities - (46)-------------------------------------------------------------------------------------------------------Net assets acquired 84 195-------------------------------------------------------------------------------------------------------Goodwill arising 55-------------------------------------------------------------------------------------------------------Cash consideration 250-------------------------------------------------------------------------------------------------------\* T (ii) Disposals (a) Discontinued operation - The Consumers' Waterheater Income Fund As explained in note 1, the Group has deconsolidated The Consumers' WaterheaterIncome Fund (the Fund) with effect from 1 December 2007. An analysis of assetsand liabilities disposed of and the pre-tax profit arising on disposal ispresented below: \* T £m----------------------------------------------------------------------------------------------------Attributable goodwill 124Other intangible assets - customer relationships and other 9Property, plant and equipment - water heaters 221Trade and other receivables - current 4Cash and cash equivalents 15Trade and other payables - current (8)Bank overdrafts and loans (15)Issued bonds (248)Borrowings - units of The Consumers' Waterheater Income Fund (325)Exchange differences on translation of foreign operations (4)----------------------------------------------------------------------------------------------------Net liabilities disposed of (227)Gain on disposal of discontinued operation 227----------------------------------------------------------------------------------------------------Proceeds on disposal -----------------------------------------------------------------------------------------------------\* T An analysis of the results of The Consumer's Waterheater Income Fund presentedas a discontinued operation within the Group Income Statement is as follows: \* T 2007 2006------------------------------------------------------------------------------------------------------------------ Results for the period to Results for 1 December the year before Results before exceptional Exceptional for exceptional Exceptional items and items and the items and items and Results certain certain period certain certain for re- re- to 1 re- re- the measurements measurements December measurements measurements year £m £m £m £m £m £m------------------------------------------------------------------------------------------------------------------Revenue 42 - 42 47 - 47Cost of sales (i) 27 - 27 25 - 25------------------------------------------------------------------------------------------------------------------Gross profit 69 - 69 72 - 72Operating costs (30) - (30) (22) - (22)------------------------------------------------------------------------------------------------------------------Operating profit 39 - 39 50 - 50Net interest expense (38) (19) (57) (42) 37 (5)------------------------------------------------------------------------------------------------------------------Profit/(loss) before taxation 1 (19) (18) 8 37 45Tax credit - - - 6 - 6------------------------------------------------------------------------------------------------------------------Profit/(loss) after taxation from discontinued operation 1 (19) (18) 14 37 51Gain on disposal of discontinued operation - 227 227 - - -Taxation on gain on disposal of discontinued operation - - - - - -------------------------------------------------------------------------------------------------------------------Discontinued operations 1 208 209 14 37 51------------------------------------------------------------------------------------------------------------------\* T (i) Included in discontinued operations is elimination of the cost of salesincurred on sales of water heaters from Direct Energy to the Fund resulting in acredit to the cost of sales above. (b) Discontinued operation - OneTel In 2006, the finalisation of the OneTel disposal resulted in a charge to theIncome Statement of £8 million net of a £3 million tax credit. 15. Events after the balance sheet date The Directors propose a final dividend of 9.65 pence per share (totalling £355million) for the year ended 31 December 2007. The dividend will be submitted forformal approval at the Annual General Meeting to be held on 12 May 2008. 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 2008. On 14 January 2008 the Group acquired 88.4% of the outstanding common shares ofpublicly traded oil and gas company Rockyview Energy Inc. (Rockyview) for cashconsideration of C$68 million (£34 million) and the remaining 11.6% of theoutstanding common shares of Rockyview by 19 February 2008 in a series oftransactions for additional cash consideration of C$9 million (£5 million). Thefair values of assets and liabilities acquired and stated below are provisionalbecause the Directors have not yet reached a final determination on all aspectsof the fair value exercise. \* T IFRS carrying values pre- Fair acquisition value £m £m-------------------------------------------------------------------------------------------------------Other intangible assets 7 10Property, plant and equipment 64 54Trade and other receivables 6 6Trade and other payables (24) (24)Provisions for other liabilities and charges (2) (6)Deferred tax liabilities (4) (1)-------------------------------------------------------------------------------------------------------Net assets acquired 47 39-------------------------------------------------------------------------------------------------------Cash consideration 39-------------------------------------------------------------------------------------------------------\* T Notes to the financial information (unaudited) 16. Group Income Statement for the six months ended 31 December 2007 \* T 2007 2006 (restated) (ii)---------------------------------------------------------------------------------------------------------------- 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 18 7,772 - 7,772 7,699 - 7,699Cost of sales (ii) (5,983) - (5,983) (5,858) - (5,858)Re-measurement of energy contracts (i) 18,19 - (135) (135) - (423) (423)----------------------------------------------------------------------------------------------------------------Gross profit 1,789 (135) 1,654 1,841 (423) 1,418 ---------------------------------- ------------------------------------- Operating costs before exceptional items (ii) (1,070) - (1,070) (1,115) - (1,115) Systems write-down 19 - - - - (196) (196) Business restructuring costs 19 - - - - (87) (87) Rough storage incident 19 - - - - (6) (6) ---------------------------------- -------------------------------------Operating costs (ii) (1,070) - (1,070) (1,115) (289) (1,404)Share of profits/(losses) in joint ventures and associates, net of interest and taxation (i) 4 (4) - 3 (15) (12)----------------------------------------------------------------------------------------------------------------Group operating profit 18 723 (139) 584 729 (727) 2 ---------------------------------- ------------------------------------- Interest income 175 - 175 26 - 26 Interest expense (220) - (220) (65) - (65) ---------------------------------- -------------------------------------Net interest expense (45) - (45) (39) - (39)----------------------------------------------------------------------------------------------------------------Profit from continuing operationsbefore taxation 678 (139) 539 690 (727) (37)Taxation on profit from continuing operations (342) 29 (313) (255) 199 (56)----------------------------------------------------------------------------------------------------------------Profit/(loss) from continuing operationsafter taxation 336 (110) 226 435 (528) (93) ---------------------------------- ------------------------------------- (Loss)/profit from discontinued operations (i) (1) 48 47 3 3 6 Gain/(loss) on disposal of discontinued operations - 227 227 (8) - (8) ---------------------------------- -------------------------------------Discontinued operations (1) 275 274 (5) 3 (2)----------------------------------------------------------------------------------------------------------------Profit/(loss) for the year 335 165 500 430 (525) (95)----------------------------------------------------------------------------------------------------------------Attributable to: Equity holders of the parent 334 165 499 430 (525) (95) Minority interests 1 - 1 - - ----------------------------------------------------------------------------------------------------------------- 335 165 500 430 (525) (95)---------------------------------------------------------------------------------------------------------------- Pence Pence Pence Pence----------------------------------------------------------------------------------------------------------------Earnings/(loss) per ordinary shareFrom continuing and discontinued operations: Basic 20 13.6 (2.6) Adjusted basic 20 9.1 11.8 Diluted 20 13.3 (2.6)From continuing operations: Basic 20 6.1 (2.5) Adjusted basic 20 9.1 11.9 Diluted 20 6.0 (2.5)----------------------------------------------------------------------------------------------------------------\* T (i) Certain re-measurements (notes 1 and 3) included within operating profitcomprise re-measurement arising on our energy procurement activities andre-measurement of proprietary trades in relation to cross-border transportationor capacity contracts. Certain re-measurements included within profit fromdiscontinued operations comprise re-measurement of the publicly traded units ofThe Consumers' Waterheater Income Fund. All other re-measurement is includedwithin results before exceptional items and certain re-measurements. (ii) Restated to present costs incurred under the energy savings programmes incost of sales and to present The Consumers' Waterheater Income Fund as adiscontinued operation. Note 1 details the change of accounting presentation andthe deconsolidation of The Consumers' Wateheater Income Fund. 17. Group Cash Flow Statement for the six months ended 31 December 2007 \* T 2006 (restated) 2007 (i) Notes £m £m-----------------------------------------------------------------------------------------------------Operating cash flows before movements in working capital 21 975 986Increase in inventories (5) (60)Increase in receivables (541) (691)Increase in payables 1,007 1,077-----------------------------------------------------------------------------------------------------Cash generated from continuing operations 1,436 1,312Interest received 18 6Interest paid (2) (3)Tax paid (368) (463)Payments relating to exceptional charges (22) (52)-----------------------------------------------------------------------------------------------------Net cash flow from continuing operating activities 21 1,062 800Net cash flow from discontinued operating activities 21 34 33-----------------------------------------------------------------------------------------------------Net cash flow from operating activities 1,096 833-----------------------------------------------------------------------------------------------------Purchase of interests in subsidiary undertakings and businesses net of cash andcash equivalents acquired (248) (5)Disposal of interests in subsidiary undertakings and businesses net of cash andcash equivalents disposed (1) (23)Purchase of intangible assets (112) (107)Disposal of intangible assets 12 13Purchase of property, plant and equipment (290) (226)Disposal of property, plant and equipment - (2)Investments in joint ventures and associates (43) (2)Disposal of interests in associates and other investments - 4Interest received 51 23Net sale of other financial assets 40 ------------------------------------------------------------------------------------------------------Net cash flow from continuing investing activities (591) (325)Net cash flow from discontinued investing activities (31) (14)-----------------------------------------------------------------------------------------------------Net cash flow from investing activities (622) (339)-----------------------------------------------------------------------------------------------------Issue of ordinary share capital 7 14Purchase of treasury shares (2) - --------- ----------- Interest paid in respect of finance leases (82) (24) Other interest paid (63) (41) --------- -----------Interest paid (145) (65) --------- ----------- Cash inflow from additional debt 203 489 Cash outflow from payment of capital element of finance leases (374) (8) Cash outflow from repayment of other debt (3) (726) --------- -----------Net cash flow from decrease in debt (174) (245)Realised net foreign exchange loss on cash settlement of derivative contracts (8) 21Equity dividends paid (123) (115)-----------------------------------------------------------------------------------------------------Net cash flow from continuing financing activities (445) (390)Net cash flow from discontinued financing activities (19) (20)-----------------------------------------------------------------------------------------------------Net cash flow from financing activities (464) (410)-----------------------------------------------------------------------------------------------------Net increase in cash and cash equivalents 10 84Cash and cash equivalents at 1 July (ii) 1,088 511Effect of foreign exchange rate changes 2 (3)-----------------------------------------------------------------------------------------------------Cash and cash equivalents at 31 December (ii) 1,100 592-----------------------------------------------------------------------------------------------------\* T (i) Restated to present exploration and evaluation expenditure, previouslyreported in property, plant and equipment, in other intangible assets on theBalance Sheet and to present The Consumers' Waterheater Income Fund as adiscontinued operation. Note 1 details the change of accounting presentation andthe deconsolidation of The Consumers' Waterheater Income Fund. (ii) Cash and cash equivalents are stated net of overdrafts of £30 million(2006: £48 million). 18. Segmental analysis for the six months ended 31 December 2007 \* T 2006 (restated) 2007 (v),(vii)--------------------------------------------------------------------------------------------------------------------- Less inter- Gross segment Gross Less inter-segment segment revenue Group segment revenue Group revenue(i),(ii),(iii),(v) revenue revenue(i),(ii),(iii),(v) revenue(a) Revenue £m £m £m £m £m £m---------------------------------------------------------------------------------------------------------------------Continuing operations: British Gas Residential 2,960 - 2,960 3,074 - 3,074 British Gas Business 1,164 - 1,164 1,134 - 1,134 British Gas Services 663 - 663 583 - 583 ------------------------------------ -------------------------------------- Gas production and development (i) 557 (395) 162 360 (189) 171 Power generation (ii),(iv) 355 (273) 82 - - - Industrial and commercial (iv) 443 - 443 - - - Industrial sales and wholesaling (ii),(iv) - - - 466 (67) 399 Accord energy trading (v) (2) (12) (14) 40 (10) 30 ------------------------------------ -------------------------------------- Centrica Energy 1,353 (680) 673 866 (266) 600 Centrica Storage (iii) 207 (29) 178 207 (39) 168 Direct Energy (vi), (vii) 1,919 - 1,919 1,986 - 1,986 European Energy 218 (3) 215 154 - 154--------------------------------------------------------------------------------------------------------------------- 8,484 (712) 7,772 8,004 (305) 7,699---------------------------------------------------------------------------------------------------------------------Discontinued operations: The Consumers' Waterheater Income Fund (vii) 20 - 20 23 - 23--------------------------------------------------------------------------------------------------------------------- 20 - 20 23 - 23---------------------------------------------------------------------------------------------------------------------\* T (i) Inter-segment revenue arising in Gas production and development is derivedfrom sales of gas produced for other Group segments. (ii) Beginning in 2007, sales of generated power from Power generation to otherGroup segments is transferred and reported at fair value. Prior to 2007, thesale of generated power from Centrica Energy to other Group segments wastransferred and reported at cost. (iii) Inter-segment revenue arising within Centrica Storage represents theprovision of storage facilities to other Group companies, on an arm's lengthbasis. (iv) In 2007, the Group changed its reportable segments creating a Powergeneration reportable segment and an Industrial and commercial reportablesegment. Prior to 2007, these two segments were reported together as Industrialsales and wholesaling. The change to reported segments is detailed in note 1.Prior period comparatives have not been restated as it is impracticable toprovide this information on an equivalent basis. (v) The external revenue presented for Accord energy trading comprises net gainsand losses (both realised and unrealised fair value changes) from trading inphysical and financial energy contracts. Inter-segment revenue arising in Accordrepresents the recharge of brokerage fees to other Group segments. Gross segmentrevenue and inter-segment revenue for Accord have both been increased by £10million in 2006 to reflect the recharge of brokerage fees as inter-segmentrevenue to be consistent with the presentation provided in 2007. (vi) Direct Energy was disclosed as North American Energy and Related Servicesin the 2006 Annual Report and Accounts. This change was made to align withinternal management reporting. (vii) Discontinued operations previously formed part of the Direct Energysegment. Direct Energy gross segment revenue inclusive of gross revenue fromdiscontinued operations amounted to £1,939 million (2006: £2,009 million). \* T Operating Operating profit/(loss) profit/(loss) before exceptional after exceptional items and Certain re- items and certain re- Exceptional items measurements certain re- measurements (note 19) (note 19) measurements----------------------------------------------------------------------------------------------------------- 2006 2006 (restated) (restated) 2007 (iii) 2007 2006 2007 2006 2007 (iii)(b) Operating profit £m £m £m £m £m £m £m £m-----------------------------------------------------------------------------------------------------------Continuing operations: British Gas Residential 38 238 - (214) (64) (415) (26) (391) British Gas Business 72 76 - - 184 (282) 256 (206) British Gas Services 88 58 - (66) - - 88 (8) -------- ----------- -------- -------- -------- -------- -------- ----------- Gas production and development 306 160 - - (16) 18 290 178 Power generation (i) (1) - - - (42) - (43) - Industrial and commercial (i) 31 - - - (201) - (170) - Industrial sales and wholesaling (i) - (78) - - - 278 - 200 Accord energy trading (10) 25 - - - 9 (10) 34 -------- ----------- -------- -------- -------- -------- -------- ----------- Centrica Energy 326 107 - - (259) 305 67 412 Centrica Storage 112 135 - - (7) 2 105 137 Direct Energy (ii),(iii) 77 81 - - 10 (33) 87 48 European Energy 6 11 - - (4) (15) 2 (4) Other operations (iv) 4 23 - (9) 1 - 5 14----------------------------------------------------------------------------------------------------------- 723 729 - (289) (139) (438) 584 2-----------------------------------------------------------------------------------------------------------Discontinued operations:The Consumers' Waterheater Income Fund (iii) 17 21 227 - - - 244 21 OneTel - (11) - - - - - (11)----------------------------------------------------------------------------------------------------------- 17 10 227 - - - 244 10-----------------------------------------------------------------------------------------------------------\* T (i) In 2007, the Group changed its reportable segments creating a Powergeneration reportable segment and an Industrial and commercial reportablesegment. Prior to 2007, these two segments were reported together as Industrialsales and wholesaling. The change to reported segments is detailed in note 1.Prior period comparatives have not been restated as it is impracticable toprovide this information on an equivalent basis. (ii) Direct Energy was disclosed as North American Energy and Related Servicesin the 2006 Annual Report and Accounts. This change was made to align withinternal management reporting. (iii) Restated to present The Consumers' Waterheater Income Fund as adiscontinued operation as explained in note 3. Discontinued operationspreviously formed part of the Direct Energy segment. Direct Energy segmentresult inclusive of the result from discontinued operations amounted to a profitof £94 million (2006: £102 million) before exceptional items and certainre-measurements and £331 million after exceptional items and certainre-measurements (2006: £69 million). (iv) In 2006, operating profit before exceptional items and certainre-measurements includes a £20 million gain arising on revisions to theassumptions made in calculating the Group's defined benefit pension liability.The Schemes' rules were amended from 1 April 2006 to allow employees to commutea larger amount of their pension to a cash lump sum on retirement, in line withchanges in the Finance Act. 19. Exceptional items and certain re-measurements for the six months ended 31December 2007 \* T 2007 2006(a) Exceptional items (note 1) £m £m----------------------------------------------------------------------------------------------------Exceptional items recognised in continuing operations Systems write-down (i) - (196) Business restructuring costs (ii) - (87) Rough storage incident (iii) - (6)----------------------------------------------------------------------------------------------------Total exceptional items recognised in continuing operations - (289)Tax credit on exceptional items (i),(ii),(iii) - 81----------------------------------------------------------------------------------------------------Total exceptional items recognised in continuing operations after taxation - (208)Discontinued operations: Profit on disposal of The Consumers' Waterheater Income Fund (note 14) 227 -----------------------------------------------------------------------------------------------------Total exceptional items recognised 227 (208)----------------------------------------------------------------------------------------------------\* T (i) Systems write-down costs in 2006 comprised the write-down of certain majorsystems developments following a review of their existing and required futurefunctionality. The cost comprises write-downs in British Gas Residential (£178million) and British Gas Services (£18 million). A tax credit of £59 million wasrecognised in respect of these costs. (ii) Business restructuring costs in 2006 comprised £67 million from staffreductions at the corporate centre (£3 million), British Gas Residential (£16million), and British Gas Services (£48 million), and £20 million related to theclosure of the head office of British Gas Residential. A tax credit of £20million was recognised in respect of these costs. (iii) Centrica Storage operations at Rough suffered a major interruption causedby a fire in February 2006. Our investment in emergency shutdown systems andprompt management action mitigated the damage to ensure no loss of life.Following a full assessment of the work needed to restore operations, the costsof the incident resulted in an exceptional charge before taxation of £48 million(of which £24 million was recognised within Other operations). A tax credit of£14 million was recognised in respect of the charge of which £2 million arose inthe 2nd half. \* T 2007 2006(b) Certain re-measurements (note 1) £m £m----------------------------------------------------------------------------------------------------Certain re-measurements recognised in relation to energy contracts Net (losses)/gains arising on delivery of contracts (i) 43 (114) Net losses arising on market price movements and new contracts (ii) (175) (333) Net (losses)/gains arising on proprietary trades in relation to cross-border transportation or capacity contracts (iii) (3) 24----------------------------------------------------------------------------------------------------Net re-measurement of energy contracts included within gross profit (135) (423)Net losses arising on re-measurement of joint ventures' energy contracts (iv) (4) (15)----------------------------------------------------------------------------------------------------Net re-measurement included within Group operating profit (139) (438)Taxation on certain re-measuremements: 29 118----------------------------------------------------------------------------------------------------Net re-measurement after taxation (110) (320)Discontinued operations: Gains arising on re-measurement of the publicly traded units of The Consumers' Waterheater Income Fund (v) 48 3----------------------------------------------------------------------------------------------------Total certain re-measurements (62) (317)----------------------------------------------------------------------------------------------------\* T (i) As energy is delivered or consumed from previously contracted positions, therelated fair value recognised in the opening balance sheet (representing thedifference between forward energy prices at the opening balance sheet date, andthe contract price of energy to be delivered) is charged or credited to theIncome Statement. (ii) Represents fair value losses arising from the change in fair value offuture contracted sales and purchase contracts as a result of changes in forwardenergy prices between reporting dates (or date of inception and the reportingdate, where later). (iii) Comprises movements in fair value arising on proprietary trades inrelation to cross-border transportation or storage capacity, on which economicvalue has been created which is not wholly accounted for under the provisions ofIAS 39. (iv) Certain re-measurements included within Group operating profit also includethe Group's share of the certain re-measurements relating to the energyprocurement activities of joint ventures. (v) Certain re-measurements included within discontinued operations comprisere-measurement of the publicly traded units of The Consumers' Waterheater IncomeFund. All other re-measurements are included within results before exceptionalitems and certain re-measurements. 20. Earnings per ordinary share for the six months ended 31 December 2007 \* T 2007 2006--------------------------------------------------------------------------------------------------- Pence per Pence per ordinary ordinary(a) Continuing and discontinued operations £m share £m share---------------------------------------------------------------------------------------------------Earnings/(loss) - basic 499 13.6 (95) (2.6)Net exceptional items after tax (notes 1 and 19) (227) (6.2) 208 5.8Certain re-measurement gains after tax (notes 1 and 19) 62 1.7 317 8.6---------------------------------------------------------------------------------------------------Earnings - adjusted basic 334 9.1 430 11.8--------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------Earnings/(loss) - diluted 499 13.3 (95) (2.6)--------------------------------------------------------------------------------------------------- 2007 2006--------------------------------------------------------------------------------------------------- Pence per Pence per ordinary ordinary(b) Continuing operations £m share £m share---------------------------------------------------------------------------------------------------Earnings/(loss) - basic 225 6.1 (93) (2.5)Net exceptional items after tax (notes 1 and 19) - - 208 5.8Certain re-measurement gains after tax (notes 1 and 19) 110 3.0 320 8.6---------------------------------------------------------------------------------------------------Earnings - adjusted basic 335 9.1 435 11.9--------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------Earnings/(loss) - diluted 225 6.0 (93) (2.5)--------------------------------------------------------------------------------------------------- 2007 2006--------------------------------------------------------------------------------------------------- Pence per Pence per ordinary ordinary(c) Discontinued operations £m share £m share---------------------------------------------------------------------------------------------------Earnings/(loss) - basic 274 7.5 (2) (0.1)--------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------Earnings/(loss) - diluted 274 7.3 (2) (0.1)---------------------------------------------------------------------------------------------------\* T Certain re-measurements (notes 1 and 19) included within operating profitcomprise re-measurement arising on our energy procurement activities andre-measurement of proprietary trades in relation to cross-border transportationor capacity contracts. Certain re-measurements included within discontinuedoperations comprise re-measurement of the publicly traded units of TheConsumers' Waterheater Income Fund. All other re-measurement is included withinresults before exceptional items and certain re-measurements. 21. Notes to the Group Cash Flow Statement for the six months ended 31 December2007 \* T 2006 (restated)Reconciliation of Group operating profit to net cash flow from operating 2007 (i) activities £m £m------------------------------------------------------------------------------------------------------Continuing operationsGroup operating profit including share of result of joint ventures and associates 584 2Less share of losses of joint ventures and associates - 12------------------------------------------------------------------------------------------------------Group operating profit before share of joint ventures and associates 584 14Add back: Amortisation and write-down of intangible assets 38 49 Depreciation of property, plant and equipment 250 247 Systems write-down - 196 Employee share scheme costs 16 12 Profit on sale of businesses - (4) Loss/(profit) on sale of property, plant and equipment, and other intangible assets 2 (7) Movement in provisions (78) 58 Re-measurement of energy contracts (ii) 163 421------------------------------------------------------------------------------------------------------Operating cash flows before movements in working capital 975 986Increase in inventories (5) (60)Increase in receivables (541) (691)Increase in payables 1,007 1,077------------------------------------------------------------------------------------------------------Cash generated from continuing operations 1,436 1,312Income taxes paid (275) (192)Net petroleum revenue tax paid (93) (271)Net interest received 16 3Payments relating to exceptional charges (22) (52)------------------------------------------------------------------------------------------------------Net cash flow from continuing operating activities 1,062 800------------------------------------------------------------------------------------------------------Discontinued operationsGroup operating profit before share of joint ventures and associates 244 21Add back: Amortisation of intangible assets 1 - Depreciation of property, plant and equipment 10 11 Profit on disposal of subsidiary (227) - Loss on sale of property, plant and equipment, and other intangible assets 5 -------------------------------------------------------------------------------------------------------Operating cash flows before movements in working capital 33 32Increase in payables 1 1------------------------------------------------------------------------------------------------------Net cash flow from discontinued operating activities 34 33------------------------------------------------------------------------------------------------------Net cash flow from operating activities 1,096 833------------------------------------------------------------------------------------------------------\* T (i) Restated to present exploration and evaluation expenditure, previouslyreported in property, plant and equipment, in other intangible assets on theBalance Sheet and to present The Consumers' Waterheater Income Fund as adiscontinued operation. Note 1 details the change of accounting presentation andthe deconsolidation of The Consumers' Waterheater Income Fund. (ii) Adds back unrealised (profits)/losses arising from re-measurement of energycontracts including those related to proprietary trading activities. 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 2007 Preliminary Results presentation for analysts andinstitutional investors at 9.30am (GMT) on Thursday 21 February 2008. 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 01452 556 620From overseas +44 1452 556 620\* T The call title is "Centrica plc - Preliminary Results Announcement 2007" and theconference ID is 31229130. An archived webcast and full transcript of the presentation and the question andanswer session will be available on the website on Friday 22nd February 2008. Enquiries \* TInvestors and Analysts: Kieran McKinney Director of Investor Relations Telephone: 01753 494 900 email: [email protected] Media: Media Relations Telephone: 0845 072 8002 email: [email protected]\* T Financial Calendar Ex-dividend date for 2007 final dividend 23 April 2008 Record date for 2007 final dividend 25 April 2008 Annual General Meeting 12 May 2008 Interim Management Statement 12 May 2008 2007 final dividend payment date 11 June 2008 2008 interim results announcement 31 July 2008 \* TRegistered OfficeMillstreamMaidenhead RoadWindsorBerkshireSL4 5GD\* T Copyright Business Wire 2008

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