Annual Report and Accounts 2006 Annual Report and Accounts 2006

Centrica plc Annual Report and Accounts 2006 Annual Report and Accounts 2006

report Securing our customers’ energy needs Our vision is to become a leading integrated energy company in selected markets in order to maximise value to shareholders. In 2006 we focused on securing energy to meet our customers’ future needs.

Our strategy

Our strategy is to create a distinctive business model that delivers sustained proﬁtability through the commodity cycle. We will achieve this by focusing on the following clear priorities: Transform British Gas Sharpen up the organisation and reduce costs Reduce risk by adding new sources of gas and power Build on our multiple growth platforms

Our main activities Our upstream business Our downstream business

We source energy internationally We supply energy to homes We find and produce gas predominantly in the UK We are Britain’s largest gas and electricity retailer, and have acquired licence blocks in Norway and supplying 49% of the residential gas market and 22% north and west Africa. We trade energy in the UK, of residential electricity. We are a growing North America and Europe and secure contracts force in North America, serving customers in five to bring gas to the UK. Canadian provinces and 15 US states.

We generate energy We supply energy to businesses We generate electricity through our gas-fired power In Britain, we are a major supplier of gas and stations in the UK and US and through a growing electricity to the commercial sector. We also have portfolio of wind assets and purchasing agreements. customers in Belgium, the Netherlands and Spain. In North America, we offer energy solutions to businesses in Canada and the US.

We store and distribute energy We provide home and energy services Our Rough storage facility is the UK’s largest gas We are Britain’s biggest provider of central heating, store, providing more than 70% of the country’s gas appliance installation and maintenance. In North storage capacity. The Rough facility stores gas under America, we deliver a range of heating, ventilation the North Sea for British Gas and for other customers. and air-conditioning services. Contents

02 Financial Highlights 03 Chairman’s Statement 05 Directors’ Report – Business Review 06 Chief Executive’s Review 08 Group Overview 10 Group Key Performance Indicators 12 Operating Review 19 Group Financial Review 21 Principal Risks and Uncertainties 24 Corporate Responsibility

27 Directors’ Report – Governance 28 Board of Directors and Senior Management Team 30 Corporate Governance Report 33 Other Statutory Information 34 Remuneration Report 42 Independent Auditors’ Report

43 Financial Statements 48 Notes to the Financial Statements 105 Company Balance Sheet 106 Notes to the Company Balance Sheet 111 Gas and Liquid Reserves 112 Five Year Record

113 Shareholder Information 116 Index

To receive your copy of the Annual Report electronically go to: www.centrica.com/investors

Disclaimers This Report does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Centrica shares. This Report contains certain forward- looking statements with respect to the ﬁnancial condition, results, operations and businesses of Centrica plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. Past performance is no guide to future performance and persons needing advice should consult an independent ﬁnancial adviser.

Centrica plc Annual Report and Accounts 2006 01 Financial Highlights ietr’Rpr uiesRve 0 ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’p27 Report – Governance Directors’ Report – Business Review p05

12 months ended 31 December 2006 2005 Financial highlights Group turnover^ £16.5bn £13.4bn Operating profit*^ £1,442m £1,513m Adjusted basic earnings* per share 19.4p 18.2p Ordinary dividend per share 11.15p 10.50p

Statutory results Group turnover^ £16.5bn £13.4bn Operating profit^ £180m £1,957m Basic (loss)/earnings per share (4.3p) 27.4p

^ from continuing operations * including joint ventures and associates, stated net of interest and taxation, and before exceptional items and certain re-measurements

Ordinary dividend Group turnover^ Earnings per share (pence) (£ billion) (pence) 06 11.15 06 16.5 -4.3 06 05 10.5 05 13.4 06 19.4 04† 8.6 04 11.4 05 27.4 03 5.4 03 11.7 05 18.2 02 4.0 02 10.0 04 38.0 04 18.1 † excludes special dividend of 25p ^ from continuing operations 03 11.8

03 16.8 02 11.4 02 15.2 Basic earnings per share Adjusted basic earnings per share (2004–06: before exceptional items and certain re-measurements, 2002–03: before goodwill amortisation and exceptional items)

Earnings and operating profit numbers are stated, throughout the commentary, before exceptional items and certain re-measurements where applicable – see note 2 for definitions. The Directors believe this measure assists with a better understanding of the underlying performance of the Group. The equivalent amounts after exceptional items and certain re-measurements are reflected in note 4 and are reconciled at Group level in the Group Income Statement. Certain re-measurements and exceptional items are described in note 6. Adjusted earnings and adjusted basic earnings per share are reconciled to their statutory equivalents in note 11. All current financial results listed are for the 12 months ended 31 December 2006. The Group adopted IFRS with effect from 1 January 2005. The comparative data for 2004 has been restated accordingly. IAS 32 and IAS 39 were adopted with effect from 1 January 2005, and the comparative data for 2004 does not reflect the effect of these standards. Amounts in years prior to 2004 are presented in accordance with generally accepted accounting standards (GAAP) in the UK prevailing at the time. Turnover prior to 2004 excludes Accord trading revenue. All references to ‘the prior year’, ‘2005’ and ‘last year’ mean the 12 months ended 31 December 2005 unless otherwise specified. Throughout this Report references to British Gas include Scottish Gas.

02 Centrica plc Annual Report and Accounts 2006 Chairman’s Statement

It is our intention to strike a fair balance between lower prices and sustainable profits* in order to reward both our customers and shareholders. ietr’Rpr uiesRve 0 ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance Directors’ Report – Business Review p05

Securing shareholder value

Performance review Looking forward, it is our intention to strike We achieved good underlying financial a fair balance between lower prices and performance despite the particularly sustainable profits* in order to reward both challenging circumstances which prevailed our customers and shareholders. throughout the year. Returns to shareholders In the winter of 2005/06 gas shortages The Board is proposing a final dividend of in the UK and increasing worldwide 8.0 pence (2005: 7.4 pence) for payment demand for energy drove wholesale in June 2007 bringing our full-year dividend prices to record levels necessitating to 11.15 pence (2005: 10.5 pence). This price increases to many of our customers. represents a 6% year-on-year increase, The management team worked hard to in line with our policy and commitment to minimise the effect of these increases by real growth in the ordinary dividend. As we containing operating costs and developing Roger Carr become more confident in the sustainability innovative products designed to protect Chairman of more benign market conditions, we will customers and preserve loyalty in be able to consider the reinstatement of increasingly competitive markets. our share buyback programme should Regrettably, despite these actions, we surplus funds permit. lost one million residential energy accounts during the year. British Gas Residential Corporate governance returned to profit* by the end of the year Our reporting has always been open which, together with continued good and transparent, and this year we have delivery in gas production, strong growth refined our approach to include the in North America and the lower tax latest EU legislative requirements. We charge, enabled the Group overall to have integrated the key aspects of our I look forward to 2007 deliver sound earnings* growth. corporate responsibility performance “ The high commodity prices in the first within our Business Review (formerly the with confidence in both half of the year held up the price of assets Operating and Financial Review). Also in our business model and and the Board continued to exercise the Business Review is a section on the the management team. financial discipline and invest only in KPIs that the Board uses to measure additional sources of supply where progress against strategy, as well as a returns met our rigorous financial hurdles. section on the main risks facing the Group. ” In the latter part of the year, there was Board changes a fundamental change in the UK energy Sir Roy Gardner retired at the end of market. New gas supply pipelines from June. We are grateful to him for his Norway and Holland, whose construction material contribution and commitment, was made possible by long-term having led Centrica through a decade contracts entered into by British Gas, came of considerable change. on-stream at a time when the country was In July, Sam Laidlaw was appointed Chief experiencing the warmest autumn since Executive of the Company bringing with records began. This change in the balance him considerable experience in managing of supply and demand, combined with a and developing large scale international fall in global oil prices, reversed previous energy businesses. Since taking up the wholesale gas price trends. This enabled appointment he has made real progress British Gas to announce price reductions in developing the long-term vision for the from March 2007 when a portion of the Group and in sharpening the immediate * including joint ventures and associates stated net of interest and taxation, and before exceptional items more expensive gas supplies to which we focus on improving the current performance and certain re-measurements. are already committed will be exhausted. and efficiency of the organisation.

Centrica plc Annual Report and Accounts 2006 03 Chairman’s Statement continued

Mark Clare left the Company in the The future summer to take up an appointment We are entering 2007 under new outside the industry, having made an leadership but with continued commitment important contribution to the Group both to the twin goals of customer service ietr’Rpr uiesRve 0 ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’p27 Report – Governance Directors’ Report – Business Review p05 as Finance Director and, more recently, and shareholder value creation. Lower Managing Director of British Gas wholesale energy prices have provided Residential. Patricia Mann OBE retired us with the opportunity to reduce retail from the Group after nine years valuable prices and we expect the completion of service on the Board and her role of new systems to help address the service Senior Non-Executive Director was levels. We will also continue our search for assumed by Mary Francis CBE. Sadly cost-effective supply sources to rebalance Patricia died later in the year having our market exposure and sharpen our bravely fought a long-term illness. competitive edge. Phil Bentley who has ably served as Our investment programme will be Finance Director and Managing Director, driven by value and our cost structure Europe will move to the role of Managing will be the focus of continued stringent Director, British Gas following the appraisal. Innovation will be key to our appointment of Nick Luff as Group marketing effort and the application of Finance Director. Nick brings with him our skills and service network to meet significant commercial experience. the growing consumer demand for Jake Ulrich has taken on responsibility energy efficiency will be at the heart of for the continental European operations. our endeavours. I look forward to 2007 At the beginning of the year we with confidence in both our business established a main board committee to model and the management team. lead our corporate responsibility strategy. This is chaired by Mary Francis CBE and includes the managing directors of each business unit. I am confident that this new team will bring renewed vigour and commitment to the successful development of Centrica Roger Carr in the years ahead. Chairman 22 February 2007 Our employees Our employees worked particularly hard throughout 2006 as they responded to the unusually demanding environment. External pressures arising from turbulence in the energy market were magnified by the degree of change in systems, working practices, organisation and management within the Company and I thank them all for their loyalty, hard work and dedication. The upstream team once again made a material contribution to our financial performance and demonstrated their absolute professionalism in both the operation of our offshore facilities and the rapid recovery of our Rough storage platform following a fire earlier in the year. Tragically the risks of working offshore were again made evident when six people, four of them Centrica employees, were killed in a helicopter accident in Morecambe Bay at Christmas with a seventh person still missing, presumed dead. Our thoughts and deepest sympathies are with their families and our thanks go to all the employees who continue to help fulfil the UK’s energy needs under arduous and challenging conditions.

04 Centrica plc Annual Report and Accounts 2006 Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 0506 Report – Directors’ Business Review 08 Review Chief Executive’s 10 Overview Group 12 Key Performance Indicators Group 19 Operating Review 21 Financial Review Group 24 Uncertainties Principal Risks and Responsibility Corporate Chief Executive’s Review

Financially, the business performed well in a difficult year. While good progress is being made there is further work to be done to improve the British Gas service levels, reduce our cost base and develop our services, energy efficiency and Directors’ Report – Business Review p05 international businesses.

Delivering our strategy

Overview of 2006 cold weather driving higher call outs. Against a backdrop of unprecedented However the business finished the volatility Centrica produced a solid set of year strongly as the changes we ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance financial results. During the year the UK made to systems, management and experienced large fluctuations in wholesale processes improved both operational gas costs, particularly in the first quarter and service measures. when cold weather and fear of shortages Operationally the gas production pushed the wholesale gas price to 250 business performed well but production pence per therm (p/therm). The six main volumes were restricted by maintenance energy suppliers struggled to keep up with work during an extended summer outage this rate of rise in commodity costs and at the South Morecambe field and implemented 13 separate tariff increases management’s decision not to produce during the first 10 months of the year. from the field for a large portion of the Sam Laidlaw Supply fears subsided in the second half second half as a result of falling wholesale Chief Executive of the year as good progress was made prices and weak demand due to the with the construction of the Langeled unusually warm weather. This fall in prices and BBL pipelines, both of which were at the end of the year greatly improved underpinned by British Gas contracts, the ongoing position of the industrial and and wholesale gas prices started to fall. commercial legacy contracts which were The high wholesale prices in the first half significantly loss-making* overall during of the year materially impacted the supply the year. businesses. British Gas Residential made Centrica Storage had a challenging year. a significant loss* in the first six months In February 2006 a catastrophic failure of the year and stubbornly high forward and fire at the Rough storage field halted wholesale prices forced us to follow other operations. However an exceptional effort We are focusing firmly on “ suppliers in increasing retail prices for a by the team delivered reliable injection the priority of reducing second time in September. The quantity in time to refill the field before the start exposure to short-term and magnitude of tariff increases across of the winter production season, enabling movements in the all suppliers hit consumer sentiment the asset to deliver another strong wholesale gas price. and resulted in high levels of customer financial result. switching. Despite continuing to launch In North America, Direct Energy innovative products, including the very had another year of record figures with successful Fix and Fall offering, British Gas turnover up 15% primarily due to strong ” lost 1,029,000 energy accounts during growth in business markets and Texas. the year. The tariff increase in September The Texas operation performed particularly returned the business to profit* in the well, providing a large portion of the 21% second half of the year. Once the outlook overall increase in North American profit*. for wholesale prices became clearer This was due particularly to improved British Gas took the lead in announcing results in both the organic business, a price reduction to residential customers as it gained scale, and the incumbent of 17% in gas and 11% in electricity, business, as the competitive market effective from 12 March 2007. structure, combined with our effective British Gas Business delivered further procurement, enabled us to implement customer growth and record profits* despite proactive discounted price offerings to the extremely challenging commodity customers. Despite this strong overall environment in the first half of the year. growth, as part of a continual review of the British Gas Services suffered a difficult efficiency of the business, decisive action start to the year due to the exceptionally was taken to reduce costs. This resulted

06 Centrica plc Annual Report and Accounts 2006 in 450 job losses during the year, 9% of We made some progress on this agenda We expect to see further growth in British the total, primarily in Canada and in US during the second half of the year. The Gas Business which is also benefiting from home services. price increase in British Gas Residential the fall in wholesale prices and is retaining The European business made announced in July was followed later in strong customer renewal and loyalty considerable progress as, overall, it moved the year by a softening in wholesale gas levels. In British Gas Services we expect Directors’ Report – Business Review p05 firmly into profit*. However the ongoing and power prices; this has returned this the investment we have made in new negotiations between major companies business to profit* and allowed us to be systems, management and processes in France, Spain and Holland provided the first company to offer customers a to deliver significantly improved financial evidence of continued support within price reduction, announced in February. performance in 2007. In North America we European Union member states for We also launched our Essentials Tariff to expect to continue to grow both revenue consolidation and the formation of national provide protection to our most vulnerable and profit*, with further load growth in champions ahead of the existence of customers. The service levels in our British business markets focused primarily full competition. Gas Services business have shown a in the northeastern United States and The year ended on a tragic note with a significant improvement and our attention increased profit* contribution from our helicopter accident in the Morecambe Bay is now firmly focused on service levels in energy wholesale and trading activities. area which claimed the lives of six people, the residential business. Further expansion in continental Europe four of them long-standing and highly We carried out an initial review of the remains an important element of our committed Centrica employees with a costs and processes in our business. As growth plans. However while welcoming seventh person still missing, presumed a result we took an exceptional non-cash the conclusions of the Shareholder Information p113 European Financial Statements p43 Directors’ p27 Report – Governance dead. Our thoughts are with all of their charge of £196 million which reflects the Commission’s Energy Review, that market families and friends. Centrica regards write-down of our IT systems. We also took mechanisms need to be put in place to safety as a top priority, and is committed an exceptional cash charge of £87 million encourage greater competition, we remain to providing a healthy and safe environment for the initial restructure of parts of the cautious about the potential for making for employees and the communities which corporate centre, British Gas Residential further material inroads in the short term. it touches. We have a range of appropriate and British Gas Services resulting in around The recent publication of the Stern controls in place and these are subject to 1,550 job losses. Together these charges report was significant in the development regular review by the Board. reduce ongoing costs with around of climate change policy in the UK. Business outlook £50 million saved in 2007. Climate change is probably the most significant environmental issue facing Since taking over from Sir Roy Gardner Our progress to date leaves me current and future generations. Accordingly, as the Chief Executive of Centrica in July optimistic for 2007. We will continue to there is clear evidence that slowing or of 2006, I have spent a large part of my review the structure of our business and stabilising global warming is taking on first six months assessing the strengths put in place internal operational metrics and weaknesses of the business and which will identify and drive further greater importance for governments, companies and consumers alike. While the priorities going forward. My initial efficiencies. British Gas Residential is Centrica already has the lowest carbon observations are that the core businesses on track to return to a more sustainable intensity profile of the major UK power remain strong and we are in an enviable operating margin* and to arrest the decline suppliers we will continue to expand position in most of our chosen markets, in customer numbers assisted by the price our investments in the area of renewable with good growth being achieved reduction, improving customer service and energy and promote the use of energy- internationally, particularly in North America. ongoing innovation in our product offerings. efficient technology by consumers. We In addition, after a difficult few years, the We are also focusing firmly on the will also capitalise on our unique expertise wholesale pricing environment is starting to priority of reducing the exposure to short- and capability to deliver energy efficiency improve. However it is clear that the returns term movements in the wholesale gas advice, services and products to both in our residential business in the UK have price. We continue to expect this to be our business and residential customers. been low and that we have proven to achieved through a mixture of upstream I expect 2007 to be an important year in be overly exposed to the rapidly rising asset acquisitions and contractual Centrica’s development. Although some of wholesale cost of the commodities which arrangements. We will leverage Centrica’s our priorities will take longer to deliver fully, we supply to our customers. We have also unique market position on both sides I anticipate making real progress during suffered dual running costs and delivered of the Atlantic to secure liquefied natural less than satisfactory customer service as this year and delivering a step up in the gas for our customers and offer security performance of the business. we have moved to a new billing platform of demand for producers. in British Gas, the efficacy and robustness In Centrica Energy we expect gas of which is still in the proving stage. production levels to be broadly flat on We will now seek to build on our 2006. We renegotiated the terms of the strengths, remove the weaknesses and inter-company sales contracts on the overcome the challenges. To do this South and North Morecambe gas fields, Sam Laidlaw I have set out some clear priorities for with the agreement of HM Revenue and the Company: Chief Executive Customs, to establish a direct link to 22 February 2007 Transform British Gas month-ahead gas prices. We will also Sharpen up the organisation and commission the Maria, Thurne and reduce costs Davy East fields. The industrial and Reduce risk by adding new sources of commercial contracts are forecast to * including joint ventures and associates stated net of gas and power become profitable* as a result of lower interest and taxation, and before exceptional items Build on our multiple growth platforms wholesale prices. and certain re-measurements.

Centrica plc Annual Report and Accounts 2006 07 Group Overview

Customers are central to all our operations. Our activities are focused on securing and delivering energy and offering a distinctive range of home and business energy solutions. Directors’ Report – Business Review p05

Our businesses at a glance ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance British Gas British Gas British Gas Residential Business Services

Business description We are the biggest energy We market gas and electricity We are Britain’s largest supplier in Britain’s domestic to a full range of businesses operator in the installation and market. Operating under our under the British Gas Business maintenance of domestic central British Gas brand (Scottish Gas banner. We offer a range of heating and gas appliances, in Scotland and Nwy Prydain in propositions from open tariffs employing more than 8,600 Wales), we had 16 million gas to fixed price contracts to suit engineers. We offer services and electricity accounts at the our customers’ needs. through our HomeCare product end of 2006. and Dyno-Rod.

Market Retail energy margins have The business market is highly Competition has become more been put under intense pressure sophisticated with many larger intense in the contract cover in 2006, with energy suppliers companies operating through market, with industry players finding it difficult to keep pace professional energy buyers. offering lower priced propositions with rapidly rising commodity Brokers and consultants are that provide less cover. Climate costs. These are now falling increasingly a feature as the change and high energy prices and we anticipate that industry market becomes more have led to increased interest profit margins downstream competitive. in energy efficiency. will recover.

Opportunities 95% of customers are on A 95% SME renewal rate in Our on-demand offerings our new billing system. 2006 indicates the strength are helping us access Our innovative energy of our prospects for 2007. new markets. products will win and Smart metering and new, We are developing our retain customers. named account managers online sales presence. Reducing our cost base will will improve customer service. The demand for energy help us find additional value We are developing efficiency technologies and improve our marketplace propositions for customers is opening new sales competitiveness. who see energy efficiency as opportunities. a key way of cutting costs.

Brands

Web address > www.house.co.uk > www.britishgasbusiness.co.uk > www.house.co.uk

08 Centrica plc Annual Report and Accounts 2006 Turnover^ by business Operating proﬁt* by business (£m) (£m) British Gas Residential 7,112 95 British Gas Business 2,303 87

British Gas Services 1,104 102 Directors’ Report – Business Review p05 Centrica Energy 1,245 686 Centrica Storage 294 228 Centrica North America 4,097 223 Europe 295 7 Other 0 14 ^ from continuing operations * including joint ventures and associates, stated net of interest and taxation, and before exceptional items and certain re-measurements ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance Centrica Energy Centrica Storage Centrica North Europe America

We source gas and electricity Our Rough storage facility is the Under our Direct Energy brand, We are involved in power from our own production and UK’s largest. It is supported by we are North America’s largest generation, energy management from third parties, principally to a gas processing terminal at competitive energy solutions and retail energy supply in supply British Gas Residential. Easington, also managed by provider, serving residential and Europe. We have operations Investments include renewable Centrica Storage. From October business customers in Canada in Belgium, Germany, the generation and we are currently 2006, Centrica Storage became and the US. Netherlands and Spain. seeking secure supplies of gas responsible for operating the from overseas sources as UK adjacent terminal receiving gas production gradually declines. from the Langeled pipeline.

Gas prices are falling now With the decline of supplies The regulatory landscape Some EU states have been more gas is arriving in the from the UK’s North Sea gas is fragmented, with robust slow to make the legislative UK. Lower gas prices, retiring fields, the need for large volume competition in business markets changes for the full opening coal and nuclear plants and storage has grown. Moving across many states and of the market due in July 2007 an increasingly stringent forward, the UK will require provinces, and residential but there are strong signs that emissions trading scheme additional storage as traditional competition chiefly in Ontario, the EU is keen to apply more have improved the outlook seasonal swing producing Alberta, Texas and the pressure. North-west European for gas-fired power stations. fields deplete. northeastern United States. energy markets are increasingly interconnected and with more open access greater competition will be possible.

Our construction of an 885MW We are progressing a number We are growing our retail There are major opportunities combined cycle gas turbine of projects to increase the energy and services businesses in the Benelux and German power station at Langage in capacity of Rough to take in the deregulated markets. markets, which are undergoing Devon began. advantage of the increased As a source of value creation structural change. We are developing an additional demand for gas storage. we are developing our energy We intend to develop our 252MW of wind generation management capabilities. generation assets, our mid- and have secured a 600MW Where we see value, our stream activities and our electricity supply contract linked intention is to acquire more energy management solutions to international coal prices. assets to support the supply as the market dynamics in We acquired gas acreage in the of energy to our customers. Europe change. UK, Norway, Nigeria and Egypt.

> www.centrica.com > www.centrica-sl.co.uk > www.directenergy.com > www.luminus.be > www.luseoenergia.com > www.oxxio.nl > www.centrica-energie.de

Centrica plc Annual Report and Accounts 2006 09 Group Key Performance Indicators

In this section, as part of our commitment to enhanced narrative reporting, the Board and the Executive Committee have set out the key performance indicators (KPIs) that we use to monitor progress against our strategy. Directors’ Report – Business Review p05

Measuring our performance Financial Adjusted basic Total shareholder Dividends per share earnings per share return (TSR) ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance (EPS)

Adjusted basic Total shareholder return indices Ordinary dividend pence earnings per share pence 200 06 11.15 06 19.4 175 05 10.5 05 18.2 150 04† 8.6 04 18.1 125 03 5.4 Adjusted EPS is disclosed and reconciled 100 02 4.0 in note 11 on page 64. 01 02 03 04 05 06 † excludes special dividend of 25p Years ended 31 December Centrica FTSE 100

Description This measure of performance Total shareholder return This is the total dividend is calculated as profit before measures the return to per share (excluding special exceptional items and certain shareholders in terms of the dividends) paid in respect re-measurements for the growth of an investment in the of each financial year. year, attributable to equity Company’s shares, assuming shareholders of the parent that dividends and returns company, divided by the of capital are reinvested. We weighted average number of compare the Company’s TSR shares in issue during the year. with those of the other 99 members of the FTSE 100.

Target To deliver growth in adjusted TSR is used as one of the To deliver real growth EPS. This measure is used performance conditions in the per annum. as one of the performance Company’s Long Term Incentive conditions in the Company’s Scheme, details of which are Executive Share Option Scheme on page 35. and Long Term Incentive Scheme, details of which are on page 35.

Analysis/comment We have seen a 7% growth We have outperformed the The 2006 dividend shows an in adjusted EPS during a FTSE 100 Index by 31% over increase of 6% on the 2005 challenging year. a five year period. dividend which is in excess of the rise in the Retail Price Index.

Source/verification The measure of adjusted EPS is Alithos Ltd. The dividend is reported reported on the Group Income as part of the audited Statement, part of the audited Financial Statements. Financial Statements.

10 Centrica plc Annual Report and Accounts 2006 Directors’ Report – Business Review p05

Non-financial Lost-time injuries Employee Group carbon (LTI) engagement footprint ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance

Lost-time injuries Engagement score per 100,000 hours worked

† 8.6m 06 0.8 06 3.84 0.73 3.78 05 05 tonnes of CO2/ 04 1.1 04 3.73 12345CO2 equivalent** † this measure includes the LTI consequences of the incident at Rough. **data tolerance level of 10% See page 25 for commentary. A further 8.3 million tonnes of CO2 emissions comes from UK purchased power.

We measure lost time injuries The Centrica annual employee We measure the carbon dioxide per 100,000 hours worked. survey measures engagement and other greenhouse gases The majority of these are and commitment levels for every emitted from our activities. This incurred through slips, trips, team at all levels across the comprises emissions from power falls and manual handling. We Group. The overall engagement generation, gas production and use both incidence rates and score reflects the attitudes and storage, energy usage, fleet active indicators to monitor opinions of our employees and operations and business travel. the effectiveness of the health measures, on a scale of one to and safety (H&S) preventative five, their feelings about working programmes that we run for Centrica. throughout the Group.

Continue to target the reduction To improve employee Continue to provide a range and elimination of lost time engagement as part of of energy efficiency services injuries across our business improving business to help our customers reduce and have increasingly sought performance. their carbon footprint. We will to adopt a ‘zero tolerance’ also look to deliver new energy approach on prevention. saving programmes across the Group.

We have established a solid Our score shows a 2006 was the first year that track record of continual year-on-year increase and we have fully collated data to improvement and our underlying several businesses have calculate our Group carbon Customer satisfaction performance in 2006 continues seen significant improvement. footprint. We have the lowest In 2006, we used a variety of to indicate the beneficial impact carbon intensity profile of any measures across our business of our H&S strategy. large UK power supplier and units to measure levels of customer intend to further improve satisfaction. During 2007, a Group efficiency at all levels. customer KPI will be developed that recognises our position as Measured internally. The survey is managed by an Emissions data is collected a provider of energy and related external supplier. internally. UK carbon intensity services to both domestic and figures are calculated by commercial markets. This www.electricityinfo.org. information will be included in our 2007 Annual Report.

Centrica plc Annual Report and Accounts 2006 11 Operating Review

cost reductions were more than offset by British Gas Residential training and backfilling costs associated 800 more customer service staff with the migration of customers to the new billing system, increased bad debt 95% of customers now on new billing system Directors’ Report – Business Review p05 costs and the cost of implementing two Lost 1 million customer accounts price rises during the year. Operating profit* for the year increased by 6% to £95 million (2005: £90 million) British Gas Residential performance indicators as operating margins* recovered strongly For the period ended 31 December 2006 2005 % in the second half. Customer numbers (period end) We transferred 95% of our customer Residential gas (‘000) 10,263 11,131 (8) accounts onto our new billing system by the end of the year. We expect to have Residential electricity (‘000) 5,759 5,920 (2.7) transferred all customers by the end of Total 16,022 17,051 (6) March 2007. The increase in calls around Estimated market share (%) the times of the tariff increases, coupled Residential gas 49 54 (4.5)ppts with the ongoing system changes, meant Residential electricity 22 23 (0.8)ppts that customer service levels dropped in ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance Average consumption the middle of the year. In the second half Residential gas (therms) 569 597 (4.7) of the year we increased front-line staff Residential electricity (kWh) 4,069 4,146 (1.9) by 800 to improve customer service. Weighted average sales price We took a pre-tax exceptional cash charge of £36 million for restructuring Residential gas (p/therm) 78.66 61.16 29 the operation and the planned closure of 95.63 Residential electricity (£/MWh) 75.36 27 the British Gas Residential headquarters Transportation & distribution costs (£m) building. These result in a benefit of Residential gas 1,110 1,146 (3.1) £7 million in 2007 and around £16 million Residential electricity 511 493 3.7 thereafter. We also took a pre-tax exceptional Total 1,621 1,639 (1.1) non-cash charge for systems write-down Operating costs (£m) of £178 million, resulting in reduced British Gas Residential 1,029 974 6 amortisation charges, with around Turnover (£m) £28 million expected in 2007. Under the UK Energy Efficiency 4,832 Residential gas 4,196 15 Commitment British Gas installed more 2,280 Residential electricity 1,836 24 than 13 million energy efficiency measures, Total 7,112 6,032 18 such as loft and cavity wall insulation and Operating proﬁt/(loss) (£m)* low energy light bulbs, with an equivalent British Gas Residential 95 90 6 carbon saving of 1 million tonnes, Operating margin (%)* benefiting more than 6 million households. British Gas Residential 1.3 1.5 (0.2)ppts Beyond our legislative commitments, we have a range of energy efficiency services % has been used to express ‘percentage change’ to help customers reduce their carbon * including joint ventures and associates, net of interest and taxation, and before exceptional items and certain re-measurements. footprint. These include our Energy Savers Report, a bespoke home energy efficiency This year saw commodity prices again in March and September of 2006 and the audit which 1.5 million householders reach record highs with demand weighted full-year effect of the September 2005 completed during the year. wholesale market gas and electricity up price rise, partially offset by lower customer In addition, British Gas was selected as by 42% and 32% respectively on the numbers and reduced consumption due an accredited supplier for the government’s previous year to 57.10p/therm and mainly to an unseasonably warm autumn. Low Carbon Building Programme providing £47.13/MWh. This not only meant that In the year we incurred a charge of access to grant funding of up to 50%. We the business made a loss* in the first £175 million (2005: £85 million) for our are the only company within this phase of half of the year but forced tariff increases share of the imbalance costs of the the programme to gain accredited supplier across the industry. national network. We believe that certain status across all five microgeneration These price increases resulted in an industry processes systematically technologies – solar photovoltaic, ground overall rise in customer churn. At the disadvantage British Gas and we are source heat pumps, biomass, wind and end of December we had 16.0 million working with the regulator to make sure solar thermal. energy accounts, a net loss of 1,029,000 that gas costs are more fairly allocated British Gas committed to provide accounts year-on-year. The effect of churn across the entire industry. Overall gross £18.3 million of winter fuel rebates to on our business was reduced by the margin* increased by £59 million as the vulnerable customers during the year. launch of innovative product offerings, increase in turnover more than offset the We also continued to tackle fuel poverty such as the 2009 fixed price product and higher commodity costs and the increase through our ‘here to HELP’ programme. It Fix and Fall, which helped to maintain in transportation and distribution charges reached more than 117,000 homes during sales at around 60,000 per week. per customer. the year, installing free energy efficiency Turnover increased by 18% to £7.1 billion Operating costs increased to £1,029 products and identifying over £2.2 million (2005: £6.0 billion) due to price increases million (2005: £974 million) as underlying of unclaimed benefits.

12 Centrica plc Annual Report and Accounts 2006 British Gas Business This year brought unprecedented highs in commodity prices with significant Record proﬁts*, up 13% to £87 million increases in input costs for both gas and SME contract renewals topped 95% electricity. Despite having to raise prices to customers, we increased our total Directors’ Report – Business Review p05 ‘Named’ point of contact for each customer supply points by 2.5% to 932,000 (2005: 909,000) as increases in gross British Gas Business churn rates in our tariff book were more performance indicators than offset by strong sales performance, For the period ended 31 December 2006 2005 % continued SME contract renewal levels Customer supply points (period end) of over 95% and further improvements Gas (‘000) 400 394 1.5 in corporate customer retention. Electricity (‘000) 532 515 3.3 Turnover increased by 53% to £2.3 Total (‘000) 932 909 2.5 billion (2005: £1.5 billion) due to price Average consumption rises, higher customer numbers and higher average consumption in both 3,990 Gas (therms) 3,492 14 fuels as a result of winning a number 29,844 Electricity (kWh) 27,512 8 of large corporate accounts. Weighted average sales price Operating profit* was Shareholder Information p113 up 13% to Financial Statements p43 Directors’ p27 Report – Governance Gas (p/therm) 69.86 51.87 35 £87 million (2005: £77 million) despite Electricity (£/MWh) 74.87 57.88 29 a significant loss* being made in the Transportation & distribution (£m) tariff book prior to the price increase in Gas 149 124 20 March. Profit* in the second half was markedly higher as tariff increases took Electricity 261 217 20 effect and fourth quarter wholesale costs 410 Total 341 20 reduced, improving margins across the Turnover (£m) customer base. Gas 1,115 692 61 During the year operating costs Electricity 1,188 818 45 increased, driven by investments in a Total 2,303 1,510 53 new billing system, rising absolute cost Operating proﬁt (£m)* of debt on higher turnover and higher British Gas Business 87 77 13 sales and marketing costs. We made Operating margin (%)* progress on a customer service initiative that will create a single named point of 3.8 British Gas Business 5.1 (1.3)ppts contact for each customer and the deployment of new technology and % has been used to express ‘percentage change’ * including joint ventures and associates, net of interest and taxation, and before exceptional items and processes which will rationalise our certain re-measurements. invoicing and collection systems. We also continued to establish our position as an industry leader in providing real-time consumption data to help customers improve energy efficiency.

Centrica plc Annual Report and Accounts 2006 13 Operating Review continued

British Gas Services Service levels saw a marked improvement Turnover increased by 8% Directors’ Report – Business Review p05 Product relationships up 4% to 7 million

British Gas Services performance indicators For the period ended 31 December 2006 2005 % Customer product holdings (period end) Central heating service contracts (‘000) 4,392 4,337 1.3 Kitchen appliances care (no. of customers) (‘000) 387 365 6 Plumbing and drains care (‘000) 1,384 1,307 6 Home electrical care (‘000) 986 860 15 Home security (‘000) 22 25 (12) Total holdings (‘000) 7,171 6,894 4.0 ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance Central heating installations (‘000) 91 92 (1.1) Turnover (£m) Central heating service contracts 519 478 9 Central heating installations 264 251 5 Other 321 295 9 Total 1,104 1,024 8 Engineering staff employed 8,676 8,348 3.9 Operating proﬁt (£m)* British Gas Services 102 111 (8) Operating margin (%)* British Gas Services 9 11 (2)ppts

% has been used to express ‘percentage change’ * including joint ventures and associates, net of interest and taxation, and before exceptional items and certain re-measurements.

During the year British Gas Services In addition the second half of the year made significant progress on fixing saw a stronger performance in the central operational issues that were highlighted in heating installation business with a 9% the first half, when temperatures below the increase in installation volumes on the seasonal norm led to a record number of second half of last year, recovering much call outs. These call outs put additional of the fall in the first half. We installed pressure on operations and affected around 90,000 energy-efficient boilers in service levels. Operational performance the UK during the year and our engineers improved considerably in the second are now providing solar thermal products half of the year as process and system to domestic customers. changes were implemented. This resulted Operating profit* decreased by 8% to in a marked improvement in service £102 million (2005: £111 million) due to levels in the latter part of the year. Most the increased breakdown call outs and importantly we coped with the period extra cost of parts required for the repairs covering the switch-on of central heating in the first half of the year. The second systems in the autumn, which results half showed a year-on-year improvement in high overall demand, without any of 12%. significant issues with operations and During the year we significantly customer service. restructured operations to reduce cost Turnover was up by 8% at £1.1 billion and increase productivity, resulting in 390 (2005: £1.0 billion) as the total number job losses with an exceptional cash cost of product relationships increased by 4% of £48 million. This will have a payback over the prior year to just over 7 million. of just over three years. We also wrote- The average price of central heating care down certain unused functionality and also increased reflecting initial structural capitalised development costs within changes to pricing based more accurately the systems portfolio. This resulted in a on the costs of servicing each customer. pre-tax exceptional charge of £18 million.

14 Centrica plc Annual Report and Accounts 2006 contributed to the 47% increase in oil and Centrica Energy condensates production which reached Completed new Langeled reception terminal 5.6 million barrels of oil equivalent (MBOE) (2005: 3.8 MBOE) with average selling Work started on £400 million 885MW Langage power station prices of £34/BOE (2005: £29/BOE). Directors’ Report – Business Review p05 First green power from Barrow offshore wind farm The 36% increase in variable production costs is due to the increased proportion Centrica Energy of volumes from the newer fields where performance indicators depreciation levels are higher. For the period ended 31 December 2006 2005 % In addition to the £153 million acquisition Gas Production of a 4.84% stake in the Statfjord field we Gas production volumes (mmth) invested £100 million in maintaining and developing our upstream portfolio of Morecambe 1,207 2,445 (51) assets during the year. Of this, we invested 709 Other 612 16 an initial £21 million in the Statfjord Total 1,916 3,057 (37) depressurisation project to increase the Average gas sales price (p/therm) 53.1 39.4 35 level of gas reserves and spent £46 million Oil and condensate production volumes (MBOE) 5.6 3.8 47 on the development of Maria, Thurne and

Average oil and condensate sales price (£/BOE) 33.8 28.7 18 Davy East. These new Shareholder Information p113 fields together with Financial Statements p43 Directors’ p27 Report – Governance Turnover (£m) 1,291 1,365 (5) the Statfjord project add 1,348 million therms (mmth) of gas reserves and 11.6 External turnover (£m) 323 183 77 million BOE for a total cost of £186 million. Operating costs (£m) We also spent around £17 million on Volume related production costs 293 215 36 our focused gas exploration programme Other production costs 139 130 7 in the UK as we farmed into four projects. Total 432 345 25 We made a successful application under Operating profit (£m)* 864 1,020 (15) the 24th UK offshore licensing round for Power stations acreage around the Morecambe fields and opened an office in Stavanger to 10,541 Power generated (GWh) 11,641 (9) enable us to participate successfully in Industrial & wholesale the Norwegian licensing round where we External sales volumes (mmth) 2,667 3,081 (13) gained shares in four blocks in January Average sales price (p/therm) 31.3 24.8 26 2007. We also have licence blocks in Turnover (£m) 883 786 12 Egypt and Nigeria which we started to Operating profit/(loss) (£m)* (210) (156) n/m assess and have made an application Accord under the Trinidad licensing round. Operating profit (£m)* 32 39 (18) Industrial sales and wholesaling Centrica Energy operating profit (£m)* 686 903 (24) The industrial sales and wholesaling segment made an operating loss* of % has been used to express ‘percentage change’ £210 million (2005: £156 million loss*). * including joint ventures and associates, net of interest and taxation, and before exceptional items and certain re-measurements. Losses* from the legacy gas sales contracts remained broadly flat at £171 million Centrica Energy faced a challenging Gas production (2005: £173 million loss*) as the increase year and operating profits* were down Operating profit* was down 15% to £864 in input commodity costs was offset by 24% at £686 million (2005: £903 million) million (2005: £1,020 million) due to a 37% an increase in the weighted average due to lower gas production levels and the reduction in gas volumes partially offset by sales price combined with a reduction forecast increased losses* in the industrial a 35% increase in selling price. The 51% in volumes. Volumes reduced as three and wholesale segment. reduction in Morecambe production contracts ended and the remaining For the year, market month ahead volumes was due to management customers chose to buy from the gas prices rose by 36% to 50.22p/therm decisions to carry out remedial work on wholesale market when gas prices (2005: 36.82p/therm) and electricity rose South Morecambe’s cooler units during an softened. This reporting segment includes 30% to £45.84/MWh (2005: £35.27/MWh). extended summer maintenance period and certain operating costs of Centrica Energy; The UK experienced huge fluctuations in our decision to switch off the field in response these increased to £66 million (2005: £34 wholesale gas costs, particularly in the to low intraday gas prices especially in the million) as we continued to expand our upstream operations. early part of the year when cold weather fourth quarter of the year. and fear of shortages pushed the wholesale This was partially offset by a 16% Electricity generation price per therm to 250 pence. Gas prices increase in other production volumes We generated 10.5TWh of power (2005: reduced substantially in the second half mainly due to the full-year effect of our 11.6TWh) from our 3.4GW fleet of gas-fired of the year due to the increased flow of 2005 acquisition of the Kerr McGee fields power stations in the period which was gas through the newly constructed and the acquisition of an increased share down on the prior year due to a number Langeled and BBL pipelines. in the Statfjord field. These fields of extended outages in our fleet. Total fleet

Centrica plc Annual Report and Accounts 2006 15 Operating Review continued

load factor was 41% (2005: 49%). We Clean Development Mechanism (CDM) for the supply of 600MW of baseload power started work at Langage, Devon to build and invested in the largest private fund in over a 5¼-year period starting October an 885MW gas-fired plant on our the carbon market. Centrica believes the 2007, indexed to international traded coal consented site. The total investment is CDM is crucial to engaging developing prices and including a fixed clean seasonal

Directors’ Report – Business Review p05 expected to be around £400 million and countries in emission reductions and has dark spread. commercial operations are due to start committed to further investments in this area. We also completed an innovative during winter 2008/09. This will be the Renewables three-year winter super peak electricity first power station to be built in the UK generation tolling agreement with Rolls- In March we produced the first green for five years. In November we announced Royce Power Development to reduce power from our 90MW joint venture the acquisition of 85% of Coastal Energy Centrica’s exposure to volatile short-term Barrow offshore wind farm. In November, Limited who are seeking planning market prices during these periods. The Airtricity started commissioning the 72MW permission to build the UK’s first Integrated contract commenced in October 2006, Braes of Doune wind farm and subject to Gasification Combined Cycle (IGCC) with a total capacity of 245MW from successful testing and handover from the power plant which would incorporate pre- several small independent energy projects. construction contractor, we will acquire 50% combustion carbon capture technology, In the last quarter of the year two key of the equity from Airtricity for £42 million. with the result of producing the lowest pipeline projects, capable of meeting The award of the main construction carbon emissions of any fossil fuel plant 40% of the UK demand, underpinned contracts for the two 90MW wind farms in the UK. We also acquired an interest by British Gas purchase contracts, were at Inner Dowsing and Lynn is almost ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance in a company developing a carbon commissioned. Langeled, underpinned complete. First power from this project is sequestration business. by our 10 year 5.1BCM/year contract expected to be delivered in late 2008. We We continued to participate in the with Statoil, and BBL, underpinned by also submitted an application for planning European Union (EU) Emissions Trading our 10 year 7.3BCM/year contract with consent for the 250MW Round Two Lincs Scheme. We believe it is the cornerstone Gasunie started to deliver significant offshore wind farm. If successful, first power mechanism for reducing emissions across amounts of gas to the UK. from the project could be delivered in 2010. the EU. In 2006 Centrica was involved in 15% of all EU carbon allowance trades. Energy procurement We also made a number of significant In April 2006 we agreed an innovative coal- investments through the United Nations linked power purchase agreement with Drax

The production facilities were returned Centrica Storage to operation less than 32 weeks after Restored operation after fire the original incident. The force majeure notice was lifted on 20 November, once Recovery operation involved 500,000 man-hours, final operational testing was complete. with no lost-time incidents The restoration project involved Operating profit* up 48% to £228 million approximately 500,000 man hours and was completed without any health and safety lost-time incidents. The two Centrica Storage performance indicators employees hospitalised at the time of For the period ended 31 December 2006 2005 % the incident have now recovered and Average SBU price (calendar year) (pence) 56.5 34.8 62 are back working on the platform. Turnover (£m) The cost of the repairs and payments Standard SBUs 254 159 60 made under the storage services contract resulted in an exceptional cash cost to Extra space 30 19 58 the Group for the year of £48 million of Native gas sales 0 20 (100) which £24 million is recognised in the Gas sales 58 30 93 books of Centrica Storage. 16 Other 25 (36) Since recovery the reliability of the asset Total 358 253 42 has been re-established. Both injection External turnover (£m) 294 195 51 and production have experienced 99% Cost of gas (£m) 58 35 66 availability, and the reservoir was filled Operating profit (£m)* 228 154 48 by early November well in advance of the winter production season. % has been used to express ‘percentage change’ Operating profit* before the exceptional * including joint ventures and associates, net of interest and taxation, and before exceptional items and certain re-measurements. charge for the year was up 48% to £228 million (2005: £154 million). This The main focus for Centrica Storage Despite extensive damage, it took was mainly due to a rise of 62% in in 2006 was the recovery of operations only 16 weeks to recommission injection the average SBU price to 56.5 pence after the explosion and fire which caused at the facility. In restoring full production (2005: 34.8 pence) and an increase in significant damage to the main offshore capability the processes offshore the realised price of space sales, partially platform of the Rough storage facility were simplified to export wet gas offset by the 2005 sales of native gas of in February. rather than using offshore dehydration. £20 million not being repeated in 2006.

16 Centrica plc Annual Report and Accounts 2006 Recognising the need for greater Centrica North America incentives on power procurement, we Turnover topped £4 billion have agreed a package with the regulator that now enables us to earn a return on Operating proﬁt* grew by 21% to £223 million the regulated electricity supply business. Directors’ Report – Business Review p05 Bought 244MW power station in Texas Texas residential and small commercial energy Centrica North America performance indicators Turnover grew by 18% to £1,120 million (2005: £953 million). This was largely For the period ended 31 December 2006 2005 % driven by growth in our organic customer Customer numbers (period end) base in areas of Texas outside our Canada energy (‘000) 2,090 2,118 (1.3) incumbent territory. In April we acquired Texas energy (‘000) 948 897 6 approximately 100,000 customers from Other USA energy (‘000) 348 331 5 Entergy. In July, as part of a wider Home services (‘000) 1,964 1,885 4.2 agreement with the Public Utility Volumes: Commission we implemented a 5% discount to our residential customers in Gas production (mmth) 304 308 (1.3) CPL/WTU which effectively removed those 4,450 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance Electricity generation (GWh) 3,212 39 customers from Price-to-Beat (PtB), and Turnover (£m) then reduced prices by a further 6% at Canada residential & small commercial energy 1,425 1,533 (7) the start of 2007. The growth in scale of Texas residential & small commercial energy 1,120 953 18 the organic business, allied with effective Other USA residential & small commercial energy 247 208 19 procurement across both businesses, Home services 371 360 3.1 including the positive impact of the three Business markets 902 481 88 power stations, increased operating profit* by 63% to £117 million (2005: £72 million). Energy wholesale and trading 32 17 88 Customer numbers increased as a result Total 4,097 3,552 15 of the acquisition of the customer base of Operating proﬁt/(loss) (£m)* Entergy and continued strong competitive Canada residential & small commercial energy 42 47 (11) sales in our organic business, partially offset Texas residential & small commercial energy 117 72 63 by the ongoing churn in the incumbent Other USA residential & small commercial energy 12 16 (25) customer base. In February we acquired Home services 68 51 33 the Paris power station in northern Texas Business markets (21) (8) n/m and we completed three new wind power purchasing agreements, which together Energy wholesale and trading 5 7 (29) with the one signed in 2005, increased our Total 223 185 21 total contractual wind power capacity to Operating margin (%)* 643MW. These investments are enabling Total North America 5.4 5.2 0.2ppts us to offer our customers innovative % has been used to express ‘percentage change’ renewable energy plans. * including joint ventures and associates, net of interest and taxation, and before exceptional items and Direct Energy continued to support certain re-measurements. the ‘Neighbor-to-Neighbor’ project in Houston, with a US$1million (£540,000) Our North American business has Canada residential and contribution. We work in partnership with continued its strong growth. Overall small commercial energy 29 community agencies, which distribute turnover grew by 15% to £4.1 billion Turnover decreased by 7% to £1,425 funds to vulnerable customers who are (2005: £3.6 billion) driven primarily by million (2005: £1,533 million) with unable to pay for their home electricity the continued growth in business markets increases in the deregulated business in emergency situations. and the organic residential business in being more than offset by reductions in the regulated Alberta business. Operating Other USA residential and small Texas. Operating profit* grew by 21% to commercial energy £223 million (2005: £185 million) primarily profit* reduced by 11% to £42 million (2005: £47 million) as a result of the Turnover grew by 19% to £247 million due to higher profits* in Texas and the removal of the business protection plan (2005: £208 million) due to increased home services business with adverse rebate (BPPR) in Ontario, partially offset customer numbers and higher retail exchange rate movements in the second by increased profits* from equity gas prices. We made encouraging progress half negating the positive impact in the production and a significant reduction in growing the customer base by 5%, first six months. in employee numbers. with a strong performance in the New York Despite this strong overall growth, Our Alberta business moved into profit* market. This combination of rising prices as part of a continual review of the for the first time, although the competitive and growing customer numbers was efficiency of the business, decisive action market is growing slowly. Here the offset by expenditure on growth and was taken to reduce costs. This resulted regulated business has experienced a lower consumption due to very warm in 450 job losses, 9% of the total, during net customer decline to date of only 8%. weather at the end of 2006, resulting the year, primarily in Canada and in US We now have around 95,000 competitive in a lower operating profit* of £12 million home services. customer accounts on-supply. (2005:£16 million).

Centrica plc Annual Report and Accounts 2006 17 Operating Review continued

Home services by 11% to 557mmth and 127% to 11.2TWh Home services performed well during respectively. Turnover grew by 88% to the year with a 33% growth in operating £902 million (2005: £481 million). profit* to £68 million (2005: £51 million) During the year we successfully entered

Directors’ Report – Business Review p05 on a turnover increase of 3%. This was 12 new utility areas. The costs of doing achieved primarily in Canada through this, together with loss of the BPPR rebate increased margins on heating, ventilation in Ontario, caused an increased operating and air conditioning sales and ongoing loss* of £21 million (2005: operating loss* operational efficiencies. The US home of £8 million). However, underlying gross services business remained stable despite margins* remain healthy. This segment the backdrop of a severe downturn in the includes a services business which has been US housing market. loss-making* and a turn-around plan for the In June we disposed of our remaining services business has already been executed. 19.9% holding in The Consumers’ Energy wholesale and trading Waterheater Income Fund for £65 million, During 2006 we widened the remit of our recording a one-off pre-tax gain of existing wholesale and trading business £7 million. Although we no longer have to encompass taking future capacity in an equity share in the fund, we are still natural gas transportation and storage ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance required to consolidate the full financial and wind power contracts, so as to exploit results of the fund owing to the continuing the expert resources already in place to close contractual relationship. support retail procurement across the US Business markets and Canada. We will continue to develop We continue to invest heavily in this sector these activities in the future. This segment and have seen significant growth with registered an operating profit* of £5 million volumes sold in gas and electricity rising (2005: £7 million).

Europe Turned a £9 million operating loss* into a £7 million proﬁt* Entered German market Full integration of SPE businesses in Belgium

The industry continues to consolidate In the Netherlands, we continued to in Europe with evidence of support for grow our customer base through our national champions in France, Spain and Oxxio brand. To support future growth the Netherlands. While we continue to we signed a tolling agreement with review opportunities for developing our Intergen for the output of a 400MW new business in continental Europe, this build combined cycle gas turbine (CCGT) remains a challenge in the current climate at Rijnmond which we expect to begin and we will be robust in only pursuing operations in 2009. We made significant those opportunities which can deliver progress on the development and long-term shareholder value. During the installation of smart meters. year our European segment performed Our Luseo operation in Spain reduced well, delivering a £7 million operating its supply operations due to the adverse profit* (2005: operating loss* £9 million). regulatory environment in Spain. However, In Belgium we achieved full integration it continued to develop energy of all previous businesses that made up management services to special regime SPE and we now operate nationally (renewable) generators and exploited other under the Luminus brand. We transferred profitable energy management activities. 500,000 Wallonian residential customers We continued to grow our footprint in on 1 January 2007, opened a new call Europe by creating a German subsidiary, centre in Liège and we approved Centrica Energie GmbH, based in investments in open cycle gas turbine Dusseldorf and recruited key staff. This (OCGT) generation in Ghent and two is in response to positive developments wind farms. in the legal and regulatory framework for competition in German energy markets. * including joint ventures and associates, net of We are positioned to begin selling energy interest and taxation, and before exceptional items to the commercial supply market in 2007. and certain re-measurements.

18 Centrica plc Annual Report and Accounts 2006 Group Financial Review

2006 was a year of extreme volatility in wholesale commodity costs. Still Centrica produced sound growth in earnings* and the share price rose by 39%, outperforming the FTSE 100 by 28 percentage points. Directors’ Report – Business Review p05

Centrica’s financial aim is to achieve a total Earnings shareholder return (TSR) ranking in the first Group earnings* on a continuing basis quartile of UK FTSE 100 Index companies, were up by 8% to £715 million (2005: ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance taking account of share price growth and £661 million). The lower operating profits* dividends received and reinvested over were more than offset by the reduction a sustained period. Centrica seeks to in the Group tax rate to 43% (2005: 52%) maximise the return on capital it achieves due to the lower contribution from high in excess of its cost of capital, within a tax rate upstream gas production. prudent risk management framework. The statutory loss for the year was The Remuneration Report summarises our £155 million. The reconciling items TSR performance over recent years against between Group earnings* and the our comparator FTSE 100 Index group. statutory loss are exceptional items The Group’s closing share price on and certain re-measurements that are Phil Bentley 31 December 2006 was 354.50 pence explained below. Group Finance Director (31 December 2005: 254.75 pence), Earnings per share and dividends an increase of 39%, outperforming the Adjusted earnings per share* improved FTSE 100 Index by 28 percentage points by 7% to 19.4 pence in 2006 from 18.2 in the year. pence in 2005. The Group reported a basic loss per share of 4.3 pence, down Financial statements from basic earnings of 27.4 pence in 2005, reflecting the post-tax impact of exceptional charges and certain Group turnover re-measurements. Group turnover from continuing operations In addition to the interim dividend of was up 22% at £16.5 billion (2005: 3.15 pence per share, we propose a £13.4 billion). The increase was driven final dividend of 8.0 pence giving a total primarily by organic growth in the North ordinary dividend of 11.15 pence for the American business markets and the year (2005: 10.5 pence). residential business in Texas, and price Cash flow increases in British Gas Residential and Group operating cash flow before working British Gas Business. capital adjustments was up from £1,936 Centrica share performance Group operating profit million to £1,965 million but after working (pence) Group operating profit* from continuing capital adjustments, operational interest, 400 operations was down 5% at £1,442 million tax, exceptional charge and discontinued 300 (2005: £1,513 million), with the strong items was down 36% at £737 million 200 growth in Centrica Storage and North (2005: £1,144 million) primarily due to America being more than offset by reduced the working capital investment required 100 profits* in gas production on lower volumes. by significant movements in the wholesale Jan 2001 Dec 2006 The results include £20 million non-recurring prices. The net cash outflow from investing Centrica plc FTSE 100 Relative profit* relating to the valuation of the Group’s activities increased to £720 million (2005: pension schemes due to the effect of new £529 million), 36% higher than last year pension legislation, introduced by the due to the receipt in 2005 of £184 million Finance Act from April 2006, upon the of disposal proceeds relating to the sale * including joint ventures and associates, net of interest and taxation, before exceptional items increased estimate of future amounts of British Gas Connections and Onetel. and certain re-measurements. of pension commuted for a lump sum. The net cash outflow from financing

Centrica plc Annual Report and Accounts 2006 19 Group Financial Review continued

activities increased to £597 million (2005: further streamlining of the group corporate Accounting policies £335 million), an increase of 78% on 2005, structure including the outsourcing of due mainly to a net increase in debt of parts of finance and HR, resulting in around 1,550 job losses. This will deliver £623 million in 2005, partially offset by UK listed companies are required to Directors’ Report – Business Review p05 benefits of £20 million in 2007 and the suspension of the share repurchase comply with the European regulation to approximately £39 million in 2008. programme, announced in February 2006, report consolidated financial statements Finally there is an exceptional cash resulting in a reduction in year-on-year cash in conformity with International Financial cost of £48 million relating to the outflow of £365 million. Reporting Standards (IFRS). The Group’s Rough incident in February. Net debt and interest significant accounting policies are Tax credits of £93 million have been explained in note 2 to the Financial The Group’s net recourse debt level at recognised in respect of these costs. 31 December 2006 was £1,527 million Statements. Note 3 to the Financial (2005: £1,060 million). This was up on Certain re-measurements Statements explains the critical accounting 2005 due primarily to the increased In our business we enter into a portfolio judgements and key sources of estimation working capital requirement. This debt of forward energy contracts which include uncertainty arising in the preparation of includes £808 million of finance lease buying substantial quantities of commodity the Financial Statements. The Group has commitments on the Humber and to meet the future needs of our customers. not made any material changes to its Spalding power stations. Net interest A number of these arrangements are accounting policies in the year ended considered to be derivative financial 31 December 2006.

ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance payable was £183 million (2005: £145 million) and was covered seven times instruments and are required to be fair by operating profit* (2005: ten times). valued under IAS 39. Fair valuing means that we apply the prevailing forward market Net assets prices to these contracts. The Group Net assets decreased by 33% to has shown the fair value adjustments £1,642 million (2005: £2,442 million). separately as certain re-measurements Phil Bentley This is primarily due to the movement in as they are unrealised and non-cash in Group Finance Director our derivative financial instruments which nature. The profits* arising from the are marked-to-market, from an asset of physical purchase and sale of commodities £0.6 billion at the end of 2005 to a liability during the year, which reflect the prices in of £1.2 billion at the end of 2006. This the underlying contracts, are not impacted resulted in a charge of £931 million by these re-measurements. (including joint ventures) arising on the net The statutory results include charges mark-to-market movement on our energy to operating profit relating to these re- procurement activities recognised as measurements of £931 million (2005: certain re-measurements in the Income net credit of £455 million), primarily from Statement, and a charge to reserves of marking-to-market some contracts relating £939 million, where certain contracts have to our energy procurement activities. As achieved hedge accounting under IAS 39. gas and power were delivered under these After the related deferred tax credits, these contracts, the net in-the-money mark-to- movements account for a total reduction market positions were unwound generating in net assets of £1.2 billion. Exceptional a net charge to the Income Statement in the charges account for a further decrease in period of £287 million (2005: net credit of net assets of £238 million after tax. These £140 million). As the forward prices reduced are partially offset by a post-tax actuarial in 2006 the portfolio of contracts fair valued gain on our pension liability of £332 million. under IAS 39 reported a net loss on Exceptional items revaluation of £638 million (2005: credit There is a pre-tax exceptional charge for of £298 million). The remaining £6 million the year of £331 million (post tax £238 (2005: credit of £17 million) reflects the million). There are three elements. Firstly, proprietary trading positions relating to there is a non-cash charge of £196 million cross-border capacity and storage relating to the write-down of systems contracts. The £37 million (2005: £nil) assets following a review of existing and credit to interest income relates to the re- required future functionality within the measurement of the publicly traded Units of more focused Group. This will result in The Consumers’ Waterheater Income Fund. a reduction of £31 million in the 2007 Acquisitions and capital expenditure amortisation charge. We also took an During the year the Group acquired a £87 million exceptional cash charge mainly further 4.84% interest in the Statfjord oil relating to the streamlining of the British and gas field from BP for £153 million, Gas Residential back-office, the planned and the Paris Energy Centre, a 244 MW closure of the British Gas headquarters gas fired combined cycle power plant in * including joint ventures and associates, net of building at Stockley Park, a restructuring Texas, for £32 million, along with a number interest and taxation, before exceptional items of the British Gas Services team and a of smaller acquisitions. and certain re-measurements.

20 Centrica plc Annual Report and Accounts 2006 Principal Risks and Uncertainties

Centrica, like all businesses, faces a number of risks and uncertainties as we conduct our operations. There are a number of risks that could impact the Group’s long-term performance and steps are taken to understand and evaluate these in order to achieve our objective of creating long-term, sustainable returns Directors’ Report – Business Review p05 for shareholders.

We have a risk management process operated by third parties both in the in place, which is designed to identify, UK and abroad. The potential threat of manage and mitigate business risk. terrorism in relation to certain markets ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance Regular reporting of these risks and the and assets is an increasing risk. monitoring of actions and controls is To respond to this changing environment, conducted by the Audit Committee, the Company has supported new which reports its findings to the Board. infrastructure development to bring gas This process is described in the Corporate to the UK. In addition we continue to take Governance section on page 32. steps to acquire assets to replace our The factors described below highlight declining gas reserves. The Company will risks and uncertainties which affect the continue to secure and develop such gas Group but are not intended to be an and power assets in the UK and overseas exhaustive analysis of all the risks which and continually review the security may arise in the ordinary course of business arrangements to protect those assets. or otherwise. Some risks may be unknown Health, safety and the environment to the Group and other risks, currently The Company faces inherent health and regarded as immaterial, could turn out safety risks due to the large scale onshore to be material. and offshore assets that we operate, and the millions of home visits our service Operational factors businesses in the UK and North America make to customers each year. We are committed to maintaining high standards of UK customer service, brand and reputation health and safety, and our well developed High wholesale prices and higher levels of processes reflect this risk. Further price volatility in the commodity markets information on our approach to health (see commodity prices below) have caused and safety is available in the Corporate all suppliers to increase prices to customers Responsibility section on page 25. which in turn have driven up customer The Company’s activities have an impact churn and adversely affected customers’ on the environment. Climate change service levels. The Company has recently presents risks and opportunities for our engaged additional staff and implemented a business. The need for action to tackle new billing system for residential customers climate change was further emphasised to help improve levels of customer service. in the Stern Review published in 2006. Further information on our approach to Further information on our approach to customer service is available in the Corporate climate change is available in the Corporate Responsibility section on page 25. Responsibility section on page 25. Security of supply Outsourcing and offshoring As the indigenous gas reserves have Centrica has entered into a number of declined, the UK, and so the Company, outsourcing contracts, some of which has become increasingly reliant on are offshore, in respect of certain support supplies from mainland Europe and functions for its UK and North America other parts of the world. Accordingly, a businesses. As with any contractual key element of security of supply is access relationship, including outsourcing and to these reserves and the reliability of the offshoring, there are significant inherent transmission and distribution networks risks to be considered and mitigated.

Centrica plc Annual Report and Accounts 2006 21 continued In July 2006, the Government published the signs regarding positive are There proposals for the five-year price controls for the five-year proposals as electricity transmission on gas and on gas price control well as a one-year will The new arrangements distribution. from network companies apply to the expected are 1 April 2007. The proposals in transportation in an increase to result prices to customers, charges, and so final potentially contributing to therefore customer churn. Ofgem is also conducting price control a five-year gas distribution This activity will set process. review gas for the regulated allowed revenues companies for the distribution network As a supplier, period 2008 to 2013. to to any revisions Centrica will be subject charges resulting policies or transportation At this early stage of the review. this from the it is not possible to predict process outcomes, and while all users of the gas distribution networks would be affected, this could again feed into higher costs and customer prices. its Energy Review entitled “The Energy Challenge, Energy Review Report 2006”. ongoing currently Policy consultations are with an Energy White Paper expected in Spring 2007. Centrica has been active during this period of consultation to help define policy on issues such as the future of the Renewables Obligation and the Commitment, measures Energy Efficiency the planning system for new to improve and proposals projects energy infrastructure for changes to energy billing and metering. for a firm continue to press also We political commitment to the EU Emissions Scheme post-2012 which is Trading critical to new investment decisions being taken over the next few years. have welcomed the GovernmentWe of a Climate Change Bill introduction which sets in statute the Government’s carbon emissions by 60% target to reduce ahead with the moving are by 2050. We development and consenting commercial and Carbon Capture of our Teesside The final decision will Storage project. need to take into account the support framework for low carbon technologies. energy markets. liberalisation of European In June, the EU Energy Commissioner that announced a strategic energy review of competitive markets at has the creation competition its heart. The need for effective level of is emphasised by the current with consolidation activity in Europe, the potential emergence of national champions, which could not only impact but also our our participation in Europe and transport gas across ability to source to the UK. continental Europe units e.g. the use of Active monitoring of customer trends and Active monitoring of customer trends In the UK energy market, the regulator, network In January 2007, the regulated Regulatory factors climate, gas and electricity prices and an and electricity prices climate, gas environmental of the awareness increasing Centrica plc Annual Report and Accounts 2006 and/or greater use of demand-side and/or greater e.g. smart management technology demand in the metering, could affect monitors medium term. The Company develops weather consumption trends, seeks to inform hedge strategies and the provision customers through and products. of energy saving advice Level of competitive activity The energy supply market in the UK is so highly competitive and increasingly in North America. The Company also operates in the competitive home services markets in both the UK and North America. In the UK, competitive as existing increasing are pressures and other service energy providers such as insurance companies, providers, their market position. seek to strengthen competitor activity enables the Company to changing circumstances to respond campaigns and by developing retention innovative customer propositions. The energy markets in the UK, North are America and Continental Europe operating subject to comprehensive as defined by the relevant requirements and/or governmentsector regulators departments. As participants in these markets, amendments to the regulatory could have an impact on the regime Company achieving its financial goals. Ofgem, is undertaking a supply licence scheduled for completion in June review changes were 2007. The proposed published for the first time in December to retain 2006 and Ofgem has proposed only a limited number of conditions that necessary for the energy market to are the and to protect function properly of customers, in particular those interests vulnerable. The final decision who are document together with the new licence 2007, expected in March conditions are with the new licence conditions coming in June 2007. The precise into force requirements extent of the remaining uncertain. is therefore final companies accepted Ofgem’s Principal Risks and Uncertainties Uncertainties and Risks Principal the energy use. Furthermore, impact of of new and application development either from technologies, heat and power units, micro-combined domestic energy generating To manage this risk, the Company To External market factors 22 Consumption Gas sales volumes, and to a lesser extent by affected electricity sales volumes, are and other weather factors. temperature In addition, customers’ demand behaviour will be influenced by the national economic profiles of our customers’ by the use supplemented requirements energy of financial instruments such oil and gas swaps, gas derivatives and bilateral for gas and power. agreements the Financial Risk Management Committee. policy is to hedge a The Company’s for a number of the exposure proportion of years ahead matched to the underlying optimises its asset and contract portfolio market analysis based on comprehensive and continuous assessment overseen by Commodity prices to energy requirements The Company’s serve its gas and electricity customers are dependent on the wholesale commodity markets for gas, oil, coal, carbon and power prices, all of which have been volatile during 2006. While the outlook stable market for 2007 suggests a more place, particularly in gas, driven by greater liquidity as new pipelines to the UK come into operation, this will always be subject to external market events and factors. Further consolidation particularly between companies with significant upstream to a less liquid could lead resources in available market due to the reduction counterparties with whom to trade. Information systems systems information Large and effective management critical for the efficient are of our customers and and accurate billing activities. trading to support our upstream to the Company continues Accordingly, most notably the invest in such systems, management of its UK customer replacement systems. These extensive change subject to implementation are programmes the application of strong risks and require and comprehensive management project business continuity plans. The oversight and effective management and effective The oversight multiple contracts across of complex the UK, North America in service providers of focus a significant area and India is team. An management for Centrica’s Governance Outsourcing/Offshoring approach the Group’s coordinates Group these initiatives to ensure to outsourcing managed. properly risks are

Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 23 Committee. Centrica plc Annual Report and Accounts 2006 Credit rating Credit rating of the credit strong The current (long-term debt: A3 (Moody’s Group Investors Service, Inc. (Moody’s)), & Poor’s A negative outlook (Standard Rating Services (S&P)); short-term debt: A-1 negative outlook (S&P)) P-2 (Moody’s), high levels of means that it benefits from for its existing counterparty credit Any material deterioration relationships. of this rating will mean that the Group its levels of security will need to increase contracts for existing energy procurement on its which may have a material effect cash position or limit its ability to trade in commodity markets. Pensions maintains a variety of pension The Group schemes including defined benefit schemes. partially The pension fund liabilities are matched with a portfolio of assets, which the mortality leaves potential risk around rate, wage inflation and returns on assets. In addition, actions by the Pensions and/or any Regulators or the Trustees to the existing pension material revisions increased legislation could require to the contributions by the Group pension fund. Counterparty limit counterparty policy is to The Board’s limits for each by setting credit exposures possible by reference where counterparty, are ratings. Exposures to published credit market to the nature, in relation measured value and maturity of each contract or financial instrument. Surplus cash is invested in short-term financial instruments and only deposited with counterparties rating of A3/A-/A-or with minimum credit investors any Moody’s P1/A-1F1 from Ratings & Poor’s/Fitch served/Standard long-term and short-term ratings Energy trading activities respectively. with counterparties undertaken are set. limits are for whom specific credit All contracted and potential exposures are to the Financial Risk reported Management Interest rate Interest manage policy is to actively The Group’s long-term borrowings rate risk on interest to fixed that the exposure while ensuring a 30% to 70% range. within rates remains derivative This is achieved by using such as interest financial instruments, basis the interest rate swaps, to adjust debt. At the of the portfolio of long-term on both debt had been raised year-end, basis. a fixed and floating rate All debt raised in US dollars through All debt raised in US dollars through In order to mitigate these risks, we to mitigate these risks, In order Financial factors the US commercial paper programme the US commercial has been used as part of the translation hedging operations described above. Currency Currency wholly-owned US and Canadian Through subsidiaries and wholly-owned and entities, the partly-owned European in US has operational exposure Group The and Canadian dollars and euros. policy is to maintain the sterling Group’s investment currency value of its foreign balance sheet hedging through instruments. Canadian dollar and euro balance sheet translation exposure is hedged by maintaining a portfolio of liabilities which financial currency foreign to the net asset value of approximate operations. the Canadian and euro-based dollar balance sheet translation US is hedged by borrowing exposure a US on a short-term basis through paper programme. commercial Liquidity identifying the liquidity Cash forecasts produced are for the Group requirements for stress-tested These are frequently. reviewed scenarios and are different that to ensure the Board by regularly exists for at least a headroom sufficient policy is 12-month period. The Group’s to maintain a minimum level of committed of debt that a proportion facilities and ensure over a range should be long-term and spread of maturities. As at 31 December 2006, the undrawn committed facilities had Group used to support of £1.3 billion, which were paper programme. the US commercial continue to monitor political and regulatory continue to monitor and engage developments/agendas through stakeholders with the relevant ongoing contact comprehensive in place with regulators, programmes government ministers and senior officials. In North America, the risk of political the risk of political In North America, an remains intervention or regulatory competition electricity Texas, In uncertainty. the Legislature by under review is currently changes potentially lead to which could we face In Ontario, in market structure. customer contract large scale electricity climate that in a regulatory renewals (especially with is somewhat uncertain In Alberta to automatic renewals). respect is mandated to the Department of Energy the progress regarding conduct a review competitive arrangements. of the current Corporate Responsibility

Corporate Responsibility is integral to a business that is managed in the long-term interests of its shareholders. Directors’ Report – Business Review p05

The Centrica Group engages with a business is conducted in an ethical way. wide range of stakeholders in the UK We also encourage our business partners and overseas, so that we can more to respect and adhere to our standards. ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance effectively manage the social, ethical and Information on our corporate environmental impact of our business responsibility (CR) activities over the last activities. We thereby seek to minimise year is included in the reports on each of risk, create sustainable value for our our business units. This section provides shareholders and contribute positively a summary of key themes, as well as to wider economic development in the performance information on group-wide regions in which we operate. activities. More detail will be provided in our The Group’s business principles and 2006 CR Report, which will be available policies set out the standards of behaviour at www.centrica.com/responsibility we expect of our employees to ensure our in May 2007. Mary Francis CBE Senior Independent Non-Executive Director and Chair, Centrica Corporate Responsibility Committee 2006 2005 Δ% Climate change

Group carbon footprint (million tonnes of CO2 /CO2e)* 8.6 –– Carbon intensity of power supplied in the UK

(tonnes CO2 /MWh)** 0.35 0.37 (6) Household energy efficiency products installed (million) 13.5 9.0 44 Lifetime carbon savings for household energy efficiency products installed (million tonnes)*** 1.0 1.3 (23) Vulnerable customers – ‘here to HELP’ Homes signed up 117,438 116,823 0.5 Homes completed (energy efficiency products installed) 37,532 28,212 33 Value of unclaimed government benefits identified (£m) 2.2 2.6 n/a Average increase in claimable government benefits per household (£)**** 1,467 1,542 n/a Health and safety Lost-time injuries/1,000 employees 14.3 13.2 8 Lost-time injuries/100,000 hours worked 0.8 0.7 14 Total injuries/100,000 hours worked 3.3 3.1 6 Employees Human capital return on investment ratio***** 2:1 2.1: 1 (5) Employee engagement score 3.84 3.78 2 Employees from ethnic minority groups (%) 15.9 17.2 (8) Female/male employees (%) 29.9/70.1 30.9/69.1 n/a Employees with a disability (%) 2.7 2.5 8 Communities Total community contribution (£m) 7.4 8.2 (10) % has been used to express ‘percentage change’. Data tolerance level of 10%. A further 8.3m tonnes of CO emissions comes from UK purchased power. * 2 ** Source: www.electricityinfo.org *** Source: http://www.nef.org.uk/energyadvice/co2calculator.htm **** Describes the average value of additional claimable benefits per vulnerable household identified by British Gas through our ‘here to HELP’ programme. ***** Source: PWC Saratoga – a measurement of financial return for investment in employee remuneration, benefits and training.

24 Centrica plc Annual Report and Accounts 2006 CR governance project. The project, in Teesside, would be throughout this period of volatility has At the beginning of the year, we changed the first to couple integrated gasification been to protect customers by passing our governance arrangements for CR, combined cycle technology with carbon through only a proportion of the full establishing a main board committee capture and storage capabilities. The wholesale market increases. We were to lead our strategy. It is chaired by result would be a ‘clean coal’ power pleased to be the first UK supplier to Directors’ Report – Business Review p05 Mary Francis CBE, Centrica’s Senior station supplying electricity for British Gas announce a price decrease for residential Independent Non-Executive Director, and customers, together with a pipeline and customers. From 12 March 2007, we its members include the Managing Director storage to capture the CO2 emissions. will reduce our standard tariffs for gas of each business unit. This reflects the Energy efficiency by 17% and for electricity by 11%. importance we attach to integrating CR We continued to develop a range of energy New social tariff in the business, its risk management and efficiency services to help customers reduce British Gas also introduced the UK’s strategic functions. During the year, we their own carbon emissions. The British Gas largest social energy tariff, aimed at cutting focused on identifying the areas of Group Energy Savers Report, a bespoke home gas and electricity bills for 750,000 of our activity which have the greatest impact and energy efficiency audit, was completed by most vulnerable customers. The Essentials which present the most significant risks to more than 1.5 million householders during Tariff provides additional help to vulnerable and opportunities for our business. the year. In the business to business market, customers, particularly those who use both British Gas Business and Direct Energy prepayment meters. Tackling climate change have innovative programmes to help ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance Centrica has the lowest carbon commercial customers reduce energy usage. Ensuring health and safety intensity proﬁle of the major UK Serving our customers Lost-time injuries per 1,000 power suppliers today employees were 14.3 British Gas announced The ever-growing need to address climate the launch of a social tariff The health and safety of our employees, change presents risks and opportunities that will beneﬁt 750,000 customers and others who could be affected across our business. Upstream, we must vulnerable customers by our activities are a top priority for us. balance the economic and regulatory Our previously strong safety performance aspects of emissions to ensure reliable As a multi-national utility, providing was marred by two major incidents power supplies; downstream, there is a essential services to millions of customers during the year. The first occurred when significant and growing customer demand every day, understanding their evolving a pressure vessel on our Rough storage for energy efficiency products and services; needs is very important. Being responsible facility failed catastrophically causing a and we know that whether or not we and responsive in how we manage gas release, explosion and residual fire. are perceived to be environmentally relationships with our customers is The crew evacuated but two people were responsible, increasingly affects our central to our business strategy. injured. The Health and Safety Executive reputation. Throughout our activities Investing in new systems investigation concluded that this equipment we aim to contribute to the creation of failure could not have been foreseen and In 2006, we made significant progress in a sustainable, low-carbon future, while that the consequences of the failure were installing a new multi-million pound billing ensuring the security of energy supplies. lessened by our substantial investment in and customer management system the platform, its shutdown systems and Mapping our carbon footprint in British Gas. During the process of incident response arrangements since In order to develop a coordinated and transferring customer accounts, we were acquisition in 2001. effective response to climate change we unable to maintain the high standards The year ended on a tragic note with undertook work to calculate the carbon of service we strive for. Returning to a helicopter accident in the Morecambe footprint of our operations. Our footprint an industry-leading position is a high Bay area which claimed the lives of six – comprising emissions from power priority for us. Our investments in new people, four of them long-standing and generation, gas production and storage, systems, additional manpower and front- highly committed Centrica employees energy usage, fleet operations and line training are now delivering benefits with a seventh person still missing, business travel – was 8.6 million tonnes to our customers. presumed dead. of CO /CO e* in 2006. This work will 2 2 Pricing Investigation indicates that neither underpin our climate change strategy High wholesale energy costs continued to incident was the result of a defective and determine how Centrica can adapt to dominate the first half of the year. In the safety management system within our and mitigate against the effects of climate UK this forced retail price increases from own sphere of operations and that our change on the Company and on society all the major suppliers, including British emergency response capability was as a whole. Gas. To lessen the impact, we created rapid and comprehensive. However, in Carbon capture and storage innovative fixed price propositions and both cases the impact on our employees In addition to our ongoing investments in developed a range of initiatives to help and their families has been traumatic wind farm developments, we announced millions of our most vulnerable customers. and tragic. We remain determined to an acquisition with the opportunity to For example, we committed to provide keep safety at the top of our agenda participate, alongside partners, in the UK’s £18.3 million of winter fuel rebates to and to be relentless in applying our zero first complete clean coal power generation vulnerable customers. Our pricing policy tolerance programmes.

Centrica plc Annual Report and Accounts 2006 25 Corporate Responsibility continued

Other than the two incidents described was developed to support our employees activities, which equates to around above, we have continued to maintain and managers, and we reviewed our £300,000 of in-kind support. our underlying improvement in safety policies and procedures to maintain our performance by reducing the injury position as an inclusive employer. Engaging stakeholders Directors’ Report – Business Review p05 frequency rates in most businesses and Development and talent management maintaining very low frequency rates in We invested over 400,000 hours in training Our stakeholder groups others. Our performance is underpinned to equip our front-line employees with the broadly concur with by the application of a robust safety skills to use our new British Gas customer our identiﬁcation of key management system, comprehensive management system. In addition we impact areas annual improvement plans, performance re-shaped our management learning targets and KPIs, throughout our UK and programme benefiting 800 managers. international operations. We must be attuned and responsive to Our British Gas Engineering Academy the needs and opinions of our customers, continued its work to recruit more women employees, suppliers and wider Valuing our people and people from minority ethnic groups stakeholder groups, and to emerging into our engineering workforce. We raised British Gas Business changes in society and government. This awareness of careers in engineering recognised as the No.1 engagement is a continuous and dynamic amongst young people. large employer in the UK process which at every level – from our ietr’Rpr oennep7FnnilSaeet 4 Shareholder Information p113 Financial Statements p43 Directors’ p27 Report – Governance by the Financial Times Reward Chief Executive meeting a senior politician, We continued to extend our flexible to one of our engineers talking with a benefits package and more than 10,400 customer – helps us shape our future The calibre and the conduct of our employees now benefit from the scheme. business direction. people are central to building successful Our fourth annual equal pay audit showed During 2006, we listened to our relationships with our customers, that the gender pay gap in Centrica stakeholder groups through direct shareholders, suppliers and the continues to narrow and compares very dialogue and a range of surveys. While communities we serve. During 2006, favourably with published national norms. approaching particular issues from varying perspectives, there was broad agreement the Group employed an average of Centrica encourages employee share with our identification of key CR impact 33,718 people: 28,489 were employed ownership by operating a number of areas. We will continue to listen to views in the UK; 5,032 in North America; and all-employee share schemes. In the and respond to any concerns. 197 in the rest of the world. UK 12,042 employees participated in Working with our suppliers Engagement Sharesave and 6,031 participated in our Share Incentive Plan. In North America We made particular progress during the Employees are regularly updated on our 1,012 employees participated in our year on engaging with our suppliers. We performance against group strategy. Our Employee Share Purchase Plan. ran a successful briefing session for our annual engagement survey measures the group commercial team on managing CR attitudes and opinions of our employees. in our supply chain and hosted a round In 2006, our overall engagement score Investing in communities table discussion on current and future increased by 2% which, during a very We contributed £7.4 million1 trends in supply chain responsibility with challenging period for the business, 11 of our main suppliers. demonstrates the commitment of our to community causes through a people. The Group maintains regular combination of cash, time and Helping to shape the policy environment dialogue with representatives of local in-kind support2 Centrica operates in highly regulated employee consultative bodies and markets. Public policy decisions recognised trade unions to ensure significantly affect all aspects of our By understanding our impact on the it fully understands employees’ views. business operations from investment communities in which we work, we can decisions and entry into new markets, Diversity and inclusion develop successful partnerships that to consumer protection and employment The Group is committed to pursuing benefit us both. We aim to deepen our relations. We are committed to playing a equality and diversity in all its employment understanding of current issues of social full and active role in the political process activities and continues to support and environmental concern and contribute to support the creation of an optimal initiatives to provide employment for to action that addresses them. We do this policy environment that will allow our people from minority groups in the by both supporting outside agencies and business to thrive, move towards a low- community, including people with a encouraging our own employees to get carbon environment and deliver secure disability, carers and lone parents. To the involved. In North America, Direct Energy energy supplies for our customers. extent possible, people with a disability employees continued to take part in During the year, we participated in are offered the same employment training, our ‘Dollars for Doers’ programme, with numerous policy consultations, principally career development and promotion paid time off to volunteer. In the UK, we on energy and environmental matters. In opportunities as other employees. launched an initiative called ‘Centrica addition, our sustained efforts to push for During the year we worked closely with Get Involved’ enabling employees to take the creation of a fully liberalised European the Employers’ Forum on Age to prepare advantage of volunteering opportunities energy market were rewarded when the for the introduction of the new UK age with paid time off from the Company. EU Energy Commissioner announced a regulations in October. An integrated During the year our people invested strategic energy review that has the creation communication and training programme more than 13,000 hours of volunteering of competitive markets at its heart.

1 Cash donations in the UK during the year amounted to £6.1 million (2005: £6.7 million). This included a donation of £3 million to the British Gas Energy Trust, which supports vulnerable customers. In line with Group policy, no donations were made for political purposes. The Group, in the normal course of its business, has paid for its management to attend events at which politicians and other opinion-formers have been present, but does not consider these payments to be political donations. 2 London Benchmarking Group model

26 Centrica plc Annual Report and Accounts 2006 Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p41 Shareholder Information p111 2728Report – Directors’ Governance 30 and Senior Management Team of Directors Board 33 Governance Corporate Report 34 Statutory Information Other 42 Report Remuneration Auditors’ Report Independent Board of Directors Directors’ Report – Business Review p05

123 Directors’ p27 Report – Governance

4 5 6 iaca ttmnsp3Shareholder Information p113 Financial Statements p43

7 8 9

Senior Management Team

10 11 12 13

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28 Centrica plc Annual Report and Accounts 2006 Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 29 .N.R .N.R A ervices C.E C.E ervices S its Chief Operating Operating Chief its GC) and British Gas y for the Group’s y for the rked for Union NGC, . Chris Weston Chris Weston . 3 17. Ian Peters Peters Ian 17. Managing Director, C British Gas Business in 2002 to Ian Peters joined Centrica lead Goldfish, after extensive financial services experience. Ian became British Gas Managing Director, Business in June 2005. 1 Managing Director, British Gas Chris Weston was appointed British Gas Managing Director, 2005. Prior to Services in June this he was Managing Director, British Gas Business from January 2002. ustralian citizen A citizen S .N.R Paul Walsh joined the Board in March the Board in joined Paul Walsh 2003.Chief HeDiageo plc, Executive is of been previously having variety of served in a having Officer and Non-Executive is a He management roles. Director of Federal Corporation, Express Management a Governor of the Henley Centre and Deputy Chairmanof the International Business Prince of Wales Leaders Forum. Key to membership of committees Committee A Audit C Corporate Responsibility Committee D Disclosure Committee Committee E Executive Committee N Nominations Committee R Remuneration 7. Paul Rayner Non-Executive(52) Director A September the Board in joined Paul Rayner Director Finance been 2004. He has since Tobacco plc of British American January 2002. In he 1991 joined Rothmans senior Australia, holding Holdings Ltd in Chief became and executive appointments, Tobacco American British of Officer Operating Australasia Ltd in September 1999. 8. Jake Ulrich Managing Director, Centrica Energy C.E (54) U to the Board in appointed was Jake Ulrich January 2005. He Managing appointed was Director, Centrica Energy in 1997. He assumed responsibilit in Europe activities in continental September 2006. Between 1994 and 1997 he was Managing of Accord Director Natural venture between Energy Ltd, a joint Gas Clearinghouse (N plc. He previously wo OXY/Mid Carbide Corporation and the Con/Peoples Energy Group. 9. Paul Walsh Non-Executive(51) Director or of Corporate Corporate of or

ffairs C e A e t t i m nne Minto OBE OBE nne Minto m .N.R .N.R A o A c

16. Catherine May May Catherine 16. Group Director of Corporate Catherine May joined Centrica Affairs in as Director of Corporate previously September 2006 having Direct been Group Elsevier. Relations for Reed 12. 12. Group Director, C.E Human Resources Group appointed Anne Minto was Director, Human Resources in to that she Prior 2002. October Resources was Director, Human plc, a position for Smiths Group early 1998. which she held since t i d nior Independent Independent nior ector of the Bank u a

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a r e m s r i i v a d h .C.N.R A merica C.E merica

A C r ndrew Mackenzie A

o A i e enior Independent Non-Executive Director n Centrica plc Annual Report and Accounts 2006 h e

Industrial Minerals, at Rio Tinto plc. Industrial Minerals, at Rio Tinto in Previously, he spent 22 years with BP plc and engineering technical a range of senior ultimately Vice positions, and as Group President, BP Petrochemicals. He is also a Non-Executive Director and Director and also a Non-Executive He is 2006.Director in SheNon-Executive May Dir is a Non-Executive Modwen Aviva plc and St. of England, Fund of Director is a She plc. Properties the a Trustee of and Distribution Ltd Director a former Almeida Theatre. She is Association of British General of the a senior civil previously Insurers. She was Prime the and servant in the Treasury Minister’s Office. 6. Non-Executive(50) Director Board in the Andrew Mackenzie joined Chief Executive, September 2005. He is Europe between July 2004 and September Director Finance he was Formerly, 2006. of UDV Guinness 1999 from and Group Director of Risk Management Treasurer and 1997. Previously,of Diageo plc from he spentin 15 years with various BP plc roles. exploration and gas international oil t of Kingfisher plc. 5. Mary Francis CBE S (58) Mary Francis joined the Board in June 2004 and was appointed Se 4. Phil Bentley Group Finance Director (48) D.E as Group plc Centrica joined Phil Bentley Director inFinance2000, a position held he untilFebruary the end of 2007 whenhe was appointed Managing Director, British also Managing Director, Gas. He was S

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8 9 9 1

n 11. Deryk King King Deryk 11. Managing Director, Centrica North Deryk King is responsible for all in North of Centrica’s activities America. He joined Centrica i for Projects Director, responsible initiatives. the Company’s European Lois Hedg-peth 15. Energy Director, British Gas Residential Centrica joined Lois Hedg-peth as the in September 2002 Operations. President of U.S. British 2005, she joined In July Director. Gas as Energy .N.R .N.R A trategy, trategy,

ecutive Officer ecutive at S A ecretary C.D.E S lexander CBE A am Laidlaw S in August 2000 from UBS. Development and M& appointed Mark Crosbie was Strategy, Corporate of Director M&A in May and Development Centrica 2003. Mark joined in February 1997, having joined in February 1997, British Gas in October 1996. 14. Mark Crosbie Director of Corporate Grant Dawson has been Group been Group has Dawson Grant Company General Counsel and Secretary of Centrica since the demerger from British Gas plc 10. Grant Dawson Dawson Grant 10. and Counsel Group General Company . Helen

was a Non-Executive Director of BT was a Non-Executive Foods plc. Northern Group plc and Tate Gallery and an Honorary Fellow of Tate Gallery and an Hertford College, Oxford. Formerly, she The Economist Group, a Trustee of the Helen Alexander joined the Board in joined the Helen Alexander January 2003. She is Chief Executive of 3 Non-Executive(50) Director and a Director of the Business Council Council the Business Director of and a for International Understanding. a Trustee of the medical charity RAFT medical a Trustee of the Operating Officer at Amerada Hess. He Operating Officer Director of Hanson plc, is a Non-Executive Corporation, Chief Ex and Chief President Enterprise Oil and British Gas Residential. He was previously President of the Chevron Executive Vice October 2006 and theFebruary end of for responsibility 2007 he assumed direct Sam Laidlaw joined Centrica plc as plc joined Centrica Sam Laidlaw Chief Executive in July 2006. Between Chief Executive (51) D.E.N Roberts & Co Ltd. 2. Deputy Chairman of Cadbury Schweppes Deputy Chairman of a senior adviser to Kohlbergplc and Kravis was appointed Chairman in May 2004. ChairmanHeButlers of Mitchells is plc, & Non-Executive Director inDirector Non-Executive and 2001 Chairman (60) N.R a joined the Board as Roger Carr 1. Roger Carr 1. Roger Carr same facilitator interviewing rs if they that have concerns the individual contributions of The Board evaluation built on ucted, with the assistance ectors, the mix of skills on the ee below. All Directorsee below. All joining to address the issues raised. ief Executive. The Remuneration nceof the Chairman to appraise d that during the year, the the Group, the Chief Executive’s experience would strengthen the Group, as well as the operational e Non-Executive Directors (other n-Executive Directors are initially that the appointment of a Chief eria in the Code and determinederia in the Code and by the Chairman and that of the d, subjectd, to rigorousreview and output from thoseinterviews including the effectiveness of the an and the other Non-Executive other Non-Executive an and the ximum of three such terms. In ator, JCA Group, a formal and e Board and the businesses. r first AGM since their respective dependent Non-Executive Director eeting in November 2006, along initial three-year terms. d transparent procedurefor the intment. Thereafter, theysubjectare to rmal channels has failed to resolve rmal channels has failed or for In addition, the Senior Independent The Boardcontinue will review to its procedures,its effectiveness As part of the performance management system that applies The process adopted involved the The evaluation report conclude During the year, cond the Board Mary Francis succeeded Patricia Mann as the Senior Throughout the year, the Non-Executive Directors, including Full details of Directors’ service contracts, emoluments and issues. The report also concluded Executive with extensive upstream workings of the Board. and development in the year ahead. to management at all levels across performance is reviewed regularly other Executive Directors by the Ch Committee assesses the performance of the Executive Directors in of an independent external facilit rigorous evaluation of its own performance and that of its Committees and individual Directors. the positive results and output from the previous evaluation year’s and covered a number of topics Chairman and the Board as a whole, the Non-Executive and Executive Dir Board, the development of our strategy, risk management, Board processes and links th between separately each of the Directors and the General & Counsel Secretary. Company Non-Executive Director chaired a meeting of the independent Non-Executive Directors in the abse Chairman’s performance. The the was compiled into a report prepared by the facilitator and this was presented to the Board at its m withnumber a of recommendations Board had made significant progress in terms of addressing the key strategic challenges facing the re-election, can upserve a to ma accordancewiththe ArticlesBentley, of Association, RogerCarr, Phil Laidlaw andSam Nick Luff will retire office from 2007 at AGM. the Upon the recommendation of the Nominations Committee, Roger andBentleyCarr Phil willbe proposed forre-election to serve further three-year terms and, being thei appointments to the Board, Sam Laidlaw and Nick Luff will be proposed for election to serve Board appointments,Board evaluation and training There is a formal, rigorous an appointment of new Directors theto Board. Thisis described in the section on the NominationsCommitt Boardareto submit themselves requiredthe for election at the AGM following their appo No The year. third every re-election fora three-yearappointed term an Throughout the the Chairm year, Directors were of independent December 2006, management. In governance, Board the corporate of its annual review as part of considered the independence of th the than the Chairman) against crit that each remained Patricia Mann remained independent. Board. from the her retirement until independent Independent Non-Executive Director on 19 May 2006. Responsibilities of the Senior In to shareholde include being available contact through the no inappropriate. which such contact is the Chairman, met independently of management on a regular basis. share interests can be found in the Remuneration Report on pages 34 to 41. Corporate Governance Report Report Governance Corporate Centrica plc Annual Report and Accounts 2006 meetings during 2006 was: Directorsapologies gave their nsive briefing papers, including r biographical details, including s and controls the Group. The in place for Directors to obtain Directors unable to attend appointed as Managing Director, ewed the relevant papers and was due to prior business or Remuneration, Nominations, the early adoption of the 2006 , the Companycomplied fully d the Board that they remain in respect of their duties. The Executive Director of the Company ip, appears on page 29. ed to each Director a week prior sufficient time to it, including rman or Committee Chairman, sitions and disposals; n-Executive Directors has given e Audit Committee; 80% for the responsibilities between the Non-Executive Directors. y and Disclosure Committees are available website www.centrica.com. e Responsibility Committee for and 100% the

Non-attendance at meetings Overall attendance by Directors at There is a clear division of Patricia Mann retired from the Board on 19 May 2006. On the system of internal control; and corporate governance. the review of management performance; financial plan, the annual operating the of approval the statements and major acqui the development of strategy and major policies;

0 attendance at Board Committee and meetings. as appropriate. Each of the No an assurance to the Chairman an committed to their role as a Non- and will ensure that they devote personal commitments and illness. Board or Committee meetings revi provided comments to the Chai 3 the Board Committee membersh Board membership The names of the Directors and thei Nominations); Andrew Mackenzie (one Board, one Remuneration); Board, one Walsh (one Remuneration); and Paul (two Rayner Paul Audit, one Nominations, three Remuneration). Disclosure Committee. The following for absence in respect of one or more meetings: Helen Alexander Remuneration); (one Francis Mary Audit); one (one Board, Audit, one Laidlaw (one Mann (two Remuneration); Sam Patricia 96% for the Board; 82% for th Remuneration Committee; 92% for the Nominations Committee; 100% for Corporat the independent-professional advice Directors also have access to the advice and services of the General Counsel & Company Secretary. One of its meetings each year is substantially to the devoted development of strategy. Comprehe financial information, are circulat to Board meetings. A procedure is X X X X on request and on our The Board is responsible for: X Board, which met eight times during the year, has a schedule of matters reserved for its approval. This schedule and the terms of reference for the Executive, Audit, Corporate Responsibilit out in this report. The Board An effective Board of Directors lead with the provisions of the Combined Code on Corporate Governance (the ‘Code’) save for revision to the Code as explained in the Remuneration Report on set applied the principles of the Code as page 34. The Company The Group is committed to the highest standards of corporate Throughoutgovernance. the year Executive and independent him as Group Finance Director. Financehim as Group Director. Chairman and the Chief Executive, which has been formalised in writing and agreed by the Board; and there is a balance of Clare resigned from the Board on 30 September 2006. On 1 March 2007, Phil Bentley will be British Gas appointed and Nick Luff will be to the Board to replace 1 July 2006, Sam Laidlaw was appointed to the succeeding Board, Sir Roy Gardner, who retired on 30 June, as Chief Executive. Mark

Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 1 3 g Practices Board, the external subject to pre-clearance by the ternal auditors are reported to met four times and considered four times and met s approved policies that restrict as Chief Executive and Phil an to the next Board meeting. sponse to developingissues,as ment milestones against which ment milestones against (UK & Ireland) 260 and Ethical ring the year included the anation of how it applies the Report on pages 34 to 41. ng and Board evaluation. The Director of Business Assurance, d evaluation process (described nce of management. The issues rms. The award of non-audit work its meetings, the Committee its meetings, the Committee met ilities of the Remuneration d future requirements of the ment by the Groupformer of its terms of reference. It received all ongoing issues, requested clear ce and have confirmed their propriate,list drawsup of required a attributes. As a matter of best practice and in accordance with NoteFinancial5 to the Statements page on 59 sets out the During the year, the Committee The CommitteeThe makes recommendations to theBoard for Significant areas of review du Audit Committee if the fee exceeds specified thresholds. All non- ex the to awarded assignments audit the Audit Committee on a quarterly basis, along with a full breakdown of non-audit fees incurred during the year. International Standard on Auditing Statement 1 issued by the Accountin auditors have held discussions with the Audit Committee on the subject of auditor independen independence in writing. implementation the new British of billing system, Gas the risk control framework and risk mitigation, the risk profile theof Group’s business model, security, information gas imbalance and debt of respect in undertakings the with and compliance management, Centrica Storage Ltd. At each of with the externalauditors, and separately with the Director of Business Assurance, in the abse discussed by the Committee and the conclusions reached were Chairm Committee reported by the consultancies major all for tenders competitive seek to policy Group’s and advisory projects. The Board ha the types of non-audit work that can be undertaken by the external auditors and restrict the employ employees of theexternalaudit fi within categories that the external auditors are permitted to carry out under the Board-approved policies is the succession to Sir Roy Gardner consultants which external for as Group Finance Director, Bentley were engaged. The Committee also considered the interim executive responsibilities prior to the commencement of a new Group Finance Director, the reappointment of Directors retiring by rotation at the AGM, the Boar above) and succession planning. Remuneration Committee The composition and responsib Committee, together with an expl principles of the Code in setting Executive Directors’ remuneration are included in the Remuneration Nominations Committee During 2006, theNominations Committeecomprised RogerCarr (Chairman), Helen July, Laidlaw Alexander, Paul Walsh, from 1 Sam and, from 19 May, Mary Francis, Andrew Mackenzie and Paul Rayner. Patricia Mann and Sir Roy Gardner were members ofthe Committee until 19 May and 30 June, respectively. Throughout the year, a majority of the Committee’s members were independent Non-Executive Directors. the appointment of replacement or additional Directors. It is also responsible for succession planni Committee reviews the balance of skills, knowledge and experience againstthe Board current an on Company and, as ap In 2006, the Audit Committee fourmet times and discharged its responsibilities as set out in from thecomprehensive reports senior management The Committee and the external auditors. commissioned further reports in re appropriate, of and, in respect objectives, timetables and achieve monitored.performance could be ternal control Centrica plc Annual Report and Accounts 2006

s strengthened during the ning including an induction ning including ncial controls, in ss of the Company’s internal ee, became a formal committee drawn from among Executive a number of committees to deal meets weekly to oversee the gy; the risks and opportunities e year, the Board was briefed on: directors’ liabilities, including the directors’ liabilities, including mpany, is identified as having cant financial reporting judgements m and annual financial statements, y and expenditure control policy. ive regular updates on changes ss, and to the legislative and naging Director, British Gas reporting requirementsfor the s the independent Non-Executive t Non-Executive Directors now being sclosure of information to the & Company Secretary; the

The following, with membership The Corporate Responsibility Committee, formerly a sub- Board Committee membership wa The minutes of the meetings of these committees are made The Directors receive ongoing trai the external auditors, including the monitoring of their independence; and monitor matters raised pursuant to the Company’s whistleblowing arrangements. monitor and review the effectivene audit function; establish and oversee the Company’s relationship with contained in them; review the Company’s internal fina and risk management systems; monitor the integrityinteri monitor of the the including a review of the signifi

udit Committee Annual Report and Accounts. and Accounts. Report Annual new requirements relating to di auditors; and the new narrative commodity risk and hedging strate of upstream exploration activities; and developments to the busine regulatory environments. During th programme tailored to meet the needs of the individual. At Board meetings, the Directors also rece X X X X is authorised to: X recent and relevant financial experience, as required by the Code. The Audit Committee, which reports its findings to the Board, Paul Walsh and Patricia Mann (until 19 May). Paul Rayner, the the May). Paul Rayner, 19 Mann (until Walsh and Patricia Paul finance director of a FTSE 100 co During 2006, the Audit Committee comprised Paul Rayner (Chairman), Helen Alexander, Mary Francis, Andrew Mackenzie, A the Group Financial Management Risk Committee and the Health, Safety and Environment Committee. Directors and senior management, are sub-committees of the Executive Committee: the Group Risk Management Committee, in the Group’s delegated authorit those matters not reserved to the Board and within the limits set out on 30 September. The Committee management of the Groupand is the decision-making body for Services. Sam Laidlaw succeeded Sir Roy Gardner as Chairman of the Committee on 1 July. Mark Clare resigned from the Committee Managing Director, Centrica North America; the Group Human Group the America; North Centrica Director, Managing Resources Director; and the Ma During 2006, the Executive Committee comprised: the Executive Directors; the General Counsel Executive Committee committee of the Executive Committ of the Board on 1 March 2006. reliance on particular individuals. Directors detailed insight into the nature of the matters being to membership anddiscussed, brings undue continuity avoids members of the Audit, Remuneration and Nominations Committees. This membership structure give year, with all of the independen available to all the Directors on a timely basis. with specific aspects of the management and control of the Group. Group. the of control and management the of aspects specific with Board committees authoritydelegated to has The Board explained in the Remuneration Report on pages 34-41. connection with its determination of remuneration levels as

ee. The resultsee. The and the Group th applicable law, regulations ring that they give a true ertakes internal audit reviews at the following Board meeting. on the going concern basis, ting standards have been e of the Group. Centrica Storagee of the Group. Centrica of issues, monitor performance ces to continue in operational ume that the Group will continue aring the Financial Statements,

necessary actions were necessary taken to has a reasonable expectation that internal control operated, as of the Company preparing, in respect of each ted Accounting Practice. The the Audit Committ the Audit d the profit or loss of the Group ngs given to the Secretary of State weaknesses identified from those dit Committee reported the issues Committee reported the dit licies and then apply them e Audit Committee, has reviewed e processes of newly-acquired rt, a Remuneration Report and have complied with the above tatement S to Audit Committee meetings. ity Listing Rules. continued The Group Financial Statements have been prepared in In preparing the Financial Statements the Directors are Across has a Risk Management the Group, each business and prudent; state whether applicable accoun followed, subject to any material departures disclosed and explained in the Financial Statements; and prepare the Financial Statements unless it is inappropriate to pres in business. select suitable accounting po consistently; make judgements and estimates that are reasonable

ssurance X X The Directors confirm that they requirements in preparing the Financial Statements. Going concern After making enquiries, the Board the Company has adequate resour existence for the foreseeable future. For this reason, we continue to Statements, Financial the in preparing basis concern going adopt the which are shown on pages 43 to 110. Directors’ Responsibility The Directors are responsible for financial year, a Directors’ Repo Financial Statements in accordance wi and accounting standards. In prep the Directors are responsible for ensu and fair view of the state of affairs at the end of the financial year an for that period. accordance with the Companies Act 1985 and International Financial Reporting Standards (IFRS) pursuant to Article 4 of the IAS Regulations. The Parent Company Financial Statements have been prepared in accordance with the Companies Act 1985 and United Kingdom Generally Accep Directors’ Report and the Remuneration Report have been prepared in accordance with the Companies Act 1985 and the UK Listing Author required to: X X which allowed it to track a number it to track a number which allowed against objectives and ensure that remedy anyor significant failings of the Au reports. The Chairman discussed and conclusions reached to identify,Committee that seeks assess and advise on the management of operational risks. In addition, the Group Risk considersManagement Committee the risks that might affect the Company at Th Group level. companies are integrated with thos undertaki to which is subject Ltd, standards same the to but separately operates and Industry, for Trade of internal control and risk management as the rest of the Group. A und assurance function business The approved by a plan according to reported are work its of The Board’s review of the system of internal control The Board, with the advice of th the effectiveness of the system of described above, throughout the period from 1 January 2006 to the date of this report and satisfied is that the Group complies with the Turnbull Guidance on Internal Control. ntrol report, Corporate Governance Report Report Governance Corporate Centrica plc Annual Report and Accounts 2006 systems and controls on internal control and risk nsive internal co the Group. The Board, either t regularlyyear, during the sclosure of inside information. of key risks facing the Group. r meetings with its major meetings with its r register to receive all their all their receive to register e AGM presents an important with the papers for each Board had. He reported his findings to his findings to had. He reported rman met with a number of major its four meetings in 2006, the to manage rather than eliminate ite includes speeches from the can be found on pages 24 to 26. e Group Finance Director ande Group Finance Director e results of this survey were y Committee became a committee of shareholder opinion was also sible for the Group’s system of te, assurance against material ing the CREST electronic proxy es, sets objectives, performance AGM, the Chairman and the Chief and management of risks enting and monitoring enting and The Company also holds regula All shareholdersAll have the opportunitycast to their votesin The Board also believes that th As the website contains a wealth of up-to-date information, the the information, up-to-date of wealth a contains website As the 2 meeting. An independent survey conducted during the year and th presented to the Board. institutional shareholders to gain a first-hand understanding of any have may they concerns issues or the Board. This was in addition to the formal independent reports of investor feedback that are included shareholders. The Chairman attends the meetings at which the and major are investors to results presented annual and interim analysts. During the year, the Chai Notice of Meeting. Shareholders who hold their shares within CREST us by proxy cast their votes can appointment service. respect ofproposed AGM resolutions by proxy, either electronically or by post. Shareholders can cast their votes online by logging onto www.sharevote.co.uk, further details of which are provided in the are also our customers. At the Executive present a review of the businesses of the Group. Representatives from across the Group are available to answer questions both before and after the meeting. opportunity for dialogue with private shareholders, many of whom 3 Audit Committee received a comprehe targets and policies for management Details of the principal risks and uncertainties are set out on pages each of this report. At 21 to 23 of The Company places great importance is environment A risk-aware and control-conscious management. promoted and encouraged throughout directly or through its committe only reasonable, and not absolu loss. misstatement or Identification, assessment Internal control The Board of Directors is respon internal control, which is designed the risk of failure to achieve business objectives and can provide at the 2007 AGM. Shareholders can 2007 AGM. Shareholders at the Company. the and both themselves benefiting online, communications Company wishes to use this as a primary means of communication communication of means a primary as this use to wishes Company with shareholders and a resolution to that effectwill be proposed shareholders. As well as share price information, news releases and annual reports, the Centrica webs AGM, presentations to the investment community and a section on shareholder services. in respect of the management di and Relations with shareholders The Company has a programme of communication with its The Disclosure Committee, which me comprised the Chief Executive, th & Company Secretary.the General Counsel The Committee has responsibility for implem 30 September 2006. The role of the Committee and details of the work it during undertook the year Disclosure Committee of the Board on 1 March 2006, it has comprised Mary Francis Group. across drawn from management the (Chairman) and senior Phil Bentley has been appointed to the Committee, with effect from 1 March 2007 and Mark Clare was a member until Corporate ResponsibilityCorporate Committee Since the Corporate Responsibilit

This Directors’ Reportcomprising pages 5 to 33 has been uditors Grant Dawson Grant Dawson Secretary Company and Counsel General 2007 22 February office: Registered Millstream Road Maidenhead Windsor 5GD Berkshire SL4 Wales and in England registered Company No. 3033654 As part of a share repurchase programme a total of 8,950,000 8,950,000 a total of programme repurchase a share of part As of 6 with a nominal value shares, each the year forand cancelled during 0.2%£23 million. This comprised The programme was suspended in February 2006. shareholdings Material FebruaryCentrica had At 21 2007, material shareholdings pursuant to the Companies 1985: Act Legal & General Group Petronas 145,000,000As at that date, no notifications voting rights attaching Centrica to shares pursuant to the Disclosure 3.96% and Transparency Rules. 171,048,880A PricewaterhouseCoopers LLP have to be reappointed as auditors 4.67% of the Company. Upon the recommendation of the Audit Committee, resolutions to reappoint them as the Company’s auditors determine their remuneration will be proposed at the AGM. approved by the Board and signed on its behalf by: tatutory Information Information tatutory S Centrica plc Annual Report and Accounts 2006 is aware, there is Other Other celled or retained as treasury and other legal obligations. for shares under the Group’s intained directors’ and ce for taking reasonable steps as permitted by the Articles of Articles of Association, the of the terms of payment; and ents comply with the Companies e for safeguarding the assets of fraud and other irregularities. ority will be proposed at the 2007 r insurance provide cover in the te are disclosedin note 35 on the 2006 AGM to purchase its advance with the supplier; the Company’saware auditors are ssued share capital as at hout 2006, which was renewed y and the Group and enable them y and the Group and which the Company’s auditors which the Company’s are onable accuracy at any time the for keeping properfor keeping accounting that: so far as he/she the General Counsel & Company hases outstanding as at 31 December 2006 2006 December 31 at as hases outstanding have acted fraudulently. y in 2006.

The Company purchased and ma ensure that suppliers are aware pay in accordance with contractual agree the terms of payment in

uthority to purchase shares hare capital Other Statutory Information Secretary is proved to for 2007. Neither the indemnity no event that the Director or officers’ liability insurance throug information and to establish that of that information. unaware; and he/she has taken all steps that he/she ought to have to he/she ought that all steps has taken unaware; and he/she taken as a Director him/herself aware to make of any relevant audit no relevant audit information of Directors share incentive schemes. AGM. Shares repurchased may be can shares to accommodate requirements own shares, within certain limits and Association. A renewal of this auth A The Company was authorised at repurchased during the year, is set out in note 24 on page 77. The Company’s authorised and i 31 December 2006, together with details of shares issued and S was 32 (2005: 34) for the Group (excluding Accord Energy Ltd) and 32 (2005: 36) for the Company. The number of days’ purc of number The X X X Creditor payment policyCreditor payment It is the Group’s policy to: Related party transactions are set out in note 32 on pages 91 to 92. Related party transactions Events after the balance sheet da page 102. Business Review on pages 5 to 26 and note 28 on page 85. sheet date Events after the balance Full details of acquisitions and disposals disclosed in the are Major acquisitions and disposals Company Secretar Company entered into a deed of indemnity to the extent permitted by law with each of the Directors and the General Counsel & Directors’ indemnities In accordance with the Company’s interests can be found in the Remuneration Report on pages 34 to 41. found Remuneration Report on pages 34 in the can be interests Full details of Directors’ service contracts, emoluments and share share and emoluments contracts, service of Directors’ details Full Each of the Directors who held office at the date of approval of this Directors’ Report confirm for the prevention and detection of Disclosure of information to auditors the Company and the Group and hen to ensure Statem that the Financial responsiblAct 1985.also They are records that disclose with reas financial position the of Compan The Directors areThe Directors responsible

S O S

s and/or E ir Roy Gardner S S LTI s Former director Bonu Mark Clare ion s Pen Directors, after that date. Full Full Directors, after that date. competitive in both commercial competitive in both commercial the discretion to make grants the discretion r median performance will remain S), which was approved at the approved S), which was rtant in providing potential a lly endorsed by the Board, will by the Board, lly endorsed ecutive – twice his base salary; all salary; his base ecutive – twice the approval of new share-based of new share-based the approval llocation of shares under the new the llocation of shares under Jake Urich ements for the Executive Directors ements for the Executive Directors s annual performance bonus in performance bonus in annual attract, retain and continue to there are exceptional circumstances circumstances there are exceptional , consisted of componentsconsisted , new Deferred and Matching Share Matching Share new Deferred and s appropriate to do so. am Laidlaw Additional payment S Current director Current s Beneﬁt Phil Bentley The Committee believes that these arrangements, which are which The Committee believes that these arrangements, Executive the of compensation total the In 2006, In 2006, executive remuneration base salary, comprised regular basis, made on a will be No further ESOS grants As a result of the changes under the new policy, the Committee minimumshareholdingA policy requiresretention the a value of contributory (a Scheme Pension Management Centrica The alary 80 60 40 20 S 100 Note: Salary and benefits are the actual amounts received during 2006; other payments include an initial payment and salary supplement in lieu of pension paid to Sam Laidlaw – see page 41; pension, for those directors in the Centrica Management Pension Scheme, is the increase in actual transfer value for 2006 over the notional transfer value for 2005 less the Director’s contributions during 2006; pension for Sam Laidlaw is the actual amount of the contribution made by the Company to his personal pension; performance bonus is that payable in respect of 2006; and ESOS and LTIS are the estimated value, based on a Black-Scholes model, of the awards made in 2006, provided that all performance conditions are met in full at the end of the relevant performance periods. that scheme during 2006. Alternative arrangements are made for Executive new employees, including arrang disclosure of the pension are given on page 41. below, are impo further explained that will remuneration package motivate Executive Directors and otherexecutives senior in a and marketplace that is challenging and human resource terms. It is intended that this remuneration fu is which policy and framework, years. and succeeding for 2007 continue page 37 on detailed Directors, proportions: following in the of each of the components Relative proportions (%): 2006 remuneration Executive Director’s endorsed by shareholders upon by shareholders upon endorsed incentive at the schemes 2006 AGM. a an bonus, annual performance (LTI Scheme Incentive Term Long 2006AGM and, transitional as part of the arrangements to the new of optionspolicy, a grant in April under the ExecutiveOption Share Scheme (ESOS). In 2007, executive remuneration will comprise the the in above, but participation Scheme (DMSS), based on the replace the ESOS. respect of 2006, will will retain Committee although the under the ESOS in thefuture if it it considers in which expects that total remuneration fo unchanged, but that total remuneration quartile for upper practice. with market line in be increased performance will Ex the Chief of shares as follows: other Executive Directors – 1.25 times their base salary; and those level – base salary. below Board immediately senior executives employees on 30 June closed to new salary arrangement) was final 2003. Executive Directors in office prior to this date participated in e designed to align e designed to Remuneration Report Report Remuneration Centrica plc Annual Report and Accounts 2006 er and the internal advisers er and the internal 6) and external consultants. 6) and external consultants. available at www.centrica.com. at www.centrica.com. available ring The 2006. Remuneration , both short- and long-term. ce, the markets in which it in which the markets ce, to the advice and views of the to the advice and views of the k provides competitive reward ackenzie. Patricia Mann was Patricia Mann was ackenzie. remuneration that executives siness needs; and would enable and would needs; siness s’ remuneration during the year. alignment with the delivery of in the formulation of the in the formulation tion packages, the Committee ciates (Kepler) acted as Carr was a member from 26 July. Carr was a member policy and framework of executive on of remuneration policy and current best practice, while practice, while current best financial and business related financial and business ork of executive remuneration ration package, the Committee the Committee ration package, Aldwinckle), the Group Human Group Human Aldwinckle), the ns elsewhere in the Group. above objectives and these were objectives and these above tion policy and framework eased shareholder value. eased shareholder are-based incentives ar are-based incentives her own remuneration. remuneration. her own Following this review, the Committee proposed theFollowing this changes review, This report, which will be submitted to the forthcoming AGM During the year, Kepler Asso year, During the The Committee makes recommendations to the Board, within The Committee, assisted by Kepl In agreeing the level of base salaries and the performance- level of base salaries In agreeing the In constructing the remunera the In constructing 4 arrangements in line with the line arrangements in 3 the Group to continue to attract, retain and motivate high-calibre environment. business a highly-challenging in management and framew to the future policy arrangements: provided a strong arrangements: value to shareholders; reflected bu particular meeting the Group’s named above, conductednamed above, a thorough review of the Group’s executive arrangements incentive in late 2005 and early 2006. to ensureThethis purpose review was that of the incentive account the Company’s performan Company’s account the operates and pay and conditio Executive Directors’ remunera Executive Directors’ ensureIt is the that role of the the Group’s Committee to and framewor remuneration policy otherfor its Executive senior Directors and into executives, taking of the Code that to Director relate No is involved Director in the determination of, or votes on any matter relating to, his or executive compensation to assist Committee’s recommendations. the principles Company has applied how the for approval, explains independent executive remuneration adviser to the Company andCommittee, having the been formally appointed in 2005. The Committee consulted, also did not but formally appoint, Towers Perrin. Both remuneration consultants on provided advice Secretary (Grant Dawson), the Chief Executive (Sam Laidlaw, who Laidlaw, (Sam Executive Secretary (GrantChief Dawson), the 200 replaced Sir Roy Gardner in July determining specific remuneration packages for each of the for packages remuneration determining specific It has access Executive Directors. Group Reward Director (Cathy Company & Counsel General the Minto), (Anne Director Resources formal terms of reference, on the remuneration and its cost to the Company.also The Committee is responsible for the implementati Governance (the ‘Code’), Roger Governance (the ‘Code’), The Committee met seven times du are reference Committee’s terms of Alexander (Chairman), Mary Francis, Paul Rayner, Paul Walsh Walsh Paul Rayner, Paul Francis, Mary (Chairman), Alexander Andrew M and, from 21 February, by way of early until 19 May and, a member of the Committee adoption of the 2006 revision to the Combined Code on Corporate Composition and role of the Remuneration Committee During the 2006, Remuneration Committee comprised Helen related elements of the remune maximum considers the potential and varies the packages Committee reviews could receive. The from year to year. appropriate when elements individual with the longer-term interests of shareholdersby rewarding them for delivering sustained incr The annual bonus scheme is designed to incentivise and reward and reward to incentivise is designed bonus scheme The annual the of demanding achievement objectives. Long-term sh theExecutive interests Directors and of other senior executives aims to achieve an appropriate balance between fixed and variable and variable fixed between an appropriate balance aims to achieve proportion significant a Accordingly, executive. each for compensation of the remuneration package depends onattainment the of objectives demanding performance

the number of shares that are rel of shares the number the performance conditions will be during been paid have would that of contro a change In the event of best practice. with line time apportionment in to will be subject furtherof grantoptions, years from the two of the with date the performance conditions increasing proportionately. Having reviewed market practice regardin all in respect of Committee removed this element measures, the option grants from September 2004. Long Term Incentive Following shareholder was approval at the 2006 AGM, a new LTIS up shares of allocations conditional which to pursuant introduced of 200% to a maximum of base sa Directors and other senior executives. otherawarded to Executiveat lower rates, to certain Directors and, be that could number of shares The maximum senior executives. Direc transferred to each Executive performance conditions in X X Executive theAs part of transitionalarrang policy adopted in and 2001 theoutlinedand new policy as above adopted in 2006, a grant of options was made in to April, equal 200% salary and, of base at the same or lower rates, to certain other senior executives. Details Directors are shown on page 40. exercisabl options normally become grant and remain so until the tenth anniversary of grant. Performance conditionsbased on the are extent to whichgrowth in the share (EPS growth) exceeds per earnings Company’s adjusted growth in the Index Retail Prices (RPI growth) over a three-year performance period. full, for theto be exercisable in EPS growthdetermined option that, growth by 18 per must exceed RPI three-year performance period. No growth fails to EPS exercisable if 9 percentage points over the performance period. The proportion by of the option grant exercisable EPS growth exceeds RPI sliding scale between 40% and 100% if growth by between 9 and 18 percentage points over the performance period. permitted the Company’s EPS to conditions over a th Centrica plc Annual Report and Accounts 2006

) SS In line with current policy, with current policy, In line ble bonus related to financial rket salary levels for similar base salary for each Executive each Executive for salary base related targets split, 64% and y below Board level, assuming y below Board level, assuming centivise the Executive Directors centivise the Executive Directors to invest an additional amount or executives will be deferred will be deferred or executives ately below Board level. 20% every objective be achieved in every objective be achieved following the satisfaction of the following the satisfaction of time apportionment in line with with line time apportionment in 2006, calculated on the same es, determined by individual ares) to be funded from actual ies derived from independent ies derived from determined on a straight-line on a straight-line determined released upon the achievement, upon the achievement, released LTIS shares only which, when when LTIS shares only which, nce targets. The number of creased to reflect the dividends creased to reflect the dividends which time they cannot be ee years and invested in Centrica in Centrica ee years and invested ng the three-year performance ng the three-year performance red shares, will bring the total shares, will red the Committee reviews the annual reviews the Committee manding three-year cumulative cumulative manding three-year cheme (DM S hare S

nnual performance bonus shares that vest will be subject to subject shares that vest will be best practice. that would have been paid duri that would have period. In the event of a changenumber of control the of matching matching shares that are released be in performance condition will closer alignment with the interests of shareholders, the number of basis from a zero match for no growth in economic profit to a two-times match for growth of 25% or above. provide a To groupeconomic profit performa be that vest will matching shares (matching shares), which will be which will be (matching shares), over a three-year period, of de entitlement in respect of the preceding year. Deferred and of the preceding year. Deferred respect entitlement in shares with conditional matched will be investment shares added to the value of the defer amount invested up to 50% of the individual’smaximum bonus in Centrica shares (investment sh (investment in Centrica shares or the release of bonus payable withdrawn. Participants may elect withdrawn. Participants may elect automatically for a period of thr shares (deferred shares), during on the 2006 annual bonus. 20% of the annual bonus payable to bonus payable bonus. 20% of the annual on the 2006 annual and other seni Executive Directors Deferred and Matching in 2007 based will be made DMSS under the award The initial be unsatisfactory. and invested in the DMSS (see below). in and invested to is deemed forfeited if overall performance be a bonus will respectively for executives immedi automatically paid in 2007 will be deferred of any annual bonus performance targets and business- 36% respectively for Executive Directors and 60% and 40% all objectives are achieved in full, ranges between 100% andall objectives are 125%. In 2006, theachieva maximum full, was 125% of base salary. The maximum bonus payable to Thebonusfull, maximum payable was 125% of base salary. other senior executives immediatel shareholders. For 2006, the maximumpayable to Executive bonus of every element Directors, should and executives other and aligns senior their with interests those of performance bonus scheme to ensure that it remains competitive remains competitive to ensure that it scheme performance bonus to in marketplace, continues in the A At the beginning of each year, onlyremuneration element of that is pensionable. positions in comparable compan salary is the Base annually. are reviewed salaries sources. Base Director and other senior executiv performance and having regard to ma Base salary The Committee seeks to establish a Components of remuneration 500–600 1 700–800– 600–700 2 900–1,0001 800–900– Bands £000 £000 Bands executives of senior No. basis as those of the Executive Directors, fell into the following bands: on page 37. The total emoluments of the four senior executives immediately below Board level for The total emoluments of the Executive Directors are disclosed

newly-issued shares used. were best suited to the interests of pointments to the Board, the ectors’ service contracts are an initial notice period of two an initial s which contain an initial notice notice initial s which contain an shares in the market or, subject the market shares in ided that after the first such ided that after the first such eligible participateto in the new shares or using shares held using shares new shares or racts have no fixed term but racts have no aresave Scheme Share and e Executive Directors are fully are Directors e Executive ear’s written notice and that the ear’s written notice and that the e Company. It is thereforeCompany. It is the e relevant performance period, the period, relevant performance ngs and investment opportunity. and ngs investment opportunity. e year. The Committee exercised e year. The ed by the individual Director. for the personalfor development of the notice period in Executive in Executive the notice period es not exceed one year. The one es not exceed the Companies Act 1985, a rolling Act 1985, the Companies or the Company may terminate the appointment of Sam Laidlaw, continued In the case of new external ap In the case The of the Executive dates Dir It is theCompany’s current intentionsatisfy to the requirements ervice contracts As required by Schedule 7A of As required definition FTSE 100 has of the been used, whereas the definition used for the purposes of the LTIS is the FTSEconstituted 100 as at the beginning of the period. In order to demonstrate the delivery the value during of shareholder TSR graph for the shown 2006 is LTIS award that vested in April on page 39. Company’s HMRC-approved Company’s Sh eligibleIncentiveemployeesPlan,are open to all the same which on basis, providing a long-term savi S policy that It is the Company’s Directors’ service contracts do service cont Executive Directors’ provide that either the Director the employment by giving one y pay compensationCompanynotice. may in lieu of Code, by the as permitted level of flexibility, Committee retains a in order to attract and retain suitable candidates. It therefore reserves the right to offer contract of one year, prov period in excess period the notice reduces to on this discretion in respect of whose service contract allows for 2008. in July to one year will reduce period years. His notice set out in the table on page 37. External appointments of Executive Directors The Board believes that experience of other companies’ practices and challenges is valuable both its ExecutiveDirectorsand for th Company’s policy to allow each Executive Director to accept one non-executive directorship of another company, although the Board retains the discretion to vary this policy. Fees received in respect of external appointments are retain Funding of share schemes the meet and LTIS the under shares of the release satisfy to In order requirements of the ESOS in 2006 Pension The pension arrangements of th disclosed on page 41. Other employmentbenefits In common with otherExecutivemanagement, senior Directors are entitled to a range of benefits, including a company car, life assurance, private medical insurance and a financial counselling scheme. Such benefits are subject limitsto financial as set out in appropriate policies. They are also of its share schemes, in a method in a method of its share schemes, either by acquiring the Company, issuing to institutional guidelines, in treasury.

06 05 Remuneration Report Report Remuneration Centrica plc Annual Report and Accounts 2006 04 itions have been achieved is have been achieved itions the participant under normal normal the participant under R Index nce conditions have been met. met. been have nce conditions g on the application of IAS 32 by Alithos Ltd (an independent riateness of the performance S if the TSR over the performance performance period, provided, performance period, locations under both the old both the under locations

riod (the LTIS comparator group). group). LTIS comparator (the riod appropriate comparator group n of the performance conditions, n of the performance conditions, ives under the old LTIS, in old LTIS, in the ives under d is released to the executive if to the executive d is released S adjusted for exceptional items items adjusted for exceptional and the new LTIS, subject to and the new s calculated in accordance with accordance with s calculated in ative TSR and audited figures in in ative TSR and audited figures on policy adopted in 2001. on policy adopted in e Committee reviews whether the e Committee reviews Company’s TSR performance Company’s TSR performance e schemes the relevant figures e schemes the 3 IS subject to the comparative TSR 0 E 100 T S 1 December 2006 under the LTIS. LTIS. under the 3 02 1 = 100 ended s Ltd R Index FT s S 01 Prior to the release of share al Prior to the release The Committee has determined that, for the pre 2006 LTIS The actual number of shares released to the participant to the participant of shares released number The actual Such allocations are released to Such allocations Centrica T 100 150 125 200 175 6 ource: Alitho ource: 1 December 200 S 3 with thatFTSE 100 Index of the for the five years ended 31 December 2006. The above table compares the The above table compares the 3 and certain re-measurements arisin and certain re-measurements and IAS 39. Return Indices – Centrica and FTSE 100 index Shareholder Total for the ﬁve year certain adjustments to the figure certain adjustments IFRS. It was agreed that for the purposes of determining respect of thosperformance in should be IFRS produced under and the RREV, to continue with the financial target of economic financial the to continue with and the RREV, DMSS new bonus and profit in respect of the annual performance of the ESOS and EPS in respect Performance conditions under IFR Following the adoption of IFRS in 2005, the Committee agreed, ABI the with consulted and having Kepler from advice taken having accordance with the remunerati accordance with after the three-year circumstances and to the extent that, the performa Prior to 2006, allocations of shares were made annually to Executive Executive to sharesmade annually were of allocations 2006, to Prior Directors and other senior execut respect of adjusted EPS. assessing the extent of satisfactio assessing the extent data provided uses the Committee third party) in respect of compar and new LTIS arrangements, th and new extent to which the performance cond In performance. financial of the Company’s reflection a genuine start of the relevant performance pe The Committee reviews the approp new each when considering targets set the specific measures and allocation of shares and for that part of the new LT of the new and for that part most performance conditions, the for the Company is the the companies FTSE comprising 100 at the period is ranked below 50th comparator position group. inLTIS the Between 25th and 50th position,on shares vest sliding a scale from 100% to 40%. allocation of shares only vests an allocation of shares only the Company’s TSR over the performance ranked period is 25th in position or above relative to theother 99 companies in the LTIS vest shares comparator group. No depends on the Company’s the TSR over performance period relative to the LTIS comparator group. The maximum annual

7 – 3 17 55 65 50 55 50

Total 2005 £000 ieu ieu 542 868 250 932 881 non- non- 1,616 4,839 4,297 eling, eling, emoluments (iv) emoluments 6 3 3 60 56 50 21 65 50 44 2006 £000 Total 412 784 3 646 1,1 1,079 1,102 4,51 5,159 emoluments (iv) e Company into his e Company into

not participate inof the any £000 £000 ive plans or pension schemes. schemes. pension ive plans or s on the exercise of share Benefits (iii) (iii) Benefits sures, exception with of the the fees paid by other companies. by other companies. fees paid yable to the Non-Executive yable ision of a car, financial couns ision of a car, financial ies and time commitment, as and time ies £000 000 was paid by th Additional Additional payments (ii) £000 Annual bonus (i) bonus performance The current annual fees pa fees The current annual The Remuneration Report from page 34 to page 37 up to this aggregate value of shares vested to Executive Directors under aggregate value of shares gains made by Executivegains Director by made Chairman£375,000 Directors: Other Non-Executive Base fee Chairman of Audit Committee Chairman of RemunerationCommittee Responsibility of Corporate Chairman Committee and Senior Independent Director £10,000 £10,000 £15,000 £50,000 experience, their responsibilit their experience, the in the Code, and envisaged Directors are: The fees are normally reviewed every two years. The Non-Executive do the Chairman, Directors, including Company’s share schemes, incent statementnot has been audited. From this point until theof end the report on page 41, the disclo graph39, haveauditedCompany’s on been by the page auditors, PricewaterhouseCoopers LLP. other than the bonus paid to Sir Roy Gardner) will be deferred to Sir Roy Gardner) will be deferred bonus paid other than the Base the Company, includingprov the £000 2006. Sir Roy Gardner retired on 30 June 2006 and Mark Clare amount of £22,000 that was paid to him in 2006 in respect of the 2,980 1,751 255 173 salary/fees e Deferred and Matching Share Scheme – see page 35. Share Scheme and Matching e Deferred so paid to him duringso paid to him the year, being a salary supplementof 40% of base pay in l Centrica plc Annual Report and Accounts 2006

the notes on page 41, and the balance of £85,000 is included above under the heading eceived a payment of £300,000 of which a payment of £215, eceived Date of appointment Date of appointment Date of service contract contract of service Date s are: the Executive Directors Directors Executive s are: the 7 as a Non-Executive Director Director 7 as a Non-Executive Counsel & Company Secretary; & Counsel ris Weston, Managing Director, als of the right calibre and and right calibre als of the of the Non-Executive Directors of the the period they were a director they the were a director period ent is subject to the Articles ent is subject Board are shown joined the Mark Clare received £28,250 as Clare received Mark the recommendation of the letter of appointment contains

21 March 2001 457 289 – 38 (v) 4 December 1996 21 – – – 1 July 2006 425 384 255 15 (v) (v) 21 March 2001 383 – – 29 1 January 2005 536 512 – 54 (v) (vi) Long Term Incentive Scheme (LTIS) – see pages 38 and 39. The the LTIS was £2,352,203 (2005: £2,906,606). pensionspage 41; – see share options – see page 40. The aggregate of the amount of options was £3,462,389 (2005: £nil); and

The benefits 2006 figure respect of Jake Ulrich in includes an (c) served as a Non-ExecutivePatricia Mann Director until 19 May resigned on 30 September 2006. Sam Laidlaw joined the on Company 1 July 2006. The following are excluded from the table above: from the table above: excluded The following are (a) (b) of any pension provisions. of any pension by benefits arising from employment all taxable Benefits include assurance premiums. life and medical insurance Additional payments. A further £170,000 was al payment of a car allowance for 2005 that he was contractually entitled to. automatically and invested as deferred shares in th invested as automatically and r Company, Sam Laidlaw On joining the personal plan, pension and is disclosed in 20% of the annual performance bonus paid in respect of 2006 ( in bonus paid performance 20% of the annual Centrica’s policy on Non-Executive Directors’ fees takes into Centrica’s policy

Directors’ emoluments (vi) (v) (iv) (iii) (ii) 646 – – – Paul Rayner Paul Walsh 23 September 2004 65 1 March 2003 50 – – – – – – Andrew Mackenzie Patricia Mann 1 September 2005 50 – – – Roger Carr 1 January 2001 344 – – – (i) Total emoluments Mary Francis 22 June 2004 56 – – – Helen Alexander 1 January 2003 60 – – – Non-Executive Directors Sir Roy Gardner Sam Laidlaw Executive Directors Phil Bentley 13 September 2000 533 566 – 37 account the need to attract individu need account the Human Resources Director; and Ch Director; and Resources Human British Gas Services). executives (Grant Dawson, General Group Minto, Anne America; North Director, Managing King, Deryk Executive Committee, whose member whose Executive Committee, senior and four other Jake Ulrich); Phil Bentley and (Sam Laidlaw, are approved by the Board upon are approved by the in the Carr’s table below. Roger fees The a six-month notice period. service contracts. Their appointm service contracts. Their dates they of Association and the Non-Executive Directors Directors includingChairmanNon-Executive the do not hold £50,000 as a Non-Executive Director of Compass Group plc. Executive Director of Hanson plc, Executive Director of Gardner received Roy plc and Sir Director of BAA a Non-Executive of Kingfisher plc, and in respect of in respect and plc, of Kingfisher £29,000 as a Non- received Laidlaw of the Company, Sam In 2006, Phil Bentley received £57,41 Bentley received In 2006, Phil Jake Ulrich 2,334 1,751 255 173 Mark Clare – – – – – – –

LTIS total total LTIS allocations allocations 2006 or on or 2006 ny’s ny’s 556,106 574,213 appointment (i)

as at 1 January January as at 1 of the

– – – – – – 7 3 2006 total ,998 S 3 1,8 LTI 3 606,064 4 61 31 December allocations as at

981 2,520 5,000 4,500 2006 or on on or 2006 19,230 21,000 342,789 200,000 693,871 Shareholdings Shareholdings appointment (i) as at 1 January January as at 1 during the year in the Compa the during the year in increased by 102 sharesby 102 increased and 0 41 3 re held by the respective Trustees ings 2006 as at 981 3 d

2,520 5,000 4,500 19,2 21,000 of Sam Laidlaw, 1 July 2006, his 2006, July date Laidlaw, 1 Sam of 460,880 200,106 719, harehol 31 December S As with other employees, the Directors are the Directors other employees, As with continued had anyinterests beneficial inCompany’s the securities the Company’s securities,of its subsidiary nor in those neficial interests of the Directors who held office at the end office at the who held Directors of the interests neficial Bentley and Jake Ulrich had each the Executive Directors who served Directors the Executive eficiaries under the trust. As at 21 February 2007, 12,255 shares 009 shares (1 January 2006: nil and 2,591) we 009 shares (1 January 2006: nil and own as at 1 January 2006 or, in case the January 2006 or, 1 as at own Remuneration Report Report Remuneration Centrica plc Annual Report and Accounts 2006 ficial interests ficial in any of of the LTIS and the Share Incentive Plan. Share Incentive of the LTIS and the

(ii)

(ii) (ii) From 1 January 2006 to 22 February 2007, none of the Directors Shareholdings and LTIS allocations are sh of appointment. Sam Laidlaw had increasedSam Laidlaw by 101 shares acquired through the Share Incentive Plan. As at 22 February 2007, the beneficial shareholdings of Phil

8 or associated undertakings. other than ordinary shares, nor any non-bene other than ordinary shares, 3 deemed to have in a potential interest those shares, being ben and 12,371 shares were held by the trustees. respective (i) (ii) Mary Francis Andrew Mackenzie Paul Rayner Walsh Paul Helen Alexander Helen Alexander Roger Carr Phil Bentley Directors as at 31 December 2006 2006 December 31 as at Directors Executive Directors year in the ordinary shares of the Company and the interests of share schemes: Directors’ interests in shares The following tables on table and pages 39 andthe show 40 the be Non-Executive Directors Non-Executive Directors Sam Laidlaw Jake Ulrich As at 31 December 2006, 12,255 shares and 4, As at 31 December 2006, 12,255 shares of employee share trusts for the purposes

riod .

2006 (iii) 2006 after t the , f the es at rectors ve been 4 September the 2003 ldings cutive ter; and ter; 3 April 3 April 2006 (iii)(vi) 2006

lative to the other compani 1 April 1 April of the relevant LTIS comparato of the relevant 2005 (ii) (ii) 2005 tired on 30 June 2006 the LT LTIS and within the 42 day pe based on Centrica’s EPS growth Centrica’s based on respective performance periods tors thencould inmade office only be erhouseCoopers LLP. It relates to 1 April 1 April to participants other than the Executive me calculation made for all the other 99 for all the made calculation me 2004 (ii) 2004 ber of shares will be released to the Di the released to be shares will ber of performance criteria over a three-year performance criteria at for the financial period three years la period three at for the financial be calculated by comparing the Company’s by comparing the Company’s be calculated sufficient shares and, accordingly, the Exe accordingly, and, shares sufficient of 1%, based onvalue the of the market shar 06 31 Mar 07 31 Mar 08 31 Mar 09 31 Aug 09 1 April 1 April nding retirement. Having re nding retirement. 2003 (i) 2003 r Return (TSR) performance re r Return time-apportioned in accordance with the rules of the LTIS of the the rules accordance with in time-apportioned ce will be assessed against that be ce will ranked 40thranked in the relevant comparator group. Accordingly, of the three-year performance TSR shares). At the (the period , which, to the extent retained, is reflected in the shareho in the reflected is the extent retained, to , which,

ansferred at the end of their the end ansferred at ally be made under the previous ally be made the calculationnumber of the of shares,adjusted the EPS and Vested during 2006 during Vested period performance In . ose of other participants, their first awards were deemed to ha first awards were deemed to ose of other participants, their

bject to a performance condition condition bject to a performance ird party), shows the TSR performance of the Companythat ando 06 by Executive Directors whoby served during the year: the Company’s auditors, Pricewat Company’s the ) nditions and they will be they nditions and 3 l results). The awards to the Executive Direc results). The awards l ormance condition will be measured, the sa measured, will be ormance condition LTIS in 2006 due to his impe Centrica plc Annual Report and Accounts 2006 to vest is dependent on the satisfaction of e first awards under the new LTIS were made the new e first awards under

Cs liability was satisfied by the sale of by the sale liability was satisfied Cs 30 September 2006,April 2004, 30 LTIS his awards made on 1 April 1 2005 and 3 April 20 ed to participants on 6 April 2006. The were subject released shares ed to to income tax a er three financial years. EPS growth will years. er three financial conveneheld the on AGM 19 May 2006 (at which sought approval was and given by at 200 05 ormance conditions are met, the relevant num the relevant are met, ormance conditions od preceding the date of allocation with th of allocation with od preceding the date p and a ranking list will be compiled. compiled. be list will p and a ranking s the Company’s Total the Shareholde a s to 1 April 2006 roup roup 3 g e LTIS allocations held e LTIS allocations National Insurance contributions(NICs) at the rate soon as practicable thereafter. soon 148.00p 232.00p 228.00p 284.00p 302.50p 148.00p 232.00p 228.00p 284.8p E 100 companie comparator group (i) S S LTI (FT 04 301,373 287,566 292,258 –– 301,373 287,566 292,258 (v) 173,575 162,898 164,006 270,957 – 173,575 162,898 164,006 allocation – period from 1 April 200 allocation – period from Ltd (iv) s S = 100 3 LTI 3 3 0

made on 3 April 2006 for all purposes of the LTIS, new including shareholder approval, but in order to align their awards with th shareholders in respect of the new LTIS) th shareholders in Directors on 3 April 2006 (on the date that allocations would norm Company’s annua of the following the release allocations made to him on 1 April 2004 and 1 April 2005 will be tr 1 April 2005 will be 2004 and to him on 1 April allocations made co performance of subject to the achievement to the Notice of Meeting As explained in companies in the LTIS comparator grou LTIS comparator the companies in Following the resignation of Mark Clare on were automatically forfeited. award of Sir Roy Gardner did not receive an comprising the LTIScomprising comparator the group – the FTSE 100 at the start period, the TSR perf end of the performance as at 31 December 2006 on page 38. 75% of the originalwere releas allocations rate and individual’s marginal NI tax and income the date of vesting. The disposal following net number of shares Directors only received the At the endperiod to 1 April of the performance the 2006, Company relative TSR performance tests and vesting the period three-year adjusted EPS figure for the financial peri adjusted EPS figure for the financial by determined will be half of the shares The percentage of the allocation eventually eventually of the allocation The percentage su shares (EPS shares) will be of the half performance period: relative to the growth in RPI (All Items) ov At the endperiod the of the performance Company’s TSR performan at the Trustee’s discretion as group. If, and to the extentgroup. that, If, andthe to perf 0

Centrica Return Index

1 190 160 250 220 ource: Alitho ource: S 1 April 200 April 200 TSR Indices – Centrica and LTIS comparator TSR Indices – Centrica and LTIS (vi) (v) (iv) (ii) (i) Sir Roy Gardner Phil Bentley Mark Clare 171,668 161,569 165,646 278,849 – Date of allocation Date of allocation The following of th table gives details LTIS allocations that vested in 2006: The following graph, provided by Alithos Ltd. (an independent th (an independent Ltd. Alithos by provided graph, following The relevant TSR comparator group. Ithas not been audited by Market price at vesting date Market price at End of performance period 31 Mar allocation date Market price at Sam Laidlaw Jake Ulrich 179,298 – 166,223 168,926 278,849 – – – – 431,837 (iii)

as he Expiry date Expiry the

exercisable Date from which which Date from

options at this date lapsed. options at this date (pence) 240.05 Jun 2004146.60 May 2011 2006 Mar 228.65 Mar 2013 Apr 2008 Apr 2015 146.60 Mar 2006223.95 Mar 2007 Mar 2013 Mar 2014 240.05 Jun 2004224.80 146.60 2005 Apr Dec 2006 Mar 2006223.95 Dec 2006 228.65 Lapsed Dec 2006 Jul 2006177.60 Dec 2006 Jul 2006 Dec 2006 107.10 Jun 2006 Nov 2006 240.05 Jun224.80 2004 Sept 2006 146.60 Apr 2005 Sept 2006 Mar 2006223.95 Lapsed Sept 2006 228.65 Lapsed 281.50 Lapsed 182.60 Jun 2007 Nov 2007 177.60 Oct 2006 Mar 2007 224.80 Apr 2005223.95 Apr 2012 2007 Mar 281.50 Mar 2014 Apr 2009 Apr 2016 240.05 Jun224.80 2004 May 2011 Apr 2005 Apr 2012 228.65 281.50 Apr 2008 Apr 2009 Apr 2015 Apr 2016 Exercise price Exercise price rved during the year, and any the year, and rved during me in the UK. The scheme is designed is The scheme the UK. me in – – – – – – – – – – – – – – 6 3 as 3 45 18 18 d 2006 3 3 3 ,451

5,161 9, 9, 7,429 3 87,010 71,799 08,269 64,768 71,799 33 3 59 419,7 450,470 3 3 3 559, 401,875 441,72 3 Clare may only exercise those Clare options to t 2,559,895 2,452,940 exercisable within 6 months of his leave date leave of his within 6 months exercisable Options hel at 31 December ecember) was 354.50 pence. The range during ecember) was 354.50 pence. The range continued les of the ESOS his outstanding the ESOS his outstanding of les during the year the during Options lapsed lapsed Options ions. Under the rules of thehe Sharesave, was able to exercis les of the ESOS he exercised all his options except for those s of the ESOS on 31 May 2001, 2 April 2002, 24 March 2003, during year during heldwhoExecutive Directors by se ,287,020 1,204,965 ty for employees. Options exercised employee savings-related share option sche during year during ree years at the date of resignation. Mark years at the date ree Options granted granted Options Remuneration Report Report Remuneration Centrica plc Annual Report and Accounts 2006

are on the last trading day of 2006 (29 D vestment opportuni vestment ber 2006. In accordance with the ru ber 2006. In accordance e Sharesave his outstanding Sharesave option is his outstanding e Sharesave savings made and interest due. savings made 1 January 2006 2006 1 January Options held as at as at held Options

(iv)

8,823 –8,823 8,823 – 9,318 –8,090 9,318 1,228 9,318 –– 9,318 – 5,161 ––5,161 – (ii) (ii) (ii) (ii) (iii) – 371,799 – – – 593,451 –––––– 593,451 419,736 450,470 – – – 337,429 –––– 337,429 387,010 – – 779,357 –– 779,357 779,357 508,227 –508,227–622,775–954,979–705,514 508,227 – 622,775 – 954,979 – 705,514 – – 361,276–––– – 361,276 406,340 406,340 437,349 437,349 – 329,098 –329,098–378,113–579,809 329,098 – 378,113 – 579,809 – – 371,799–––––– –559,345 – 401,875 441,723 – – – – 308,269 ––––308,269 364,768 – – (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) (i) Sir Roy Gardner Sir Roy Gardner retired on 30 June 2006. In accordance with the ru granted in 2005 which hadmet thecondit not relevant performance his options to the extent of the In accordance with the rules of th of with the rules In accordance the options hadfor more thanheld been th extent of the savings made and interest due. Mark Clare resigned on 30 Septem Mark Clare resigned Mark Clare Executive Share Option Scheme (ESOS) Scheme Option Share Executive Options were granted under to the Executive the Directors term 18 March 2004, 1 April 2005 and 3 April 2006.operation Details of the of theare provided on scheme page 35. The Company operates an HMRC-approved all- The Company to provide a long-term savings and in Sharesave Scheme Sharesave Scheme

ir Roy Gardner The closing price of a Centrica ordinary sh The closing price of a Centrica year was 248.25 pence (low) and 359.75 pence (high). (iv) movements in those options in the shown year, are below: 40 (iii) (i) (ii) ESOS ESOS Jake Ulrich ESOS ESOS ESOS S ESOS Mark Clare ESOS ESOS Phil Bentley ESOS Directors’ interests in share options Full details of the optionsover ordinary shares in the Company 2,196,919 371,799 8,823 – 2,196,919 3,580,170 –2,799,585 780,585 ESOS Sharesave 3,580,170 ESOS ESOS ESOS Sharesave ESOS ESOS ESOS ESOS ESOS 2,140,027 361,276 1 2,140,027 2,081,141 371,799 – – 2,081,141 Sharesave ESOS ESOS Sharesave ESOS ESOS ESOS

41 still still of ent, a’s nsion nsion rvice de to ts was er inflation (ii) inflation

ry at at ry therwise to a Executive r certain pension excluding excluding pension increase in accrued accrued in increase f 15% of the ca Transfer value of the the of value Transfer pply in respect he benefits at at he benefits tained benefits Difference in in Difference 185,835 123,300 548,635 276,100 transfer value value transfer 155,090 48,100 2,431,115 609,500 accrual rates for 2006 accrual rates for less contributions in 65 65 65 d 3 3 pai 2006 (iv) (iv) 2006 28, 19,410 17,985 28, ion and, on death after retirem on death ion and, not a member of any of Centricnot a member of any Contribution ot restricted to the rate o total uncapped pensionable salary. being paid on the value of t of value on the being paid pply at 31 December 2005 when he was 2005 2005 with employer consent, or on leaving se Transfer includes an uplift of £1,062,100 as a result uplift of £1,062,100 includes an rk Clare, which represent the total of their inRPI (a maximum of 6% applies to pe the value as at 764,500 31 December Sir Roy Gardner and Jake Ulrich were 2.65%, Gardner and Jake Ulrich were Sir Roy 1,221,100 7,740,100 1,735,600 e Centrica Management Pension Scheme, are are Scheme, Pension Management e Centrica 31 December 2006. The rate of inflation used 2006. The rate of inflation used 31 December d as being subject to the same rules as a Lifetime Allowance (LTA). Centrica did not howev not Centrica did (LTA). Lifetime Allowance eases under the scheme. the scheme. eases under 2006 from Centrica which, when added to their re Transfer been made in the Company’s balance sheet. 95,600 12,600 value as at 978,700 3 3 31 December 1, 2, 10,189,200 the Executive Directors are n the Executive der theis entitled of employment, terms of his he contract flation by revaluing the accrued pension as at 31 December 2005 at 31 December as pension flation by revaluing the accrued ions. On joiningCompany, the a payment of £215,000 was ma Company during the year and is and is year Company during the nt at age and age 62, based on to at eligible pensionable service nt sala of the member’s prospective pens resulted in a higher tax rate tax higher in a resulted Centrica transferred a portion of the unregistered element of nagement Pension Scheme, thereby delivering some of the benefi thereby delivering Pension Scheme, nagement butions were deducted against Increase inflation (ii) inflation in accrued CUPS is unfunded but are securedthe benefits by a charge ove pension less pension e for pensioners which did not a pensioners which did e for ere these limits wouldrestrictCentri thedue the promisepension used for pension incr pension used for 2006 and2006 30 September respectively. 2006 The pension 2005 the Directors and Board of behalf signed on by: its Accrued 85,800 18,611 leaving service after age 60 at own request after service leaving Centrica plc Annual Report and Accounts 2006 138,100 8,128 382,900 27,316 154,400 26,842 pension as at as pension 31 December

anteed to increase in line with the increase with the line in to increase anteed re restricted to theof 15% of the maximum earnings rate ‘cap’ up to 5 April 2006. e as follows for Phil Bentley, Mark Clare, for Phil Bentley, Mark e as follows Directors all of whom are members of th of whom are members Directors all e benefits that arise under this are treate account in calculating transfer values. transfer values. calculating in account the contributions made by the contributions

cting this from the accrued pension as at as pension cting this from the accrued of the values shown for Sir Roy Gardner and Ma d rate of 6% of pensionable rate of earnings; fits. No individual will receive benefits ionable salary for death in service; salary for death in service; ionable in lieuof any provis pension on normal retirement age below); age on normal retirement s been adjusted to exclude in been adjusted to exclude s 2006 (i) (i) 2006 providesbenefits excess onin the salary of the Scheme earningscaplevel to the thatwould o Accrue une 2006. The transfer value as at 31 December 2006 as at 31 December une 2006. The transfer value 107,500 151,200 424,000 186,800 ugh the registered arrangement, up to the new arrangement, up ugh the registered ovision in respect of their accrued value has 31 December pension as at calculation of the transfer valu

following main features: following main features:

(iii)

. ct 2004 A

31 December 2006, with the exception Accrued Accrued pension which is that would be paid on retiremeannually accruedpensionat their datesleaving of of 30 June salary ar of pensionable as a percentage This restriction was removed from 6 April 2006 so that contri Member contributions paid in the year we Member contributions paid in 2.46%, 4.11% and 3.71% respectively. a change in the method of in service The increase in accrued pension ha The increase in by the rate of inflation (3.6%) and dedu 3.6%, the annual rate to 30 September 2006, the date Sir Roy Gardner retired on 30 J no discretionary practices are taken into no discretionary practices are pension payable in the event of retirement due to ill health; to ill health; due retirement event of in the pension payable guar in deferment and payment pensions in 2004); and April accrued after 6 life assurance cover of four times pens of four cover life assurance service payable at the rate of 50% in on death spouse’s pension payable at the members’ contributions normal retirement at age 62 (see note normal retirement at right to an unreduced immediate, pension on after age 55; at Company’s request half of the accrued pension. Children’s pensions are also payable; are also payable; Children’s pensions pension. half of the accrued

Sir Roy Gardner 22 February 2007 22 February Grant Dawson Grant Dawson Secretary Company and Counsel General (i) Phil Bentley Mark Clare Pension benefits earned by Directors (£) earnings cap and are based on the rate of 6% of their total pensionableearnings. earnings the cap and rate of 6% are based on transfer any CUPS liabilities in excess of the LTA, which would have which would excess of the LTA, liabilities in transfer any CUPS April 2006, 5 April 2006. With effect from 6 Directors’ pension benefits in CUPS to the registered Ma Centrica benefits in Directors’ pension previously provided via CUPS thro As a result of the changes brought about by the Finance Act 2004, Finance of the registered portion of members’ bene elsewhere, exceed two-thirds of their final pensionable earnings. All registered scheme benefits are subject to HMRC limits. Wh X X X X X X X X The pension arrangements for the Executive the Executive arrangements for The pension Directors’ pensions Jake Ulrich Jake Ulrich Centrica assets. An appropriate pr have been paid by the registered scheme. Th Unapproved Pension Scheme (CUPS) (CUPS) Scheme Pension Unapproved Its rules provide for the shown below (with the exceptionLaidlaw of the who Sam joined the schem pension occupational salary, final HMRC-registered, is a funded, Scheme Pension Management Centrica The schemes). pension Sam Laidlaw does not participate in the Centrica pension scheme. Un scheme. pension Centrica not participate in the Sam Laidlaw does (iv) (ii) Thisreport on remuneration beenhas approved by his personal pension arrangements. arrangements. pension his personal salary supplement of 40% of base salary (iii)

s’ Report is consistent with with is consistent s’ Report

ve been properly prepared d by the European Union, d by the European Union, s Act 1985 and Article 4 of examination, on a test basis, basis, on a test examination, s and disclosures in the Group Group in the s and disclosures h we considered necessary in h we considered e to the Group’s circumstances, e to the Group’s circumstances, l Statements, and of whether the whether l Statements, and of eland) issued by the Auditing by the Auditing eland) issued ial Statements are free from ial t evidence to give reasonable to t evidence r caused by fraud or other r caused by fraud includes an assessment of the assessment includes an e Members of Centrica plc plc of Centrica e Members adequately disclosed. disclosed. adequately We planned our and performed audit so as to obtain all the the Group Financial Statements. the Group Financial the Group Financial Statements give a true and fair view, in Statements give a true and fair view, the Group Financial IFRSs as adopte accordance with of the state of the Group’s 2006 affairs as at 31 December the year then ended; cash flows for and of its loss and Statements ha the Group Financial the Companie with in accordance the IAS Regulation; and in the Director given the information

PricewaterhouseCoopers LLP PricewaterhouseCoopers Auditors Registered and Accountants Chartered London 2007 22 February Basis of audit opinion We conductedour audit in accordance with International Ir on Auditing (UK and Standards includes An audit Practices Board. to the amount relevant of evidence Statements. It also Financial significant estimates and judgements made by the in Directors the Financia preparation of the Group are appropriat accounting policies and consistently applied Opinion In our opinion: X X X information and explanations whic explanations information and order to provide us with sufficien Financ assurance that the Group whethe material misstatement, irregularity or error. In forming our opinionalso evaluated the we overall adequacy of the presentation of information in the Group Statements. Financial uditors’ Report to th to Report uditors’ A Independent Independent Centrica plc Annual Report and Accounts 2006 uditors uditors A th the nineth the provisions of unting policies set out therein. set out therein. unting policies ration Report that is described described is that Report ration t 1985 and Article 4 of the ained in the Annual Report and sponsibilities do not extend sponsibilities (UK and Ireland). This report, report, This (UK and Ireland). Directors’ Report – Governance) – Governance) Report Directors’ ent of Recognised Income and and Income ent of Recognised comprises only the Chairman’s only the Chairman’s comprises accordance with Section 235 accordance with Section ese Group Financial Statements Statements ese Group Financial planations we require for our planations we Report (comprising the Directors’ al inconsistencies with the the with al inconsistencies thority, and we report if it t in the StatementDirectors’ of ing Standards (IFRSs) as adopted and regulatory requirements and and regulatory 2006 which comprise the Group comprise the Group 2006 which been properly prepared in ver all risks and controls, or , the unaudited part of the withaudited the Group Financial prepared for and only for the only for the and prepared for assume responsibility for any other assume responsibility for any to consider whether the Board’s the year ended 31 December 2006 31 December the year ended Balance Sheet, the Group Cash the Group Cash Sheet, Balance eness of the Group’s corporate eness if we become aware of any if we become aware risk and control procedures. risk and control rmation. We consider ed by law regarding Directors’ ed uditors’ report to the members of Centrica plc A We review whether the Corporate Governance Report Corporate Governance the We review whether In to addition we report you if, in ourwe have opinion, not We report to you our opinion as to whether the Group Our responsibility is to audit the Group Financial Statements We read other information cont We read other information We have reported separately on the parent Company Financial Financial Company parent the on separately reported We have 42 form an opinion on the effectiv governance procedures or its Rules of the Financial Services Au Financial Rules of the does not. We are not required co statements on internal control remuneration and other transactions is not disclosed. wi compliance reflects the Company’s theCode (2003) Combined by the specified for our Listing review is consistent with the Group Financial Statements. Statements. Financial Group the with is consistent ex and information received all the specifi information audit, or if IAS Regulation. We also report to you whether, in ourthe opinion Directors’ the information given in the Report – Business Review and Financial Statements give a true and fair view and whether the fair view Statements give a true and Financial have Statements Financial Group Ac Companies the accordance with in giving this opinion, accept or opinion, in giving this purpose or to any other person to whom this report is shown or agreed by it may come save where expressly into whose hands our prior consent in writing. International Standards on Auditing has been opinion, the including Company’s members as a body in of the Companies Act 1985 and for no othernot, purpose. We do Responsibilities. Responsibilities. relevant legal with in accordance The Directors’ responsibilities for preparing the Annual Report and Report Annual the preparing for responsibilities Directors’ The law with applicable Statements in accordance the Group Financial Report Financial and International ou are set by the European Union Respective responsibilities of Directors and Expense and related notes. the Th acco under the have been prepared for the year ended 31 December 31 December ended for the year the Group Income Statement, the Group Statem Flow Statement, Independent plc of Centrica Statements Group Financial the We have audited to any other information. the implications for our report apparent misstatements or materi Statements. Our re Group Financial Statements. The other information Statement, the Directors’ Report Five Year Reserves, Report, the Gas and Liquid Remuneration Record and Shareholder Info consider whether it is consistent and on the information in the Remune the in information the and on audited. as having been Statements of Centrica plc for plc Statements of Centrica

£m £m the year the year Results for (i) £m £m certain certain items and Exceptional re-measurements re-measurements 26.2 25.8

7.40 3.10 27.4 27.0 – 456 456 – 34 34 – (100)– – (100) – – –– 47 – – 42 47 42 1 – 1 (i) £m £m 11 34 45 38 (1) 37 11 – 11 662 306 968 673 340672 340 1,013 673 340 1,012 1,013 102 – 102 (247) – (247) (706) (138) (844) (145) – (145) 18.2 17.9 1,513 444 1,957 3,655 456 4,111 1,368 444 1,812 (9,793) – (9,793) (2,180) – (2,180) (2,180) (11) (2,191) 13,448– 13,448 Results for exceptional exceptional ing onenergy our procurement the year before before the year items and certain items and certain re-measurements re-measurements Pence Pence 2005 2005 ) ) ) – – – 1 3 4 3 3 (8) (8) £m 3 62) (12) .15 (87) (48) 2006 2006 ed units of The Consumers’ Waterheater of The Consumers’ ed units 180 (4. (4. (4.1) (4.1) 140 3 8.00 (180) (146) (154) (155) (154) 3 (916) (146) (196) (286) 2,885 the year (2,69 ortation or capacity contracts. Certain (2, 16,450 (12,649) Results for Results ional items and certain re-measurements. ional items and – – – – – – – – – – 1) 7 7 3 (i) £m 3 3 6 (87) (48) (15) 33 3 (862) (862) (862) (862) (916) (916) (196) ( certain (1,225) (1,262) items and Exceptional re-measurements

) ) it comprise re-measurement aris it comprise re-measurement – – – – – – – 3 3 1 3 3 (i) (8) (8) £m 62) 62) 716 708 707 708 3 3 10 (54 19.4 19.6 (286) (18 ,801 Pence Pence Pence 1,259 3 1,442 tatements tatements (2, (2, 16,450 (12,649) Results for for Results S exceptional the year before re-measurements

items and certain

4 6 8 11 11 11 10 11 10 28 4,5 Notes Notes 4,16 trades into cross-border relation transp mprise re-measurement of the publicly trad mprise re-measurement of the publicly

included within results before except included within results Financial Financial Centrica plc Annual Report and Accounts 2006

(i) 4,6 (i) ontinued operations: osal of discontinued (i) Certain re-measurements (note 2) included within operating prof of proprietary activities and re-measurement co within interest re-measurements included All other re-measurement is Income Fund.

44 The notes on pages 48 to 103 form part of these Financial Statements. (i) (Loss)/earnings per ordinary share (Loss)/earnings per ordinary disc and continuing From Equity holders of the parent Discontinued operations Profit/(loss) for the year Attributable to: (Loss)/gain on disp on Profit from discontinued operations (Loss)/gain operations 4 Taxation on profit from continuing operations 9 Interest expense Interest Net interest expense Profit from continuing operations before taxation 8 8 associates, net of interestassociates, net and taxation income Interest Contract renegotiation Contract Operating costs ventures and Share of profits/(losses) in joint 6 5 Rough storage incident incident storage Business restructuring costs Rough Limited Connections Profit on disposal of British Gas 6 6 write-down Operating costs before exceptional items Systems 6 Group revenue Cost of sales 5 Year ended 31 December Continuing operations Group Income Statement Income Statement Group share dividend paid per Interim Basic Basic basic Adjusted Diluted 11 Diluted Basic Basic Group operating profit Group operating Re-measurement of energy contracts Re-measurement of Final dividend proposed per share share per Final dividend proposed Minority interests Minority 27 Profit/(loss) from continuing operations Profit/(loss) from after taxation Gross profit Gross profit Adjusted basic Adjusted operations: continuing From 11

Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 – 45 £m £m 15 56 25 45 46 (52) 2005 231 224 595 467 569 223 296 196 666 (102) (743) (807) (482) (269) (655) (143) 7 1,085 2,159 1,239 2,442 2,386 2,442 1,170 3,670 6,229 3,421 7,061 (4,453) (3,541) (1,787) (6,395) (2,267) 13,290

7) 0) 7 £m 3 3 16 57 16 17 3 98 49 (55) 2006 226 657 467 219 422 220 226 270 760 640 (180) (181) (1 (112) (220) (241) (296) (551) ,291) ,918) ,679 ,590 3 3 1,642 1,642 1,585 1,055 3 5,672 3 5,407 ( (1,7 (5,519) (2,555) ( 11,079

18 26 26 26 26 22 18 22 21 22 30 24 27 12 13 17 21 26 19 Notes Notes

Centrica plc Annual Report and Accounts 2006

hareholders’ equity am Laidlaw Laidlaw am Phil Bentley Trade and other receivables Trade and other Other financial assets assets financial Other S Capital redemption reserve Share premium account Share premium Merger reserve Financial liabilities: liabilities: Financial

Other financial assets assets financial Other Current tax assets Trade and other receivables Trade and other Deferred tax assets Deferred tax assets Property, plant and equipment Property, plant and equipment 15

Chief Executive Executive Chief The notes on pages 48 to 103 form part of these Financial Statements. Director Finance Group S and were signed below on its behalf by: and were signed below on its The Financial on pages 44 to 103 Statements were approved and authorisedfor issue by the Board of Directors on 22 February 200 Minority interests in equity Called up share capital Called Net assets Equity

Retirement benefit obligation and charges Provisions for other liabilities 23 Deferred tax liabilities Deferred tax liabilities other borrowings and Bank loans 20 Trade and other payables Trade and other Non-current liabilities Net current (liabilities)/assets Bank overdrafts and loans instruments Derivative financial 33 20 Financial liabilities: liabilities: Financial Trade and other payables Trade and other Total assets Current liabilities Financial assets: assets: Financial instruments Derivative financial 33 Inventories Current assets instruments Derivative financial 33 Interests in joint ventures and associates associates ventures and Interests in joint 16 Goodwill assets Other intangible 31 December assets Non-current Group Balance Sheet Balance Sheet Group Total minority interests and shareholders’ equity Other reserves instruments Derivative financial 33 Provisions for other liabilities and charges Provisions for other liabilities 23 Current tax liabilities Current tax liabilities Cash and cash equivalents equivalents cash Cash and

Financial assets: assets: Financial

1 2 £m £m 25 14 13 (49) (74) 2005 202 823 408 (343) (126) (109) 1,013 1,166 1,165 1,166

) ) – – – 3 1 3 3 £m 7 96 (2 2006 475 (154) (120) (198) (472) (472) (47 (472) (645) (294)

Notes Notes continued tatements tatements S Financial Financial Centrica plc Annual Report and Accounts 2006 ion of foreign operations ion of foreign 26 tion of IAS 39 and IAS 32 ned benefit pension schemes pension ned benefit 26 ilable-for-sale investments ilable-for-sale 26 Total recognised last report income and expense since 46 The notes on pages 48 to 103 theseform part of Financial Statements. Total income and expense recognised in the year is attributable to: interests Equity holders of the parent Minority Total recognised the year income and for expense adop policy: in accounting Change hedges flow on cash expense Transferred to income and Tax onequity items transferred from Transfers 26 26 on defi Actuarial gains/(losses) Tax on items taken equity directly to Net (expense)/income recognised directly in equity 26 ava of Gains on revaluation (Losses)/gains on cash flow hedges on translat Exchange differences 26 Year ended 31 DecemberYear ended 31 for (Loss)/profit the year Gains on revaluation of acquired assets 26 Group Statement of Recognised Income and Expense and Expense Income of Recognised Statement Group

) ) ) ) – – 3 3 3 7) 3 5 4 3 3 7 7 3 (4) (5) (9) (6) £m 84) 3 40 56 1 1 18 3 3 (2 (21) (8 (97) (16) (4 (27) (21) 2006 3 592 7 7 897 (720) (221) ( (597) (580) (260) (149) (627) (11 (144) (5 (151) (880) 1,177 1,965 1,47

29 28 28 29 Notes Notes overdrafts of £48 million (2005: £62 million). 19 19 Centrica plc Annual Report and Accounts 2006 (i)

settlement of derivative contracts of derivative settlement

takings and businesses net of cash and net of cash takings and businesses (i) takings and businesses net of cash and net of cash and businesses takings 1 December 3 ates and other investments ates ventures and associates associates ventures and ng operating activities 29

Cash and cash equivalents are stated net of equivalents are cash Cash and

Purchase of intangible assets Tax paid Equity dividends paid Equity dividends Disposal of interests in associ Disposal of interests

The notes on pages 48 to 103 form part of these Financial Statements. (i) Effect of foreign exchange rate changes rate Effect of foreign exchange Net (decrease)/increase in cash and cash equivalents January equivalents at 1 cash Cash and Net cash flow from financing activities Realised net foreign exchange loss on cash Realised net foreign exchange loss Net cash flow from (decrease)/increase in debt debt flow from (decrease)/increase in Net cash leases of finance payment of capital element Cash outflow from Cash repayment of other outflow debt from additional debt from Cash inflow Fund Income Waterheater Consumers’ The of holders unit to Distribution Interest paid Other interest paid Issue of ordinary share capital Re-purchase of ordinary share capital ordinary share Re-purchase of Disposal of intangible assets Disposal of intangible Disposal of interests in subsidiary under in subsidiary Disposal of interests disposed cash equivalents Purchase of interests in subsidiary under Purchase of interests in subsidiary acquired cash equivalents Net cash flow from continui Net cash Netflow from discontinued cash operating activities 29 Payments relating to exceptional charges Payments relating to Cash generated from continuing operations operations continuing from Cash generated Interest received (Decrease)/increase in payables in payables (Decrease)/increase Increase in inventories inventories Increase in Year ended 31 DecemberYear ended 31 capital in working cash flows before movements Operating 29 Group CashGroup Flow Statement Net cash flow from investing activities Interest received Cash and cash equivalents at leases respect of finance Interest paid in Net sale of other financial assets Dividends received from joint Dividends received Purchase plant and of property, equipment Interest paid Investments in joint ventures and associates ventures and Investments in joint Net cash flow from operating activities Net cash flow from Increase in receivables Increase in receivables Disposal of property, plant and equipment

separately from proprietary within interest comprise interest within t contracts are held for the t contracts are held fied a number of comparable number fied a ents in the Income Statement ents in the Income signed to achieve security of e difference between the price price between the e difference es are entered into speculatively into speculatively es are entered acity and contracts relating to acity and contracts receive under a contract value adjustments arising on value adjustments ised under the requirements of requirements ised under the et price of acquiring the same the same acquiring et price of rket. The movement in the fair in the fair rket. The movement ergy is supplied over the life over the life ergy is supplied eed in the respective contracts eed in the However, a number of contracts However, a number mplemented by shorter-term aded units of The Consumers’ The Consumers’ aded units of contracts are entered into for into contracts are entered as a result of movements in ing from the physical delivery delivery ing from the physical e fair value represents the value represents e fair supplies and customer demand customer supplies and of factors such as weather, power power of factors such as weather, comprise both purchases and purchases and comprise both ntracted volume delivered or fair value re-measurements very re-measurements very fair value e certain re-measurements column. column. e certain re-measurements on which economic value has been has value economic on which certain results before in the of commodities in accordance re-measurements. Inre-measurements. addition to ntracts and that the fair value certain re-measurements. re-measurements. certain hase, sale or usage requirements and are or usage requirements and sale hase, during the year. tatements tatements S At the balance sheet date th sheet At the balance These adjustments represent the significant majority of The Groupshown has the fair Many of the energy procuremen Certain re-measurements included Certain re-measurements These arrangements are managed are managed These arrangements re-measurement of the publicly tr re-measurement of the publicly Fund. Income Waterheater of the contract. This makes the nature from costs aris different in of energy in the period. agr prices between the difference mark or anticipated and the actual amount on thema of energy open value taken to certain re-measurem represents the unwind of the co fair in change with the the period, combined consumed during contracted energy value of future forward energy prices certain in the items included these however the Group has identi th contractual arrangements where to pay or Group expects which the to be fair valued by IAS 39. price is required and the market cross-border Theseadditional items relate to transportation or storage transmission capacity, cap bi-products,theof energy sale not wholly recogn created which is value adjustments the related fair IAS 39. For these arrangements under are also included trad energy trading activities where for the purpose of making profits in their own right. These proprietary trades are included re-measurements. these contracts separately in th This is because the intention management of is, subject to short- term demand balancing, to use these energy supplies to meet customer demand. Accordingly managementultimatethe believe the price consistent with be of sales will net charge to cost co of energy agreed in these en reverse as the adjustments will purpose of receipt or delivery purpose of receipt or with the Group’s purc therefore out IAS 39. of scope of instruments and are be derivative financial to are considered their because IAS 39, primarily under valued required to be fair to trade of the contracted the ability elements terms include basis. net-settled volumes on a Certain re-measurements its energyAs part of procurementGroup activities the enters into contracts de commodity a range of These contracts energy supply. and timescales. prices of volumes, cover a wide range sales and The majority of the underlying supply high comes from volume co which are long-term contracts arrangements. These short-term thebalancing purpose of energy andby the to optimise the Group. price paid Short-term demand as a result can vary significantly generation profiles and short-term movements in market prices.

ncial instruments Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 been measured at fair value. at fair been measured in the fair values attributable values attributable fair the in d segmental note separately d segmental ents have been prepared on prepared on ents have been quires segmental information information quires segmental ial Reporting Standards (IFRS) Reporting Standards (IFRS) ial sclosures (effective for annual sclosures (effective ich management uses internally uses internally management ich lating to reportable segments. and the assets and liabilities of and liabilities and the assets ents have been prepared in prepared in ents have been r derivative fina Treasury Share Transactions assets and liabilities that are that are assets and liabilities y 2009); this Standard replaces nt presentation of the Group’s Economies (effective for annual Economies (effective Arrangements (effective for these Financial Statements, these Financial (effective for annual periods atements of Centrica plc are plc are atements of Centrica ion and therefore comply with therefore ion and in issue but not effective at the but in issue nancial Statements, will have no have Statements, will nancial ement Approach under IAS 29, on 33. The page nature the of operations are included in operations are included ial Statements of the Group: Statements of the ial the following Standards and dged. The principal accounting dged. The principal as described below. Summary of significant accounting policies General information information General

The consolidated Financial Statem Financial The consolidated IFRIC 12, Service Concession annualbeginning on periods or after 1 January 2008). IFRIC 11, IFRS 2 – Group and (effective for annual periods beginning after on or March 1 2007); and on or after 1 May 2006); and Impairment (effective Reporting IFRIC 10, Interim Financial on or after 1 November 2006); beginning periods for annual Reporting in Hyperinflationary Reporting in Hyperinflationary periods beginning on 1 May 2006); or after periods beginning for annual 2 (effective of IFRS IFRIC 8, Scope IFRIC 7, Applying the Restat for evaluating the performance of operating segments and requires increased disclosure re IFRS 8, Operating Segments beginning on or after 1 Januar IAS 14 Segment Reporting and re wh reported to be based on that periods beginning on or after 1 January 2007); this Standard financial and capital on disclosures additional will require instruments; and IFRS 7, Financial Instruments: Disclosures, and the related related the and Disclosures, Instruments: Financial 7, IFRS di 1 on capital amendment to IAS At the date of authorisation of The consolidated Financial St Financial The consolidated The Group’s Income Statement an

48 the historical cost basis, except fo the historical cost The consolidated Financial Statem Financial The consolidated Financ International accordance with as adopted by the European Un Article 4 of the EU IAS Regulation. 2. Basis of preparation X X X X Interpretations, which were also Interpretations, which were date of authorisation of these Fi Financ on the material impact X The Directors anticipate that X not yet effective: X accordance with the policies set out in note 2. note out in set the policies accordance with the following Standards and Interpretations whichhave not but were in issue, Statements these Financial in been applied Group’s operations and its principal activities are set outnote in 4 and inDirectors’ Report the - Business Review on pages 6 to 26. Foreign presented in sterling. Centrica plc is a Company domiciled and incorporated in the incorporated and a Company domiciled is Centrica plc under Act 1985. TheUnitedCompanies the address Kingdom office is given of the registered 1. instruments, and items which are exceptional, in order to providein exceptional, are items which instruments, and consiste clear and readers with a underlying performance, to the risks that are being he to the risks that are being policies adopted are set out below. financial of re-measurement of certain identifies the effects the Group pension schemes that have that schemes pension Group the The carrying values of recognised at carried and are otherwise hedges, fair value hedged items in cost, are adjusted to record changes and available-for-sale investments, and available-for-sale

Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 49 ty revenues are recognised ty revenues g and at the effective interest interest effective the at g and ber of awards that will vest ber of awards over thevesting period, based , distribution, royalty costs and rvice contracts cost of sales cluded from current revenue. For For revenue. current from cluded from fixed fee service contracts from fixed fee rvice contracts: Where the the rvice contracts: Where market-based vesting conditions. The fair value determined at determined at The fair value sis over the life of the contract, contract, of the sis over the life s are recognised at the point s are recognised at the is recognised at the ons, revenue taking into account the industry s and total electricity usage by amounts billed in advance are in advance are amounts billed by the customer, which span the span which by the customer, of gas and electricity produced the customer. Revenue from the the customer. Revenue that exactly discounts estimated that exactly discounts 35 to 36 and in note 25, under d overheads on installation work, , whilst commodity revenues, whilst for commodity tlement method). Differences Differences method). tlement share-based payments to certain ant (excluding the effect of non ant (excluding the of the storage facilities. of the storage facilities. Market value on the date of grant theMarket value date of grant on A Monte Carlo simulation to predict the total shareholder return performance Black-Scholes Black-Scholes using an adjusted option to reflect the possibility life assumption of early exercise theMarket value date of grant on A Black-Scholes valuation augmented A Black-Scholes valuation augmented by a Monte simulation Carlo predict to the shareholder total return performance the contract term. term. the contract Gas production: Revenue associated with exploration and associated with exploration Gas production: Revenue Home services’ and fixed fee se fee and fixed Home services’ appropriate to each of the methods using is measured Fair value Storage services: Storage capaci Storage services: fee se and fixed Home services by on a time basis, is accrued Interest income: Interest income awards awards Scheme 2005 LTIS: 2006 EPS LTIS: 2006 TSR Sharesave ESOS Share Award future cash receipts through the expected life of the financial asset of the financial through the expected life receipts future cash to that asset’s net carrying value. Cost of sales the cost Energy supply includes the period during and purchased for total ga reconciliation process supplier, and related transportation services. and in materials bought and relate direct labour includes contracts in the period. repairs and service Employee share schemes in schemes, detailed share of employee a number The Group has the Report – Corporate Directors’ Responsibility on 26, the page RemunerationReport on pages which it makes equity-settled employees. Equity-settled share-based payments are measured at the date of gr at fair value market-based vesting conditions). the grant date is expenseda straight-line on basis together with equity a corresponding increase in num estimate of the on the Group’s non for the effect of and adjusted as follows: different schemes LTIS: awards up to Proprietary energy trading: Revenue net comprises gains and value changes) unrealised/fair realised/settled and losses (both contracts. energy financial physical and in from trading the contract period evenly over ga withdrawal of and the injection or out of gas flowing into Group has an ongoing obligation to provide services, revenues are and basis apportioned on a time ex and treated as deferred income as installati one-off services, such date of service provision. Revenue ba is recognised on a straight-line receivable reflecting the benefits being maintenance of emergency contract as a result life of the throughout available production sales (of natural gas, crudeoil and condensates) is recognised when title passes to production of natural gas, oil and condensates inGroup which the haswith an interest other producers is recognised based on the Group’s working interest and therelevant production terms of the (the enti sharing arrangements between production Group’s sold and share the of production are not significant. outstandin principal reference to the rate is the which rate applicable, continued Centrica plc Annual Report and Accounts 2006

pairmentvalue in in individual are of jointly controlled entities are of jointly dustry reconciliation process reconciliation dustry restructuring, therenegotiation policies of an investee entity entity an investee policies of th its fellow venturers. Under the Under venturers. th its fellow nancial Statements in proportion vidually or collectively, affect the affect vidually or collectively, tly controlled entities are carried tly controlled entities are carried of Financial of Statements, certain ission or mis-statement could, ission or mis-statement ty, less any impairment in value in value in ty, less any impairment lances, income and expenses income and lances, expenses after tax of the jointly controlled e of a non-recurring nature. Items Items nature. non-recurring a e of ent reflects the Group’s share ent reflects the Group’s share nue for energy supply activities nue for energy entities to bring the accounting entities to bring the accounting consolidate the Financial consolidate the Financial to exercise significant influence. influence. to exercise significant h the Group has an equity interest interest has an equity h the Group gy supplied to customers between anges in the Group’snet share of d entities controlled by the d entities controlled d other sales related taxes. ty method of accounting. d using historical consumption consumption historical d using joint venture which involves involves which venture joint after tax of the associate. The Income Statement reflects the Group’s Statement reflects the Group’s The Income from the effective date of acquisition or up from the effective date of consolidation. consolidation.

ummary of significant accounting policies policies accounting significant of ummary Energy supply: Revenueis recognised the on basisenergy of S Certain of the Group’s exploration and production activity is All intra-group transactions, ba The results of subsidiaries acquired or disposed of during the Control is achieved where the Company has the power to Company has the where the Control is achieved 2.

for total gas and total electricity usage by supplier, and is included debtors. income within energy in accrued gas and electricity is estimate gas and electricity patterns, taking into account the in includes an assessment of ener an assessment includes datethelast of the meter readingand the yearend(unread). Unread supplied during the period. Reve goods and servicescourse of business, provided in the normal net of trade discounts, VAT an economic benefits will flow to the Group and the revenue can can the revenue to the Group and will flow economic benefits amounts receivable for includes Revenue be reliably measured. Revenue Revenue is recognised to theprobable that extent that the it is of the results of operations assets of the associate, less any im investments. The Income Statem Under the equity method, investments in associates are carried at are carried in associates method, investments equity Under the cost plus post-acquisition changes in the Group’s sharethe net of and over which it has the ability ability it has the and over which Interests in associates in whic an entity An associate is are included in the consolidated Fi the consolidated in are included to the Group’s interest. assets, liabilities and cash flows of these jointly controlled assets of these jointly flows and cash assets, liabilities conducted through joint ventures where the venturers have a direct direct a have venturers where the ventures joint through conducted interest in and jointly control theventure. assets of the The results, entity method). (the equity individual investments. of operations share of the results at cost plus post-acquisition ch assets of the jointly controlledenti which the Group jointly controls wi Group which the equityinvestmentsjoin method, in A jointly controlled entity is a the establishment of an entity to engageeconomic in activity, Interests in joint ventures ventures joint in Interests are eliminated on on are eliminated associates and jointly controlled jointly associates and into linepolicies used with those usedGroup. by the adjustments are made to the financial statements of subsidiaries, of subsidiaries, statements made to the financial adjustments are year are consolidated necessary of disposal, as appropriate. Where date to the effective so as to obtain benefits from its activities. so as to obtain benefits from its govern the financial and operating and operating govern the financial and incorporate the results of its sh and incorporate the results of its equi the using and associates Statements of the Company an Statements of the Company year, up to 31 December each made Company (its subsidiaries) The Group Financial Statements The Group Financial true and fair presentation of theFinancial Statements. Basis of consolidation are considered material if their om material if their are considered indi the Directors, opinion of in the such a presentation on in basis a consistent future periods. Items disposals of businesses, business of significant contracts and asset write-downs. We intend to follow to the result for the period and ar for the period and to the result include nature in non-recurring and material considered be may which As permitted by IAS 1, Presentation by As permitted material are they where exceptional, as separately presented are items Exceptional items

the determination

efore the date of transition to efore the date ciate or jointly controlled entity, ed from their use or disposal. ting units or groups of cash- ting units diately in the Income Statement Income Statement diately in the nefits embodied in the asset asset in the embodied nefits is included in is included annually, or annually, more frequently amortised. The useful life of an of life amortised. The useful rrying amount may be impaired. may be impaired. rrying amount finite lives are amortised over finite lives uently if events or changes in events or changes uently if in a business combination is their is combination a business in to prepare the asset for use are to prepare the asset for use relationshipand management tion. Following initial recognition, initial recognition, tion. Following the useful life assessment from assessment from life the useful fe or the expected pattern of expected fe or the useful life is reviewed annually annually is reviewed life useful ive basis by changing the nditure for the asset is being asset nditure for the substantially when ation ceases ntractors’ charges, materials, ntractors’ charges, materials, least at each financial year-end. least at each financial te useful lives are tested for te useful lives are ders in the acquiree is initially initially is acquiree ders in the dually or at the cash-generating dually or at the units to which goodwill has been been has goodwill units to which directly attributable overheads. s of the carrying amount of each s of the sed application software, for software, sed application necessary to prepare the asset necessary to prepare the asset rst to reduce the carrying amount amount carrying to reduce the rst continued tatements tatements S Intangible assets are derecognised on disposal, or whenno Intangible assets with indefini Goodwill which is recognised as an asset is reviewed for an asset is reviewed as is recognised Goodwill which allocated testing, goodwillFor the purpose of impairment is asso a subsidiary, On disposal of b Goodwill arising on acquisitions unit level. Such intangibles are not are intangibles Such unit level. indefinite asset with an intangible assessment continues to be life to determine whether indefinite in supportable. If not, the change prospective basis. a to finite is made on indefinite recognition at cost. For purcha customer in example investments includes co cost billing systems, directly attributable labour and expe when Capitalisation begins that are activities incurred and Capitalis progress. for use are in that are necessary activities all the complete. Amortisation commences at the point of commercial The economic life. useful deployment over the asset’s estimated cost of intangible assets acquired date of acquisi as at the fair value less any accumulated cost assets are carried at intangible losses. The impairment amortisation and any accumulated finite assets are assessed to be either lives of intangible useful with assets or indefinite. Intangible for impairment whenever and assessed life economic the useful there indication is an thatmay be impaired. the intangible asset The amortisation amortisation method for an period and the asset are reviewed at intangible li expected useful in the Changes be consumption of future economic on a prospect are accounted for amortisationperiod or method, as appropriate, and treated estimates. accounting in as changes are expect benefits future economic indivi either impairment annually Theminority sharehol interest of measured minority’s at the proportion of the fair value net of recognised. liabilities and contingent liabilities the assets, freq more or annually, impairment, ca that the indicate circumstances imme Any impairment is recognised not subsequently reversed. and is Group’s cash-genera to each of the of the synergies to benefit from the expect thatgenerating units combination. Cash-generating impairment for tested are allocated the If impaired. may be unit the that indication an is there when recoverable amount of the cash-generating unit or groups of cash- the unit, the of amount carryingless than is generating the units fi allocated is loss impairment and unitassets to the allocated the then to of any other goodwill of the pro-rata on the unit basi unit. asset in the of goodwill amount the attributable of the profit or loss on disposal. IFRSretained hasprevious at the UK GAAP amounts been subject at that date. Goodwill written off to to being tested for impairment reserves underUK GAAP prior 1998 to has not been reinstated. Other intangible assets on initial are measured Intangible assets acquired separately

continued at average rates Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 e. In the event of the disposal recognised at their fair value at their fair value recognised n currency translation reserve, a t investment, at which time they nsolidated Financial Statements, Financial Statements, nsolidated are reported in the Statement of , at the date of exchange, of of exchange, at the date , es and associates are translated Group’s interest in the net fair net in the Group’s interest n entity. These are taken directly n entity. These are taken ailing on the balance sheet date. ents are presented in sterling, in sterling, ents are presented rrowings that provide a hedge ed into sterling liabilities denominated in a foreign combination represents the combination represents n currency borrowings, foreign ement. Non-monetary items that ement. Non-monetary n difference arising in the foreign and measured at fair value at fair value and measured movements are recognised in the movements are recognised in in exchange for control of the in exchange currencies are initially recorded initially are currencies with the exception of exchange nominated in foreign currencies currencies foreign nominated in r non-current assets (or disposal Statement of Recognised Income Statement of Recognised Income currency rate of exchange ruling tity concerned are translated are translated tity concerned accounted for using the purchase purchase using the accounted for e conditions for recognition under recognition for e conditions of the Company and the Group’s and the Group’s of the Company attributable to the business easured using that functional that functional easured using ate at the date of acquisition. of acquisition. ate at the date ts and liabilities of a subsidiary, ts and liabilities ld for Sale and Discontinued Discontinued ld for Sale and undertakings, jointly controlled controlled jointly undertakings, e business combination, the excess the combination, e business riod. Exchange differences arising ssociates are taken directly to differences are included in the are included differences at cost less any accumulated impairment impairment at cost less any accumulated ummary of significant accounting policies policies accounting significant of ummary S Exchange differences on foreig on Exchange differences Goodwill arising on a business Goodwill arising on a business For the purpose of presenting co jointly controlled entities and a jointly controlled entities and reserves and are reported in the All other exchange and Expense. Income Statement for the period. Statement on disposal. used to hedge contracts currency swaps and forward exchange undertakings, subsidiary in foreign investments net currency foreign of an undertaking with assets and currency, the cumulative translatio currency translationreserve is charged or credited to the Income from the re-translation of the opening net assets and the results are transferred to the Group’s foreig separate component of equity, and Total Recognised Income and Expens of exchange for the relevant pe 50 losses. If, after re-assessment, the losses. If, after re-assessment, contingent and assets, liabilities identifiable acquiree’s value of the the cost of th exceeds liabilities Income Statement. the in is recognised immediately jointly controlled entity or associ is and cost at asset an as recognised initially is Goodwill subsequently measured less costs to sell. excess of the cost of acquisition over the Group’s interest in the asse identifiable the fair value of at the acquisition date, except fo at the acquisition date, except with accordance for resale in as held groups) that are classified He Assets Non-Current 5, IFRS recognised are Operations, which acquiree, plus any costs directly any plus acquiree, and assets, liabilities identifiable acquiree’s combination. The that meet th contingent liabilities Combinations are IFRS 3, Business and the aggregate of the fair values other given, assets liabilities incurred or assumed,equity and the Group by instruments issued Business combinations and goodwill of subsidiaries is The acquisition method. The cost of the as thepaid acquisition cash is measured into sterling at exchange rates prev The results of foreign subsidiary entities and associates are translat usingexchangethe the dates of the rates as at initial transactions. subsidiary foreign Group’s the of liabilities and assets the undertakings, jointly controlled entiti are recognised in the Income Stat in the are recognised other than a currency terms of historical cost in are measured in the functionalcurrency of the en Income Statement for the period the period Income Statement for bo currency foreign differences on investment in a foreig against a net ne to equity of the disposal until the at the functional currency of the transaction.at the date rate ruling de liabilities Monetary assets and functional are retranslated at the sheet date. All at the balance own functional currency and items included in the Financial the Financial in items included currency and own functional are m entity Statements of each foreign in currency. Transactions Foreign currencies Statem Financial The consolidated which is the functional currency presentationalcurrency.entity Eachits in determines the Group 2.

Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 51 termined at the inception of at the inception termined e asset. Leases are classified Leases are classified asset. e italised as property, plant and plant and italised as property, if lower, at the present value of at the present value if lower, facilities at the end of the the end at facilities and included in property, plant included and ion costs related to exploration to exploration ion costs related are dealt with prospectively. are dealt with prospectively. to be fully recovered from the to be fully recovered e acquisition and installation of installation and e acquisition s, are included within bank loans within bank s, are included are charged to the Income ans within short-term liabilities. short-termans within liabilities. of the arrangement and requires and of the arrangement sis with the likely discounted discounted likely sis with the hnical services costs. Property, services hnical mmissioningasset is recognised are expensed in the period in are expensed lfilmentarrangement of the is ghts and concessions related to e obligation so as to achieve a e obligation so as to achieve a penditure such as geological and and such as geological penditure prospects are expensed. If the ecognised where it is considered development drilling costs, project- development drilling en this provision gives access to to en this provision gives access d from the remaining commercial operating leases. Assets held operating leases. remaining balance of the liability. of the liability. balance remaining probable reserves. For power orage facilities and power stations and orage facilities pitalised. Exploration wells are wells are pitalised. Exploration directly against income. against income. directly cluded in the Income Statement in the Income cluded eciated from the commencement from the eciated plant and equipment. For gas plant and equipment. sts are capitalised using the using the sts are capitalised ff-shore storage facilities the Rentals under operating leases Changesin these estimates and changes to the discount rates All field development costs are cap All field development Lease payments are apportioned between finance charges charges are apportioned between finance Lease payments leas the finance and reduction of constant rate of interest on the are charged charges Finance the of the term over basis straight-line a on Statement relevant lease. at the end of the useful life of the facilities, based on price levels on price based facilities, of the life useful at the end of the sheet date. and technology at the balance Wh are dealt with prospectively. a deco benefits, future economic property, within and included and o production facilities usingdecommissioning the asset is amortised unit of production onmethod, proven based and stations the decommissioningasset is amortised on a straight-line of the unwinding The facility. of the life basis over the useful provision is in discount on the within interest expense. Leases or contains a is, arrangement of whether an The determination on the substance based lease, is of whether the fu an assessment dependent use on of a specific asset or assets and the the arrangement conveys a right to use th transfer terms of the lease whenever the leases as finance thesubstantially and risks all rewards of ownership to the lessee. as are classified All other leases are capitalised leases under finance or at their fair value, and equipment each de payments, lease the minimum net of finance leases, obligations relating to finance The the lease. of future period charges in respect and other borrowings, withamount the payable within 12 months overdrafts and lo bank in included Exploration, evaluation and production assets assets production and evaluation Exploration, and evaluation co Exploration Acquisit efforts method. successful ca activities are and evaluation ex certain and initially capitalised costs is geophysical exploration subsequently determined be unsuccessful to oncompletion of associated costs evaluation, the is made. determination which that equipment. Such costs relate to th and include production facilities related engineering and other tec ri including equipment, plant and are depr production activities, of production in the fields concerned, using the unit of production onmethod, all of the proven based and probable reserves of those estimates in these Changes fields. The net carrying value of fields in production and development ba is compared on a field-by-field future net revenues to be derive r reserves. An impairment loss is that recorded amounts are unlikely net present value of future net revenues. Exploration and production impairment. of indicators for annually assets are reviewed Decommissioning costs the estimated cost value of for the net present Provision is made of decommissioning gas production st fields, and of producing lives continued emissions 2 Centrica plc Annual Report and Accounts 2006

up to 50 years 5 to 20 years up to 30 years 3 to 10 years up to 28 years up to 10 years Indefinite up to 10 years up to 20 years up to 25 years As a result no amortisation a result no amortisation a result is based on the level of electricity ts or changes in circumstances ts or changes in circumstances rectly attributable to bringing rectly attributable to bringing at cost (purchase price) within at cost (purchase price) atement. The intangible asset asset atement. The intangible n certificates are initially initially n certificates are incipal categories of intangible categories of intangible incipal arising from changes in fair fair in arising from changes included in the Balance Sheet in the Balance Sheet included wances granted. The liability The liability wances granted. g profit. Forward contracts for residual values, of individual of individual residual values, sheet date, with movements in sheet date, with id and the fair value of any value of any fair id and the ty, are equipment plant and mprises its purchase price or ion and production assets, e basis at rates sufficient to sufficient e basis at rates hased allowances up to the level up to the level hased allowances eciation and any provisions eciation and es are depreciated over their es are depreciated unted for prospectively. calculated in accordance with in accordance calculated e may not be recoverable. ngible assets. A liability for the assets. A liability ngible emissions allowances are measured are measured allowances emissions 2 ut price for that period. The intangible ut price for that period. The intangible ehold buildings emissions allowances received in a period are initially initially a period are in received allowances emissions 2

ummary of significant accounting policies policies accounting significant of ummary S Residual values and useful lives are re-assessed annually and are re-assessed annually and lives useful and Residual values The carrying values of proper Freehold land is not depreciated. Other property, plant not depreciated. Other is Freehold land The initial cost of an asset co cost The initial Purchased renewable obligatio Purchased renewable 2.

if necessary changes are acco if necessary reviewed for impairment when even reviewed for impairment when indicate that the carrying valu assets, or where shorter, the lease term. Assets held under finance leas Assets held under finance as for owned basis on the same lives economic expected useful Storage Power stations vehicles Equipment and Plant periods for the principal categories of assets are as follows: categories of assets are as follows: periods for the principal leas Freehold and assets over their estimated useful lives. The depreciation The depreciation lives. assets over their estimated useful are depreciated on a straight-lin write off the cost, less estimated and equipment, except explorat and equipment, cost is the aggregate amount pa asset. other consideration given to acquire the construction cost and any costs di the asset into operation. The purchase price or construction for impairment. for impairment. at cost, less accumulated depr at cost, less accumulated Property, plant and equipmentProperty, plant and is Property, plant and equipment the consumption of economic benefit. the consumption of economic is recorded during the period. asset is surrendered at the end of the compliance period reflecting period reflecting compliance of the at the end asset is surrendered percentages set by the UK government and the renewable obligation certificate buyo renewables obligation is recognised supplied to customers, and is recognised at cost within inta consumption of economic benefit. As consumption of economic benefit. recorded during the period. value recognised in the Income St Income in the value recognised the reflecting period compliance the end of the at is surrendered at fair value with gains and losses with gains at fair value the liability recognised in operatin recognised in the liability the purchase or sale of CO of purchased allowances held, and then at the market price of and then at the held, of purchased allowances allowances ruling at the balance emissions exceed the level of allo the level emissions exceed the cost of purc is measured at allowances are initially recognised initially recognised allowances are the level of when is recognised assets. A liability intangible Granted CO Emissions trading scheme and renewable obligations certificates Contractual customer relationships Dyno brand – Identifiable acquired Consents Consents Application software Application Licences assets are as follows: assets are The amortisationfor the period pr recognised at nominal value (nil value). Purchased CO value). Purchased (nil value recognised at nominal

er the periods benefiting from st is recognised immediately st is recognised immediately ctible for tax purposes) or the of the defined obligation benefit the carrying amount of the carrying amount of the the time of the transaction affects affects time of the transaction which the asset is realised asset is realised the which ognised only when, on the basis basis ognised only when, on the are measured at the Directors’ at the Directors’ are measured scounted to present value where scounted to present value where er the defined benefit schemes benefit schemes defined er the n recognised in the Balance the Balance n recognised in over the average period until the until over the average period bility in a transaction which is not and laws that have been enacted, that and laws regarded as probable that there e average tax rates that are ent within interest expense. required to settle the obligation at thin the same jurisdiction, in the in jurisdiction, same thin the . Actuarial gains and losses are and gains . Actuarial by the balance sheet date. sheet date. by the balance tities and associates, except except tities and associates, qualifying local tax group. Any local qualifying of a past event, that can be be that can of a past event, e already vested, and otherwise is otherwise e already vested, and Statement and presented in the in the Statement and presented unrecognised past service cost, past unrecognised rates and laws that have been that have been rates and laws at amounts expected to be paid at amounts expected of the temporary difference can of the temporary difference can that the temporary difference will that the temporary date, except to the extent that in which they occur. They are occur. They are in which they the balance sheet date. sheet balance the continued in interest expense. in interest tatements tatements S Deferred tax is recognised in respect of all temporary differences of all temporary in respect Deferred tax is recognised offset against deferred tax assets may be Deferred tax liabilities provided on temporary on Deferred tax is differences arising measured at th Deferred tax is The cost of providing retirement pensionsother and benefits is benefitThe obligatio retirement expected to apply in the periods in periods expected to apply in the or liability settled, based on tax enacted enacted or substantially tax reflects the assets and deferred tax liabilities Measurement of asset the from the manner in which expected to fall consequences or settled. or liability is recovered provision due to the passage of time is recognised in the Income Statement included with Taxation Current tax, includingcorporation UK tax, UK petroleum revenue tax, is provided tax and foreign (or recovered) using the tax rates or substantially enacted, by sheet balance at the identified of goodwill (if recognition initial the deferred tax arises from the amortisation of goodwill is not dedu asset or lia recognition of an initial the at a business combination and neither accounting profit nor taxable profit and loss. Temporary differences are differences between their tax base. and Group’s assets and liabilities within the same taxable entity or tax asset is rec deferred remaining be can it evidence, of all available wi profits, taxable will be suitable temporary the deductible which against foreseeable future, be utilised. can difference jointly controlled en subsidiaries, reversal of the where the timing it is probable be controlled and future. not reverse in the foreseeable Pensions and other post-retirement benefits schemes. pension of defined benefit operates a number The Group The cost of providingund benefits projected unit using the scheme for each separately is determined valuation method credit actuarial period in the recognised in full Income recognised outside the Income and Expense. Statement of Recognised Statement ov charged to the Income Past service co employees’ service. to the extent that the benefits ar basis amortised on a straight-line expected the between The difference vested. benefits become returnthe on and assets change scheme in present value of scheme obligations the resulting is passage of time from Income Statem recognised in the Sheet represents the present value as adjusted for of the schemes assets. of the schemes’ by the fair value and as reduced Provisions Provisions are recognised when the a presenthas Group obligation (legal or constructive) as a result Group will be required that the it is probable and reliably measured, to settle that obligation. Provisions best estimate of the expenditure di date, and are the balance sheet in the used, the increase is discounting Where material. the effect is

continued Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 , where relevant, is adjusted adjusted relevant, is , where al suppliers under take-or-pay al suppliers groups are classified as held held as groups are classified er of fair value less costs to er of fair value less costs oups) classified as held for sale held for oups) classified as diately. After such a reversal diately. After such asset (or cash-generating unit) unit) cash-generating (or asset rses, the carrying amount of the rses, the carrying arged in respect of non-current of non-current arged in respect s. A reversal of an impairment s. A reversal of an market assessments of the time time market assessments of the at the increased carrying amount at the increased om the date of classification. of classification. om the date e the asset’s recoverable amount asset’s recoverable e the are valued on a weighted average on are valued rating unit) is reduced to its reduced is unit) rating creased to the revised estimate of ey are treated as prepayments as prepayments treated ey are ecific to the asset for which the asset ecific to the asset’s revised carrying amount, timated net after realisable value, will be recovered through a sale through a sale will be recovered lable for immediate sale in its sale in lable for immediate e Group reviews the carrying e Group reviews e for redundant and slow moving for redundant e e lower of cost or estimated net ss was recognised. Where an ss was recognised. Where an ws have not been adjusted. have not been ws on a systematic basis over its remaining on a systematic ummary of significant accounting policies policies accounting significant of ummary Recoverable amount is the high is the Recoverable amount S Non-current assets and disposal Non-current assets An impairment loss is reversed only if there has been a change change been a has is reversed only if there An impairment loss If the recoverable amount of an If the recoverable amount of 52 economic benefits. economic benefits. Where payments are made to extern Where payments gas not taken, th for obligations future generate they as other receivables, within included and items. Inventories of gas and oil of cost or es basis, at the lower moving items. slow for redundant and allowance Take-or-pay contracts Inventories, excluding inventories are valued on of gas and oil, a first-in, first-out basis, at th after allowanc realisable value, present condition. Management must be committed to the to qualify for recognition as a be expected should sale which fr year within one completed sale Inventories transaction rather than through continuing use. This condition is is condition This use. continuing through than rather transaction regarded as met only whenhighly the sale is probable and the asset (or disposal group) is avai costs to sell. No depreciation is ch costs to sell. No depreciation is for sale. as held assets classified amount carrying for sale if their Non-current assets held for sale and discontinued operations gr (and disposal assets Non-current less amount and fair value the lower of carrying are measured at the depreciation/amortisation charge in future periods to allocate the less any residual value, life. useful determined had no impairment loss been recognised for the asset for the asset loss been recognised no impairment determined had year prior in unit) (cash-generating imme loss is recognised as income impairment loss subsequently reve subsequently impairment loss asset (cash-generatingin unit) is th its recoverable amount, but so that would have been does not exceed the carrying amount expense immediately. expense immediately. inused the to determin estimate lo last impairment since the is estimated to be less than its carrying amount, thecarrying carrying its less than be is estimated to asset (cash-geneamount of the an as is recognised loss impairment An amount. recoverable discount rate that reflects current discount rate that reflects the risks sp and value of money estimates of future cash flo there is an indication that the impaired. asset may be the estimated future use, in value assessing in use. In value sell and a pre-tax using value discounted to their present cash flows are generate cash flows that are independent from other assets, the other assets, independent from that are generate cash flows Group estimates the amount recoverable of the cash-generating an asset with intangible An belongs. asset the to which unit and whenever impairment annually for life is tested useful indefinite have suffered an impairment loss. If any such indication exists, the exists, indication If any such loss. impairment an have suffered recoverable amount of the in asset is estimated to determine order Wherethe the extent of any impairment asset does not loss. Impairment of tangible and intangible assets excluding goodwill th sheet date, At each balance equipment plant and and property, assets its intangible amounts of to determineany whether indicationis there that those assets 2.

Derivative financial instruments Certain physical gas, power Certain physical gas,

purposes when it alters the risk purposes when it alters the risk of the Groupline in with risk management the policies and Group’s the that which require with established guidelines, accordance is in documented is hedging relationship recognised in the Income Statemen in the recognised for sale are subsequently as available be instrument can the fair value of after the recognitio occurring (g) The Group routinely enters into sale ma and oil. The physical gas, power that were the form of contracts of receipt or held for the purpose exp with the Group’s in accordance requirements, and are not within 39. the scope of IAS of the scope contracts are within Such or contain written options. Sheet the Balance recognised in 39 and are derivatives under IAS aris losses at fair value. Gains and on derivatives that do not qual year. directly to the Income Statement for the hedge exposures to financial risks, energy price risks, exchange and business. The use of derivative fi by policies approved the Group’s manageme detail on the risk Group’s the Directors’ Report – Principal 21 to 23 andnote in 33 to the Financial Statements. whether entered they into are for trading or hedging purposes. for hedging to be used A derivative instrument is considered deferred day one gains or losses are recognised within the Income Statement. Recognition of theloss that gain results or depend fair value from changes in holding the derivative. For derivati value fair in gains or losses arising from changes any accounting, to the Income St are taken directly gross profit or interestand income interest expense. Gains and losses arising on derivatives ente trading purposes are presented on derivative is highly effective in ac derivative is highly effective in that its effectiveness can be reli holds derivatives which are no for trading. derivatives that are held the derivative is entered into an Derivatives are date. each reporting liabilitie value is positive and as Derivative assets and derivative lia on andset-off exists only a net the when of basis both a legal right intentionsettle the to net derivative contracts is present. covering periods for which observab such derivatives of The fair value to published price quotations from active markets, to the extent by using part market data exists, and in that such observable whose inpu valuation techniques, value at initial fair based from observable markets. Where the recognition for such co is referred to as a This loss will arise. or fair value gain a fair value day-one gain or day-one loss. Su andamortised to the Income over the purchased or delivered At such time available. time observable market data becomes any remaining observable market data becomes available, continued unts. Provision Provision unts. Centrica plc Annual Report and Accounts 2006 ich are readily

gains and losses gains and ailable for sale financial assets ailable for sale financial cash or another financial asset, asset, financial cash or another the Income Statement for equity for Statement Income the wings are initially recognised wings are initially recognised ip, where the carrying value is is calculated by taking into by taking into is calculated s are written off when identified. s are written identified. off when ved. Own equity instruments instruments ved. Own equity idence that thenot Group be will ated Cash Flow Statement, Flow ated Cash ecognised directly in equity and ecognised uncollectible amo uncollectible ares are shown in equity as a in equity as ares are shown and carried at original invoice at original invoice and carried cash and which are subject to to are subject which cash and loss previously recognised in ecomes a party to party ecomes a the contractual Waterheater Income Fund which Waterheater Income Fund which es) are deducted from equity. es) are deducted equity. Incremental costs directly costs directly equity. Incremental lue and have an original maturity original maturity have an lue and e for sale are not subsequently not subsequently e for sale are institutions, wh ailable for sale, and are initially are initially and ailable for sale, and recorded at the present value and recorded fair value with fair value ecognised Income and Expense, ecognised Income movements associated with the come or interest expense. come or interest ligation under the liability is the liability ligation under movements are recognised in the amortised cost using the effective amortised cost effective using the any discount or premium. discount or any rest-bearing loans and borrowings rest-bearing loans Statement. Impairment losses in the Income Statement on Statement the Income in me Statement for the period. Statement for me ttributable transaction costs. ummary of significant accounting policies policies accounting significant of ummary hare capital

Impairment losses recognised in in losses recognised Impairment S Other financial assets Units issued by The Consumers’ Waterheater Income Fund Cash and cash equivalents Trade receivables Interest-bearingand borrowings loans S For the purpose of the consolid After initial recognition, inte After initial recognition,

as defined above, net of outstanding bank overdrafts. cash and cash equivalents consist of cash and cash equivalents cash equivalents equivalents consist of cash and cash cash and insignificant risk of changes in va or less. of three months convertible to knownof amounts 2.

reversed through the Income investments classified as availabl investments classified equity is included in the Inco equity is included until the asset is disposed of or is determined to be impaired, at untilto be impaired, the asset is disposed of or is determined whichcumulative time the gain or arising from changes in fair value r arising from changes in fair value presented in the Statement of R assets within the Balance Sheet. Av assets within the Balance Sheet. recognised at are subsequently assets that are designated as av assets that are designated as other financial within are included and recognised at fair value, Available for sale financial assets are those non-derivative financial assets financial Available for sale Income Statement as interest in Income Statement as interest (f) of theredemption amount. Gainslosses related to changes and in the are recognised liability financial carrying value of the in the are treated as a financial liability liability are treated as a financial contain redemption rights providing with the unitto holders right for redeem units back to the Fund, (e) by The Consumers’ Units issued account any issue costs, and account any hedged risks and the fair value value the fair hedged risks and Income Statement. Amortised cost effective fair value hedge relationsh effective fair value adjusted to reflect the fair value are subsequently measured at are subsequently an item in hedged are the they interest method, except when at fair value plus directly a at fair value (d) borro All interest-bearing loans and balances with banks and similar similar and banks balances with Cash and cash equivalents comprise cash in hand and current current hand and cash in comprise equivalents cash Cash and equity instruments. instruments. equity (c) No gain or loss is recognised No gain or the purchase, sale, issue or cancellation of the Group’s own that are reacquired (treasury shar that are reacquired attributable to the issuenew of sh proceeds recei the deduction from (b) as classified Ordinary shares are able to collect the debts. Bad debt Bad able to collect the debts. amount less an allowance for any ev is objective there is made when (a) recognised Trade receivables are discharged, cancelled or expires. or expires. discharged, cancelled and rewards of ownership or control of the asset. Financial liabilities liabilities the asset. Financial ownership or control of and rewards of the ob are de-recognised when provisions of the instrument. Financialare de-recognised assets when the Group no longer has the rights to cash flows, the risks Financial assets and financial liabilities are recognised in the Group the Group in are recognised liabilities and financial assets Financial Group b when the Sheet Balance Financial instruments

emissions liabilities when emissions 2

lived intangibles are allocated. allocated. are lived intangibles y are reflected within operating operating within y are reflected e future, and other key sources and e future, unt rate in order to calculateunt the rate in imation uncertainty culations is provided in note 14. liability is measured at the cost at the is measured liability the Group to make an estimate level of allowances granted by granted allowances level of and purchases of allowances are of allowances and purchases ents (apart from those involving Further detail on the assumptions e Fund on a consolidated basis a consolidated e Fund on IAS 12, Income Taxes, have led IAS 12, Income Taxes, have g Limited. The Fund’s units are n such redemption rights are least on an annual basis. This This basis. least on an annual allowances ruling at the balance at the balance allowances ruling goodwill and indefinite lived theEmissions European Trading significant effect on the amounts effect significant ions in the Income Statement. Income ions in the balance sheet date, that have a have date, that balance sheet terial adjustment to the carrying ws from the cash-generating unit ws from the cash-generating oup has determined that units oup ce. The Group has adopted an adopted The Group has ce. e Group’s accounting policies as as accounting policies Group’s e continued tatements tatements S Critical accounting judgements and judgements accounting Critical of est key sources

ubsidiary – The Consumers’ Waterheater Income Fund the level of emissions exceeds the the level of emissions the Government inThe the period. allowances purchased the level of up to of purchased allowances of at market price and then held, liabilit in the sheet date. Movements profit. Forward contracts for sales value. measured at fair requires an estimation of the value in use of the cash-generatinginrequires an estimation of the value and indefinite goodwill units to which Estimating the value in use requires flo of the expected future cash a suitable disco and also to choose present value of those cash flows. used in determining cal value in use The Group has been subject to subject been The Group has sinceScheme 1 January 2005. IFRIC (EU ETS) 3, Emission Rights was withdrawn theby IASB in June 2005, andnot has yet been guidan replaced by definitive which recognises CO accounting policy, Petroleum revenue tax (PRT) Theof an definitions income tax in management to judge that PRT should be treated consistently with other taxes. The charge for the year, is presented within taxation on continuing profit from operat tax assets and within deferred Deferred amounts are included Sheet. Balance the in liabilities Key sources of estimation uncertainty th concerning The key assumptions of estimation uncertaintyat the significantof causing risk a ma are year, financial next within the amounts of assets and liabilities discussed below. Impairment of goodwill and indefinite lived intangible assets The Group determines whether at assets are impaired intangible 3. Critical judgements in applying the Group’s accounting policies of applying th In the process note 2, managementdescribed in has made the following have the most judgements that Statem Financial recognised in the estimations which are dealt with below). Finance lease – Third-party power station tolling arrangement The hasGroup entered into a long-term arrangementtolling the with the on based that, determined has and station power Spalding lease. finance a is arrangement the terms, contractual the of substance S The Group holds a nil interest (2005: 19.9%) inConsumers’ The owned wholly its through Fund), (the Fund Income Waterheater Energy Marketin subsidiary, Direct traded on the Toronto Stock Exchange.Group has determined The of the to the substance a subsidiary, due that the Fund is th included has and arrangements by held Fund in the Statements. Units Group’s Financial within the third parties contain rights providing redemption the holder of such units with the rights to put the units back to the Fundor for cash asset. The Gr another financial contai which Fund, issued by the liabilities. financial Emissions trading scheme

continued significantly n. The portion saction is no longer no longer saction is Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 e the hedged item is the cost item is the hedged e the in or loss recognised in equity in or loss recognised in in the terms of the contract of the contract in the terms of the hedge is recognised in of the hedge t. On disposal of the foreign variability in cash flows that is flows that variability in cash ing, hedges are classified hedges are classified ing, ount of the non-financial asset asset non-financial the of ount s fair value hedge accounting value s fair s or losses that are recognised s or losses that are recognised instrument which is effective, is embedded derivative qualifies for hedge accounting qualifies ture of embedded derivatives is ture of embedded derivatives taken and the contract will be will contract and the taken ilarly to cash flow hedges. Any ilarly to cash e contract, the option to fair contract, the option to fair e flow hedges or hedges of net changes in the fair value of a changes in utable to the risk being hedged. lue is recognised immediately immediately is recognised lue racts and the host contracts are the host contracts are racts and ther associated with a recognised ther associated with a recognised remains in equity until the highly highly until the in equity remains forecast transactio qualifies for hedge accounting or accounting for hedge qualifies ile any ineffectiveness is recognised any ineffectiveness ile s or is sold, terminated or strument for which the effective strument for which the effective ins or loss reported in the Income the Income ins or loss reported in ineffective portion of the hedge is ineffective d recognised in the Income d racts are treated as separate racts are treated d to the Income Statement in the d to the Income Statement in the e future cash flows under the the under flows future cash e terminated or exercised without ion occurs. If the tran ion occurs. If the rred to the Income Statement. Hedges of net investments in foreign in Hedges of net investments Derivatives embedded in other financial embedded in other Derivatives ntract contains one or more embedded ntract contains one A derivative is classified as a fair value hedge hedge fair value A derivative isas a classified r risks and characteristics are not closely are not characteristics r risks and A derivative is classified as a cash flow a cash A derivative as is classified ummary of significant accounting policies policies accounting significant of ummary S Hedge accounting Net investment hedges: Cash flow hedges: Fair value hedges: At that pointtime, any in cumulative gain or loss on the hedging

directly in equity is transfe gain or loss on the effective portion the effective portion gain or loss on equity, any gain or loss on the Income Statemen recognised in the operation, the cumulative value of any losses recognised gains or operations are accounted for sim 54 begin no later than when the hedged item ceases to be adjusted to be adjusted hedged item ceases the when begin no later than fair value attrib its for changes in amount of a hedged financial in financial hedged amount of a interestis amortised to the method Income is used Statement. Amortisation begin may as soon as an adjustment exists and shall Statement. The Group discontinue expire hedging instrument if the no longer hedge exercised, the the Group revokes the designation. Any to the adjustment carrying the hedging instrument at fair va instrument the hedging in the Income Statement. Any gainthe on or loss hedged item the carrying is adjusted against attributable to the hedged risk item an hedged amount of the when it hedges the exposure to the hedges when it gain or loss from re-measuring recognised asset or liability. Any (h) hedge account For the purposes of hedges, cash value either as fair operations. investments in foreign Embedded derivatives: 2. expected to occur, the cumulative ga expected to occur,cumulative the is recognised in the Income Statement. instrument recognised in equity instrument recognised probable forecast transact or liability. Hedge accounting is discontinued when the hedging hedging when the discontinued is accounting or liability. Hedge instrument expires or is sold, rollover, no longer replacement or or the Group revokes the designation. affects income, for example when the future sale of physical gas or of physical sale the future for example when affects income, Wher physical power actually occurs. of a non-financial asset or liability, the amounts taken to equity are carrying am transferred to the initial in the Income Statement. The gain in the directly in equity are transferre probable forecast transaction highly which the same period in attributable to a particular risk ei or highly probable asset, liability onof the the gain hedging or loss recognised directly in equity wh hedge when it hedges exposure to it hedge when which significantly modifies th which significantly contract. Where a co derivatives and providing that the not carried at fair value, with ga with value, not carried at fair na related Statement. The closely is a change re-assessed when there instruments or other host cont instruments whenderivatives thei thoserelated to of the host cont value the entire contract may be may contract entire the value in recognised value fair in changes with value fair at recognised the Income Statement. modifies the cash flows under th under modifies the cash flows

is required as differences arise as differences is required or whetherdifferencearises the are of the resulting imbalance or deems the individual suppliers, customers, and the estimated estimated and the customers, p then reviews the difference continued . Unread gas and electricity is electricity gas and . Unread judgements are considered to lied to customers. This difference s and total electricity usage s and total electricity ge in these assumptions would sts charged to cost of sales. e judgements applied, and the e judgements applied, gherindustry or lower value of estimated as being supplied to andardsusing and historical gas and electricity meters into account the industry account the into

of estimation uncertainty uncertainty of estimation . and key sources judgements accounting Critical 3

is included within commodity co suppliedinaccurateis to customers from other causes. The Group’s sh value of deemed supply. The Grou to ascertain whether there is evidence that its estimate of amounts customers by the Group, but in practice tends to result in a higher process can result in either a hi either a in process can result has been than deemed supply including the Group, to have supp The reconciliation is referred to as imbalance. supply in deemed deems to have supplied and billed supplied deems to have quantityoperatthe industry system The industry reconciliation process reconciliation The industry between the estimated quantity of gas and electricity the Group Industry Reconciliation Process – cost of sales be appropriate. However, a chan be appropriate. However, impact upon recognised.the amount of revenue of that energy consumption. Th of that energy consumption. assumptions underpinning these by supplier. Management apply judgement to the measurement to the measurement judgement apply by supplier. Management of the estimated energy supplied to customers and to the valuation reconciliation process for total for ga reconciliation process estimated applying industry st estimated applying industry taking consumption patterns energy supplied customers to between of the the meter last date year end (unread) reading and the Revenuerecognition– unread of assessment an activities includes supply energy Revenue for

£m £m £m £m ) 2005

Group iness roup. revenue

on an o-day inter- gment s charged £m £m revenue revenue (i), (ii), (iii) segment Less inter- Less restated accordingly. –

11,996 1,452 13,448

5 – 5 £m £m 42 – 42 d wholesaling segment. 871 (85) 786 344 (2)344 (2) 342 342 253 (58) 195 119 – 119 strial sales and wholesaling sales and strial revenue revenue 6,032 – 6,032 1,024 – 1,024 2,278 (1,267) 1,011 3,552 – 3,552 1,365 (1,182) 183 1,510 – 1,510 ergy and other Group segments. 14,773 (1,325) 13,448 in the Directors’ Report – Bus Directors’ Report – in the and unrealised/fair value changes value unrealised/fair and Gross segment Gross segment

2005 (restated) (restated) 2005 continued – – – 3 3 9 3 £m £m 24 0 3 2 2006 information has been information has been 294 295 3 88 3 Group 1,586 7,112 2, 1,104 1,245 4,097 which reflects the actual cost within the G which reflects the actual revenue 16,450 14,840 16,450 s Industrial sales an ns to present this amount within inter-se within ns to present this amount storage facilities to other Group companies, storage facilities to other Group companies, gement reporting system, and reflect the day-t reporting system, the gement and reflect – – – – – – – – – tatements tatements £m (64) S (152) (968) revenue segment (1,184) (1,120) (i), (ii), (i), (ii), (iii) Less inter- Less d inter-segment revenue for Indu d thin its net gains and losses is £18 million arising on fee losses is £18 million gains and thin its net 2006 2006 gains and losses (both realised gains and no effect on Group revenue or segment operating profit. or segment Group revenue no effect on – – – urement costs between Centrica En 4 5 9 3 generating streams using a method which best reflects the method which a generating streams using £m 3 3 58 0 65 3 within each segment are described segment are described each within 3 295 3 3 7,112 2, 1,104 1,0 1,291 2, 4,097 revenue 17,6 Gross segment

is not representative of the transactio les transactions on behalf of the Group’ ricity costs are recharged using a method costs are rechargedricity using a Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 s and wholesaling segment. The comparative The comparative segment. wholesaling s and rica Storage represents the provision of Storage represents rica ive of the tradingive of relationship between the segments to present these transactionsas ergy contracts. Included wi Included ergy contracts. distinguished on the the basis of internal mana

(iv) Segmental analysis from trading in physical and financial en physical and from trading in to other Group segments (2005: £8 million). It revenue. stated net within the result is revenue because The revenue presented for Accord energy trading presented for Accord The revenue comprises net Inter-segment revenueof energy proc is derived from recharges allocated to the revenue are appropriately costs Gas purchase consumption of gas withinGroup. Elect the The effect of the restatement is to reduce gross segment revenue an gross segment revenue to reduce The effect of the restatement is 2005. There is 31 December for the year ended by £589 million arm’s length basis. Accord energy trading carries out certain sa not reflect The Group considers that it is segment revenue within the Industrial sale Inter-segment revenue arising within Cent within Inter-segment revenue arising Revenue

Group revenue revenue Group 56

Rendering of services Rendering of services Sales of goods Group revenueis derived from the following activities: (iv) (i) (ii) Onetel Other operations operations Other operations: Discontinued Energy Services North American Energy and Related European Accord energy trading energy Accord Energy Centrica Storage Centrica British Gas Services production Gas and wholesaling Industrial sales British Gas Residential British Gas Business (a) operations: Continuing Review, on pages 6 to 26. Review, on pages Primary reporting format – business segments are business segments The Group’s included products and services The the business. of management 4. Other income (iii)

Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 – – – – – 1 9 4 1 1 1 7 (9) 57 £m £m £m 39 46 48 13 76 96 6 56 (21) 2005 2005 660 510 155 323 243 992 (538) 1,957

) ) – – – – – – – 3 3 3 1 3 5 6 1 8 0 (8) Operating profit/(loss) £m £m 21) 10 7 3 14 10 3 3 3 (11) (41) (1 (11) 2006 2006 3 206 180 2 896 (84 ( certain re-measurements certain year ended 31 December December year ended 31 year ended 31 December December year ended 31 Amortisation of intangibles Amortisation 1,164 after exceptional items and items exceptional after

– – – – – – – – – 6 6 5 1 £m £m £m £m 16 16 19 76 17 81 (28) 2005 2005 2005 2005 584 167 138 406 274 455 193 (435) (424) (note 6) (note arising on revisions to the arising on

– – – – – – – – 1) 1 1 2 3 3 6 2 plant and equipment £m £m 3 17 17 1 2 87 47 95 3 (15) 2006 2006 506 3 478 252 440 cognised Income and Expense. Income and Expense. cognised Depreciation of property, of property, Depreciation (724) (408) (264) (9 Certain re-measurements re-measurements Certain year ended 31 December December year ended 31 year ended 31 December December year ended 31 mes’ rules were amended from 1 April 200 rules were amended mes’

– – – – – – – – – – – – – – 6 2 (1) (5) £m £m £m £m 37 34 29 42 39 29 42 (11) (15) (23) (14) 2005 2005 e business included million £11 costs of (note 6)

Exceptional items items Exceptional Share of results of of results Share – – – – – – – – – – – – – – – – – – – – – – 1) £m £m a cash lump suma cash in on line retirement, with changes in the (12) (12) (66) (24) (27) 2006 2006 33 (214) ( year ended 31 December December year ended 31 year ended 31 December December year ended 31 net of interest and taxation and interest net of ements includes a £20 million gain joint ventures and associates and associates ventures joint ed within the Statement of Re

£m £m 2005

– 12 12 111 903 154 185

(9) 1,513 2 90 77 1,020 (156) 39

s defined benefit pension liability. The Sche pension liability. defined benefit s – 3 7 2 Centrica plc Annual Report and Accounts 2006 Operating profit/(loss) £m 14 95 87

3 (11) (11) 2006 2006 102 686 228 22 864 efore (losses)/profits on disposal of th on disposal of (losses)/profits efore (210) certain re-measurements certain year ended 31 December December year ended 31 1,442 before exceptional items and items before exceptional of £3 million (2005: £1 million charge). continued (ii)

(i) egmental analysis analysis egmental

FinanceFuture revisions Act. to the reflect will be assumption The results of discontinued b operations Operating profit before exceptional items and certain re-measur and Operating profit before exceptional items the Group’ calculating assumptions made in to allow employees to commutelarger amount a of their pension to (2005: £330 million) and a tax credit a tax credit (2005: £330 million) and S Included withinprofit operating Operating profit Operating

(ii)

Onetel Discontinued operations: Discontinued Other operations Other European Energy European North American Energy and Related Services Centrica Storage Centrica Centrica Energy Energy Centrica Gas production trading Gas energy Accord and wholesaling Industrial sales British Gas Services British Gas Business Continuing operations: operations: Continuing British Gas Residential

(c) (i) Onetel The AA operations: Discontinued The Other operations Other Energy and Related Services European North American Energy Centrica Storage Centrica Accord energy trading energy Accord Energy Centrica Gas production Gas and wholesaling Industrial sales British Gas Services British Gas Residential British Gas Business Continuing operations: operations: Continuing

(b)

– – – – – 6 2 6 2 1 £m £m £m £m 19 58 16 63 10 62 2005 2005 166 174 174 174

ceivables gs, the

– – – – – – 3 9 6 3 9 £m £m 33 54 61 18 61 2006 2006 184 172 184 184 year ended 31 December December year ended 31 year ended 31 December December year ended 31 intangible assets (note 13) assets (note intangible intangible assets (note 13) assets (note intangible Capital expenditure on other other on expenditure Capital Capital expenditure on other other on expenditure Capital (based on location of assets) on location (based

£m £m £m £m 2005 2005 2005 2005 7 7 7 7 650 109 643 14 14 109 643 7

7 – 18 – – 10 10 17 534 534 468 468 391 391 – 77 77 rred tax attached to unallocable rred tax attached to unallocable

, inventories, derivatives, re property, plant and and plant property, property, plant and and plant property, – – – – – 4 7 4 equipment (note 15) equipment (note equipment (note 15) equipment (note 3 £m £m 14 18 14 88 55 92 Capital expenditure on Capital expenditure on continued 2006 2006 509 3 107 509 3 107 509 26 year ended 31 December December year ended 31 year ended 31 December December year ended 31 (based on location of assets) of assets) on location (based int venture for each segment is analysed is analysed venture for each segment int

– – – ems such as taxation, corporate borrowin as ems such £m £m £m £m (59) (93) 2005 2005 242 (621) (141) (191) (941) 4,256 3,182 9,866 tatements tatements (7,184) (5,874) (3,797) (1,556) (1,831) 13,290 (10,848) (15,104) S Total assets Total 31 December 31 December

) – – – 7) 3 8) Segment liabilities (ii) liabilities Segment £m £m 3 8 11) 82 (80) 2006 2006 3 3 118 3 33 (665) (196) (192) (116) on a reasonable basis) and defe basis) and on a reasonable 4,946 8, 2,579 ttached to unallocable assets and liabilities, investments and and investments and liabilities, assets ttached to unallocable (9,4 (5,782) (1,041) (6, (2, (2,156) (1,288) goodwill, other intangible assets goodwill, other intangible (based on location of assets) on location (based 11,079 (14,

£m £m £m £m 2005 2005 Revenue 31 December 253 342 67 – – 981 466 451

9,643 3,552 13,448 2,543 17,546 13,290 1,948 8,044 3,046 (4,256) 5,459 1,052 1,533

Segment assets (i) assets Segment – – – 4 1 9 £m £m 3 Notes to the Financial Financial to the Notes 3 3 lities. Unallocated liabilities comprise it liabilities Unallocated lities. Centrica plc Annual Report and Accounts 2006 wings. The aggregate investment in each jo wings. The aggregate investment in 2006 2006 2006 2006 419 104 807 249 479 ,876 year ended 31 December December year ended 31 4,097 4,024 1,5 6,285 2,546 3 1,170 1,2 (4,946) 11,9 16,450 16,025 11,079

to reportable segments for Group reporting purposes based on an assessmentkey drivers of the continued egmental analysis analysis egmental ssets and liabilities Segment assets consist primarily of property, plant, equipment, Segment assets consist primarily of property, in note 16. and operating cash. Unallocated assets comprise deferred tax a Unallocated and operating cash. of borro derivatives designated as hedges Segment liabilities comprise operating liabi comprise operating Segment liabilities segments not allocable between is (which deficit Group pension assets and liabilities. S A

econdary reporting format – geographical segments 58 UK Discontinued operations: Discontinued Continuing operations: operations: Continuing UK North America The Group operates in three main geographical areas: geographical The Group operates in three main S (i) (receivables)/payables Less inter-segment Discontinued operations: operations: Discontinued Onetel Total discontinued operations assets/(liabilities) assets/(liabilities) Corporate and unallocated Energy and Related Services European Centrica Energy Energy Centrica Storage Centrica North American Energy production trading Gas energy and wholesaling Industrial sales Accord British Gas Business British Gas Services (d) operations: Continuing British Gas Residential 4. Rest of World Total continuing operations (ii) Corporate overheads are allocated Corporate overheads are allocated of each allocable cost. of each allocable

Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 4 3 (3) 59 £m £m £m 13 37 (11) (83) 0.1 1.5 1.1 1.6 0.1 1.0 5.9 0.6 2005 2005 456 (256) (329) (656) (226) (982) (906) 1,957 (9,793) (2,556) (5,996) (2,191) 13,448 onal to onal to ing into pes of work

ce and due ce and due ) – 1) 3 3 3 (1) £m £m 66) 17 (12) 2.2 1.2 0.5 0.1 0.7 4.7 0.1 2006 2006 3 33 180 (916) (407) ( (671) ( (172) (181) (955) (2,658) (8,547) (1,076) (2,69 16,450 (12,649) very or related administrative costs. haveengaged been on assignments additi sory projects. Appointments are made tak sory projects. Appointments are made and taxation (note 4) slation (including that of that of slation (including tion, the Board has approved a detailed policy defining the ty policy defining has approved a detailed tion, the Board with the Group are particularly important, including tax advi ssociates, net of interest Centrica plc Annual Report and Accounts 2006

bad debt write-offs and excludes any reco bad debt write-offs any and excludes provals required. In the past, the auditors the audit of the Company’s annual accounts accounts annual Company’s the audit of the e tenders for all major consultancy and advi consultancy e tenders for all major and its associates for other services: and its thin the Group pursuant to legi thin the

cluded within operating costs within cluded cluded within cost of sales within cluded (i) uded within operating costs operating uded within e their expertise and experience e their expertise and experience ate finance transactions transactions ate finance Costs of continuing operations of continuing Costs

Impairment of trade receivables relates to relates Impairment of trade receivables

uditors’ remuneration

nalysis of costs by nature nalysis of hare of (losses)/profits in joint ventures and a ventures hare of (losses)/profits in joint Depreciation and amortisation in

for which the auditors can tender and the ap can tender and the for which the auditors their statutory audit duties wher It is the Group’s policy to seek competitiv In addi experience. expertise and including account other factors Audit Fees of UK GAAP pension in respect scheme wi other accounts of The auditing and Group consolidation auditor the Company’s Fees payable to Fees payable to the Company’s auditor for the Company’s Fees payable to A (i) S Total operating costs Foreign exchange gains gains exchange Foreign Staff and staff-related costs incl Staff and staff-related Total cost of sales Exceptional items (note 6) Staff and staff-related costs included within cost of sales of sales cost within costs included Staff and staff-related services of provision and consumption energy to relating costs Other Transportation, distribution and metering costs

Re-measurement contracts (note 6) of energy A Revenue 5. Other operating costs Write-down of inventory

Other services relating to taxation Services relating to corpor legislation to pursuant services Other Impairment of trade receivables Impairment of trade receivables Profit on disposal of other intangible assets and other investments Profit on disposal of property, plant and equipment Depreciation and amortisation in Commodity cost All other services Operating profit from continuing operations diligence reporting on acquisitions. on acquisitions. diligence reporting outside Britain) countries and territories

– (1) £m £m £m 17 2005 2005 455 140 299 456 455 nergy nergy

ce .

n), llion). llion).

ential gnised lating s Residential.

(11) (100) – – 47 42 (5) 39 34 ) – – – – – 3 1) 7 1) (6) £m £m 3 3 (15) (87) (48) 2006 2006 33 (287) (62 (916) (9 (894) (196) ( s Services (£18 mi s

purchase contracts as contracts purchase million), British Gas Resid British Gas million), it of £14 million has been reco has it of £14 million continued lue recognised in the opening balan recognised in the opening lue sheet date, and the contract price of e contract price date, and the sheet ns at the corporate centre (£23 millio ns at sulted in an exceptional charge before charge before exceptional in an sulted e provisions of IAS 39. e und. All other re-measurement is included included is All other re-measurement und. p’s share of the certain re-measurements re-measurements p’s share of the certain ure of the head office of British Ga office head the ure of million) and British Ga re in February 2006. Our investment in new new 2006. Our investment in February re in contracted sales and contracted sales and tatements tatements ts following a review of their existing and required and required of their existing ts following a review S

the corporate centre (£3 (ii)

(v) (iv) . Certain re-measurements included within interest comprise Other operations). A tax cred re-measurement of energy contracts. A tax charge of £14 million of energy contracts. A tax charge re-measurement (£15 million), British Gas Business (£1 million) and £18 million re million) and (£15 Gas Business (£1 million), British wholly accounted for under th accounted for wholly racted positions, the related fair va million was recognised in respect of these costs. in respect of million was recognised long-term take-or-pay contracts during the period. the units of Theunits Waterheaterthe Consumers’ Income Fund.

(i) ard energy prices at the opening balance ard energy prices at the opening balance ations, the costs of the incident have re of the incident ations, the costs (iv), (v) (iv), nagement action mitigated the damage to ensuredamage mitigated thenagement no loss of life. Following action a full llion from staff reductions at llion from staff reductions proprietary trades in relation to cross-border transportation or storage capacity, oup operating profit also include the Grou operating profit also include oup sed £100 million resulting from staff reductio cent major systems developmen of The Consumers’ Waterheater Income F Waterheater The Consumers’ of million), and £20 million relating to the clos to £20 million relating million), and from the change in fair value of future of future fair value from the change in Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006

ces between reporting dates (or date of inception and the reporting date, where later) write-downs in British Gas Residential (£178 write-downs in British joint ventures’ energy contracts contracts ventures’ energy joint price movements and new contracts new price movements and in continuing operations in continuing operations ed from previously cont items and certain re-measurement. certain items and edited to the Income Statement.

Rough suffered a major interruption caused by a fi caused by a major interruption Rough suffered illion), British Gas Services illion), British Gas (ii), (iii)

on delivery of contracts on delivery

(iv) (v)

(i)

(iii) Exceptional items and certain re-measurements re-measurements and certain items Exceptional Certain re-measurements included within Gr Certain re-measurements relating to the energy procurementactivities of joint ventures traded units re-measurement of the publicly within results before exceptional A tax credit of £284 million has been recognised in respect of been recognised A tax credit of £284 million has of re-measurement of respect has been recognised in to be delivered) is charged or cr As energy is delivered or consum between forw sheet (representing the difference The Groupwritten has down certain of its re The cost comprises future functionality. on which economic value has been created which is not been created which has economic value on which Represents fair value (losses)/gains arising value (losses)/gains arising Represents fair in forward energy pri a result of changes on arising fair value Comprises movements in A tax credit of £59 million was recognised in respect of these costs. of these in respect A tax credit of £59 million was recognised Business restructuring costs comprise £67 mi Business restructuring costs comprise £67 (£16 million), and British Gas Services (£48 to changes to the property portfolio. of £23 A tax credit Centrica Storage operations at A tax credit of £20 million was recognised in respect of these costs. of these in respect A tax credit of £20 million was recognised Business restructuring costs in 2005 compri The profit in 2005 arose on the renegotiationof certain emergency shutdown systems and prompt ma to restore oper assessment of the work needed within £24 million is recognised taxation of £48 million (of which in respect of the charge. British Gas Residential (£43 m capacity contracts Systems write-down Business restructuring costs Business restructuring

Net (losses)/gains arising on market Net (losses)/gains arising trades on proprietary in relation to cross-border transportation or 60 (v) (iv) (ii) Total certain re-measurements (i) Net re-measurement included within Group operating profit Gains arising on re-measurement of the publicly traded units of 8) Waterheater Income Fund (note The Consumers’ Net re-measurement of energyprofit included within gross contracts Net losses arising on re-measurement of Certain re-measurement recognised in relation to energy contracts Net (losses)/gains arising (i) Loss on disposal of Onetel Exceptional items discontinued operations recognised in (a) Exceptional items (a) Exceptional Exceptional items recognised operations in continuing 6. Rough storage incident incident storage Rough Profit on disposal of British Gas Connections Limited Adjustment to profit on disposal of the AA recognisedTotal exceptional items in discontinued operations Contract renegotiation Contract recognisedTotal exceptional items (iii) (ii) (b) (b) Certain re-measurements (note 2) (iv) (iii) (v)

Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 Directors’ Report – Business Review p05 Directors’ Report – Governance p27 Financial Statements p43 Shareholder Information p113 – 3 7 2 61 £m £m 10 83 2005 2005 136 884 182 201 917 201 Number 1,031 1,272 1,438 5,261 1,580 5,261 35, 11,321 13,626 35,410 29,948 35,410 ation s tailments

– 3 2 2 8 3 9 8 2 1 £m 3 3 3 90 33 33 55 2006 2006 195 197 141 968 19 3 ,9 ,9 5,0 1,529 5,0 1,0 1,292 1,617 Number 33 28,704 33 10,044 14, mes are givenon pages 26, 34, been classified as restructuring cost been classified a £17 million (2005: £13 million) loss on cur a £17 million (2005: £13 loss on million) l are given inl are given note 32. tive Scheme intereststive Scheme and pension entitlements in the Remuner the Income Statement. ts. Details of employee share schets. Details of of key management personne Centrica plc Annual Report and Accounts 2006

s of £50 million (2005: £68 million) which have (2005: s of £50 million restructuring cost in cost restructuring pension and retirement benefits includes benefits and retirement pension Directors and employees and employees Directors verage number of employees during the year

Employee costsEmployee A

Other operations Centrica Storage Services North American Energy and Related Executive Share Option Scheme Scheme Executive Share Option

North America Rest of World UK

Onetel (to disposal on 30 December 2005) European Energy Centrica Energy Centrica Energy British Gas Business British Gas Business British Gas Services (b) British Gas Residential included within exceptional items. Other items. exceptional included within Wages and salaries exclude redundancy cost redundancy Wages and salaries exclude Report on pages 34 to 41 form part of these Financial Statemen and 36 andnote 25. Details of the in remuneration Details of Directors’ remuneration,Details of Directors’ share options, Long Term Incen Social security costs Social security costs (a) salaries Wages and 7. Share Award Scheme Share Award Scheme Sharesave Scheme Plan Share Incentive Long Term Incentive Scheme Scheme Incentive Term Long Otherbenefits pensionand costs (note retirement 30) which has been classified as an exceptional as an classified has been which

– £m £m £m 22 10 17 (22) (27) (23) (62) Total 2005 844 368 139 400 705 161

) 3 9 4 9 (7) (7) £m £m £m 4 51 79 10 3 3 (20) (25) 2006 3 180 199 2 4 ( (259) income Interest

bonds designated as bonds designated

– – – – 12 12 – 60 60 (2) – (2) (5) 5 – £m £m (16) 12 (4) (31) – (31) (97) (11) – 25(20) (97) 14 –(14) (20) – (14) (87) – (87) (11) – (11) (247) 102 (145) (200) 90 (110) Interest expense continued 2005 2005 ) ) ntrica Gas Production LP as described Gas Production LP as described ntrica – 3 2 8 3 7 ( £m 22 3 17 3 11 11 (47) (1 (27) Total (146) (165) (175) ing relationships and tatements tatements

S – – – – – 7 7 3 8 7 £m 66 3 3 3 25 3 26 11 140 income Interest

2006 )

– – – – 1) 3 (1) (8) £m 3 (40) (15) (47) (1 (27) (15) (286) (2 (175) Interest expense (i), (ii), (iii), (iv) (iii), (ii), (i), (i), (ii), (iii), (iv) (iii), (ii), (i),

st payable on borrowings related to the Ce (iii)

(i) Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 derivatives designated into fair value hedg derivatives designated into fair value rrangements arose on the prepayment of gas transportation charges.

(ii)

er Income Fund ly payment arrangements (v) s on other derivatives Taxation Net interest Net interest nalysis of tax charge for the year Includes £66 million (2005: £19 million) intere Includes £66 million (2005: £19 million) in note 33 (c) (xiv). Includes fair value (losses)/gains on both Interest on supplier early payment a the hedged item. the hedged item. A

Foreign deferred tax Change in UK tax rate UK tax in Change Foreign tax tax Foreign Total current tax UK petroleumrevenue tax 62

Total tax on profit from continuingTotal tax on profit operations Deferred tax Current year Current tax UK corporation tax (a) comprises: The tax charge 9. (i) (ii) Interest (expense)/income Other interest Notional interest arising on discounted items Interest on supplier ear Interest on customer finance arrangements Fair value gains arising on Units of The of The Units on arising gains Fair value Consumers’ Waterheat Interest expense on non-recourse debt Interest expense on Consumers’ The of holders unit to Distributions Fund Income Waterheater Fair value (losses)/gain debt Interest arising on non-recourse Interest expense on bank loans and overdrafts loans and bank Interest expense on leases finance Interest expense on agreements) tolling (including on hedges Fair value (losses)/gains Cost of servicing net debt Cost of servicing net debt) (excluding non-recourse Interest income 8. Tax on exceptional items and certain re-measurements Tax on exceptional items and Total deferred tax Prior year Adjustments in respect of prior years Adjustments in Tax on exceptional items and certain re-measurements Tax on exceptional items and UK petroleumrevenue tax (iii)

rrently 30%. £m 84 2006 269 115 3 Exceptional Exceptional items and certain items and certain re-measurements

– (14) (14) 3 12 15 3 6 9 £m £m 63 – 63 61 – 61 (38) 1 (37) (84) – (84)

261 – 261 706 138 844 399 134 533 1,330 445 1,775 1,368 444 1,812 rate of UK corporation tax rate items and certain items and certain re-measurements re-measurements before exceptional before exceptional Results for the year the for Results

The Group earns its profits prim The Group earns its – 3 4 (6) £m £m 12 46 14 3 on the relevant temporary differences on the relevant temporary (14) (15) (71) 2006 159 11 180 year ended 31 December 2006. The x charge relating to gains arising on on to gains arising relating x charge Results Results rate for UK corporation tax, cu rate profits. Taxation for other jurisdictions for the year ) ) – – – – opriation of retained earnings in the year opriation of retained earnings in the 6 6 3 3 £m 15 6 6 (12) 3 3 ( ( certain (1,210) (1,225) items and Exceptional re-measurements culated by applying the standard by applying culated )

– 3 3 6 ( £m 77 Waterheater Income Fund was £14 million (note 6 (b) (iv)). million (note £14 Fund was Waterheater Income (20) (15) (71) 3 159 107 54 £11 million, and the tax charge relating to certain re-measureme the tax charge £11 million, and 1,256 1,259 d assessable profit for the year. d assessable and certain year before nary activities is the standard nary activities is the e (totalling £293 million) for the (totalling £293 million) for the e Results for the the for Results re-measurements exceptional items Storage incident was £14 million (note 6 (a) (iv)). 6 (a) (iv)). Storage incident million (note was £14

g costs in 2006 was £20 million (note 6 (a) (ii)). supplementary charge from 1 January 2006 supplementary charge pence) per ordinary share (paid on2006) 14 June Centrica plc Annual Report and Accounts 2006

of energy contractsof energy £284 million. The ta was e-down 2006 was in million (note 6 (a) (i)). £59 ntly applicable on the Group’s UK upstream on the Group’s ntly applicable ted for in shareholders’ equity as an appr equity as an for in shareholders’ ted in the respective jurisdictions. jurisdictions. in the respective able to upstream profits 2005: per ordinary 3.1 pence) share15 November 2006) (paid on operations at standard operations ng operations before tax ng operations

operations before tax continued Dividends

Tax on items taken equity directly to note is disclosed in 26. re-measurement of the publicly traded units of The Consumers’ The units of traded publicly re-measurement of the of 10% to the UK The effect of the increase was £9 at 31 December 2005 million. The tax credit arising on re-measurement on arising The tax credit In 2005, tax credits relating to exceptional items amounted to In 2005, tax creditsto amounted items relating to exceptional amounted to £149 million. The tax credit arising on costs related to the Rough on costs related arising The tax credit The tax credit arising on the systems writ the systems on arising The tax credit The arising tax credit onthe business restructurin Factors affecting the tax charge the year for

(vii) (vi) (v) (iv) the profit before tax is as follows: the profit before tax is as follows: calculated at the rates prevailing rates prevailing at the calculated A supplementary charge of 20% is also curre A supplementary Corporation (2005: tax 30%) is charged at 30% of the estimate in the UK, therefore the used tax rate for tax on profit on ordi (ii) (iii) Group tax charge on profit from continuing operations operations continuing from profit on charge tax Group Overseas tax rates

for tax purposes (Income)/expenses not (chargeable)/deductible 9. Taxation 9. Taxation

The Directors propose a final dividend of 8.0 pence per shar

Prior year final dividend of 7.4 pence (2005: 6.1 dividendPrior year final of 7.4 Interim of 3.15 pence dividend ( 10. Supplementary charge applic charge Supplementary Effects of: UK corporation tax rate of 30% (2005: 30%) Group profit from continui Tax on profit from continuing Less share of (profits)/losses in joint ventures and in Less share of (profits)/losses joint ventures of interestassociates, net and taxation Profit from continuing continuing from Profit The differences between the total tax shown above and the amount cal and the amount tax shown above between the total The differences (b) (i) Connections Limited Limited Connections Exceptional profit on disposal of British Gas UK petroleum revenue tax rates tax assets Movement in unrecognised deferred respect of prior years Adjustments in will be submitted for formal approval at the Annual General Meeting to be held on 14 May 2007. These Financial Statements do no do Statements Financial These 2007. May 14 on be held to Meeting General Annual the at approval formal for will be submitted be accoun will which this dividend payable, 31 December 2007.

– 5 24 34 2005 share share share million shares ordinary ordinary ordinary ivities 3,688 3,751 roup. her shares Pence per Pence per Pence per e nts nts nary nary . Under ,643 million ,643 million e year of nsidered to – – – – 3 3 £m £m 2006 ,64 ,64 million shares 3 3 (34) (0.9) –– 661 967 17.9 25.8 45 45 1.2 1.2 (306) 672 (8.3) 18.2 967 (306) 26.2 (8.3) 1,012 27.4 1,012 27.0 2005 2005 £m 2005 2005 £m 2005

) )

3 3 6.6 6.6 Certain re-measureme (4.1) (0.2) (0.2) (4. (4. (4.1) share share share 19.6 17.1 19.4 17.1 ordinary ordinary ordinary Pence per Pence per Pence per g onenergy our procurement act underlyingof the performance G Waterheater Income Fund. All ot Waterheater Income Fund. All continued 2006 2006 2006 2006 2006 8 8 (8) (8) £m £m £m 3 3 715 2 624 707 2 624 shares in issue during the year of 3 during the year shares in issue (147) (155) (155) (147) being the weighted average number of th number weighted average being the ted for diluted earnings per ordinary share ted for diluted earnings or capacity contracts.

tatements tatements S assists with understanding the assists with understanding c earnings per ordinary share, being the basic earnings per ordi earnings basic being the share, ordinary per c earnings ngs for either 2006 or 2005, but average number the of weighted traded units of The Consumers’ traded units it comprise re-measurement arisin it comprise re-measurement ng the loss attributableng to equity the holders of the Company for th dinary 2006, no shares. outstanding In awards or options are co ion during thenote year as described in 24. e trust which were treated as treasury shares. as treasury shares. were treated e trust which the weighted average number of ordinary average number the weighted exceptional items and certain re-measurements. re-measurements. and certain exceptional items Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 per ordinary share, information is presen information is per ordinary share, ount to market value under the Sharesave Schemes under the to market value ount earnings per ordinary share is as follows: per ordinary share is as earnings relation to cross-border transportation for 2005 excluded 3 million ordinary shares ordinary 3 million excluded 2005 for used in the calculation of diluted earnings per ordinary share of diluted earnings calculation in the used der the Executive Share Option Scheme Share der the Executive used in the calculation of basic earnings per ordinary share of basic earnings calculation in the used would decrease the loss per share. the loss per would decrease and losses after tax (note 6) and losses after tax (note 6) and losses after tax Earnings per ordinary share per ordinary Earnings

Discontinued operations Continuing and discontinued operations Continuing operations In addition to basic and adjusted earnings earnings adjusted In addition to basic and There was a share repurchase programme in operat programme There was a share repurchase The Directors believe that the presentation of an adjusted basi

this presentation,no adjustments are made to the reported earni be potentially dilutive, because they because be potentially dilutive, re-measurement is included within results before results within re-measurement is included used the as denominator is adjusted, for potentially dilutive or and re-measurement of proprietary trades in and re-measurement interest comprise re-measurement of the publicly within included The reconciliation of basic to adjusted basic Company’s own shares held in the employee shar in the employee held Company’s own shares items exceptional and for certain re-measurements share adjusted £155 million (2005: earnings of £1,012 million) by £1,012 million) (2005: earnings of £155 million of shares million).(2005: 3,688 number The 64

Potentially dilutive shares issuable un Potentially dilutive shares issuable Estimated vesting of Share Award Scheme shares Weighted average number of shares Weighted average number of shares Estimated vesting of Long Term Incentive Scheme shares at a disc shares to be issued of Dilutive effect Certain re-measurements (note 2) included within operating prof (Loss)/earnings – basic (Loss)/earnings – diluted (c) (Loss)/earnings – diluted Net exceptional items after tax (note 6) (note items after tax Net exceptional Certain re-measurement gains (b) (Loss)/earnings – basic (Loss)/earnings – diluted Certain re-measurement gains gains Certain re-measurement (a) (Loss)/earnings – basic (note 6) items after tax Net exceptional Basic earnings per ordinary share has been calculated by dividi calculated been ordinary share has per Basic earnings 11. Earnings – adjusted basic Earnings – adjusted Earnings – adjusted basic Earnings – adjusted

– £m £m 29 29

Consents

£m £m 20 49 69 Customer Customer relationships relationships – £m £m 57 57 Brands (ii) Brands prior year acquisitions. prior year acquisitions. – £m £m 27 27 obligation obligation certificates Renewable Renewable 8 £m £m 3 98 160 2 3 software (i) software Application

deferred consideration on deferred consideration Centrica plc Annual Report and Accounts 2006

ber related to the following acquisitions: ber (196) – – – – – – (196) – – – (iii) Other intangible assets Other intangible assets Goodwill Goodwill

ggregate amortisation and impairment 1 December 2006 1 December 2005 1 December 2006 1 December 2006 1 December 2006 Chargeyear for the 48 – – 11 – 14 Exchange adjustments Exchange adjustments (7) – – (3) – – Additions – directly attributable costs 71 – – – – 4 Additions – acquired party third from a 15 60 – 4 – 30

3 Net book value 1 January 2006 135 – – 10 – 1 A 1 January 2006 535 48 57 41 29 5 Cost 13. ATCO Enbridge Services CPL/WTU Direct Energy Energy America The net book value of goodwill at 31 Decem 3 Disposals Exchange adjustments 1 January 2005 Acquisitions Cost and net book value Cost and net book Goodwill arising of £4 million relates to adjustments to to adjustments million relates Goodwill arising of £4 1 January 2006 Acquisitions Cost and net book value Cost and 12. 3 3 Exchange adjustments Exchange adjustments Disposals (18) – – – – – – Disposals (18) – – – Disposals (20) – – – – (2) Acquisitions (note 28) – – – 27 – – Exchange adjustments Exchange adjustments (5) – – (1) – – 3 Surrenders – (81) – – – – – Surrenders –Write-downs (81) – –

Oxxio Other Dyno-Rod Group Residential Services Enron Direct/Electricity Direct Enron Direct/Electricity

£m £m £m £m ed Total Total eriod ange SA

£m £m Other £m £m Carrying indefinite amount of amount lived brand £m £m

£m £m 77 –84 –70 – 77 26 – 84 70 26 17 57 74 87 – 87 Consents 205 – 205 133 –210 –287 – 133 210 287 stems. At 31 December 2006 stems. At 1,170 57 1,227 goodwill goodwill Carrying Carrying

amount of amount £m £m stated. The goodwill arising on stated. The goodwill arising on 2005 (restated) (i) (restated) 2005 Customer Customer continued udes write-downs in British Gas ortisation periods of these systems r of these systems ortisation periods relationships relationships 3 3 £m 68 8 61 26 74 75 33 Total 177 1 188 25 as ultimately implemented. Costs associat as ultimately implemented. to the assets and liabilities of Segebel liabilities to the assets and of companies during 2004. In accordance with 2004. In accordance of companies during 1,112 pected usage of the brand by management. by management. usage of the brand pected £m £m th indefinite useful lives view of existing and required systems required existing and view of oup structure since the beginning of the beginning oup structure since the Brands been allocated to cash-generating units units to cash-generating allocated been to operating costs in the Income Statement. Income to operating costs in the tionship management sy tionship management – – – – – – – – – tatements tatements £m 57 57 S £m £m Carrying indefinite amount of obligation obligation lived brand lived certificates Renewable Renewable efinite useful life because there is no foreseeable limit to the p no foreseeable limit there is life because useful efinite ws. In reaching this determination, management have reviewed reviewed have management determination, this ws. In reaching 2006 2006 3 3 £m £m £m 68 8 61 26 17 75 33 535 48 57135 29 41 5400 – 715 48 – 571 10 – 31 29 4 146 569 d the comparative information re 177 1 188 25 charge to intangible assets incl software 1,055 goodwill Carrying Application amount of

ions, the provisional fair values assigned values ions, the provisional fair and indefinite lived intangibles have lived intangibles and indefinite red on the acquisition of the Dyno group acquisition of the Dyno on the red reduced benefits arising from the systems the arising from benefits reduced Notes to the Financial Financial to the Notes major systems developments following a re major systems developments Centrica plc Annual Report and Accounts 2006 s occurred of changes as a result the Gr to sks of technological obsolescence and the ex and technological obsolescence sks of

and other intangible assets is charged £101 million am £323 million). The remaining (2005: as a result of the restatement. as a million in British Gas Services. million in British of goodwill and intangibles wi ftware are amounts for billing and customer rela customer amounts for billing and ftware are continued Enron Direct/Electricity Enron Direct/Electricity Direct Acquisition to which to which Acquisition goodwill relates Direct Energy/ATCO

Direct Energy/ATCO Direct (ii)

(ii) Various (iii) Impairment testing

with functionality nouse have longer in been written off. The £18 million and Residential of £178 There are no internally generatedintangible assets (2005: £nil). The Groupwritten has down certain of its functionality. The reduced functionality ha development projects and recognition of the potential threats from competition, the ri potential threats from over which the Dyno brand is expected to generate net cash inflo to generate net Dyno brand is expected over which the from five to 10 from five to years. were reassessed within 12 months of the acquisition date, an date, of the acquisition were reassessed within 12 months reduced by £23 million has acquisition In accordance with IFRS 3, Business Combinat with IFRS 3, Business In accordance Brands represent the Dyno-Rod brand, acqui Brands represent the an ind the brand ascribed IAS 38 paragraph has 88, management Included within application so Included within systems is value of these the net book . Other intangible assets . Other intangible

ggregate amortisation and impairment ggregate amortisation and impairment

3 1 December 2005 1 December 2005 1 December 2005 (iv) (iii) (ii) US home services Group Residential Services Canada Direct Energy Energy Direct Canada business services Canada mass markets Canada mass 66 Europe – SPE – SPE Europe (i) Luminus British Gas Services Dyno-Rod Cash-generating unit British Gas Business 14. combinations through business Goodwill acquired as follows: Net book value 3 Disposal of subsidiary Disposal of subsidiary Exchange adjustments 3 (1) 6 – – – – – – – – – – (1) 6 Disposals (4) – – – – –(4) – A 1 January 2005 year Charge for the (4)Disposals – – – 67 67 – – – – 10 – – – – 1 77 68 Disposal of subsidiary Disposal of subsidiary Exchange adjustments 3 (3) 7 – – – – – 1 – – – – (3) 8 Acquisitions 1 – – 32 – –33–(78) – – 1Acquisitions Disposals Surrenders – – (78) – – 32 – (5) – – – – – (5) 1 January 2005 Additions – acquired party from a third Additions – directly attributable costs 41 75 55 – 419 – – 71 – – 57 – – 8 3 29 – 99 75 2 586 Cost Amortisation arisingon application software (i) 1

Europe – Oxxio Other Oxxio Canada home services services home Canada Enbridge Services Texas residential energy CPL/WTU

ow based on ed p’s period the ive se ect and and gross n, adjusted n, adjusted r the cash- amounts might

gas and power curves, immediatel r new and renewal contract custom contract and renewal r new by business line. For services by business line. prior to the approval of the business pl if there are indications that are indications if there ported within the Group. that the 2005 cash-generating units Canad 2005 cash-generating the that ely prior to the approval of theely business p irment test is performed. The plans are test is performed. The plans irment r to the approval of the business plan, continued to the approval of the business plan, adjus pproval of the business plan, adjusted for adjusted plan, pproval of the business the approval of the business plan, adjuste the approval of the business plan, prices in Texas immediately prior to the immediately prices in Texas determine recoverable amounts fo amounts determine recoverable r new or renewal customers this is based o for the specific cash-generating units not cash-generating units specific for the oval of the business plan, adjusted for adjusted for plan, oval of the business based on business plans for a period of f plans for based on business r new or renewal customers,based this is om reporting hierarchy changes and will all and hierarchy changes om reporting mmediately prior to the approval of the prior to the approval mmediately amount of goodwill allocated to each cash- cash- goodwill allocated to each amount of period prior to the the approval of business pla etitive and regulated businesses. on Centrica’s view of forward on Centrica’s enerating units withinNorthCanada the America, specifically e consumption per customer prior to the approval of the e consumption per customer prior to the approval of the have been replaced by cash generating units Canada mass markets markets mass generating units Canada by cash replaced have been in determining recoverable amounts are derived from the Grou the from derived are amounts recoverable in determining owth rates usedprojections to extrapolate cash beyond flow the based on contracted margins. Fo e approval of the business plan, adjusted in some areas to refl some in e approval of the business plan, adjusted sh flows beyond the five-year plan period used in the value in u in the value in used period plan five-year the beyond flows sh rable amount of the cash-generating units, which corresponds to annually, or more frequently or annually, cally known gross margin targets rates in the UK, or where applicable the US, Canada, Belgium Belgium Canada, US, the applicable or where UK, the in rates generating range units from 9.4% to 9.5%, and UK and for Europe ca ate carrying value of goodwill re ate carrying value of calculations have been used have been to calculations used age churn prior to the approval of the business plan. prior to the approval of age churn the period prior to the approval of the business plan. sinesses. The impact of this change is change impact of this sinesses. The of targeted margins. ely prior to the approval of the business plan. y prior to the approval of the business plan. method of aggregation. This resulted fr aggregation. This resulted method of rket share achieved in the period prior to period in the rket share achieved rket share achieved in the period immediat period in the rket share achieved angibles with indefinite useful lives with indefinite angibles experience in the three years prior to the a in the experience on contracted margins. Fo s this is based ss multiple cash-generating units. The units. The ss multiple cash-generating e market share achieved immediately prior immediately market share achieved e ence of the average consumption per customer Centrica plc Annual Report and Accounts 2006 Centrica’s view of forward gas of forward gas and power Centrica’s view s view of forward gas and power curves i s e average income achieved immediately prio immediately average income achieved e ers this is based on contracted prices. Fo ers this is based

ed by the Board and are valid when the impa are valid ed by the Board and culations determining amounts recoverable age gross margin achieved prior to the appr rmined using cash flow budgets, which are flow budgets, which using cash rmined services in the current year. services in the current on sales and marketing activity. marketing activity. on sales and st-price to beat environment. st-price to beat environment. past experience of the averag of the past experience past experience of the averag of the past experience sales and marketing activity. sales and ssumptions specific to each of the comp to each ssumptions specific ng contract customers this is ng contract customers this is tomers this is based on current prices in the sales and marketing activity. marketing sales and ecasts range from 0% to 3%. plan and the price impact capital and for North American cash- for capital and ervices – Dyno-Rod S

Comprises goodwill balances allocated acro allocated balances Comprises goodwill compared to the aggreg is not significant generating unit During 2006, the aggregation of assets comprising certain cash-g a regional to a product from region, changed monitor those to more effectively management bu and Canada Direct Energy business Energy business Direct and Canada residential energy – west and Canada residential energy – east energy – east residential Canada – west and energy residential achieved gross margin in the period immediatel achieved gross margin in the period Budgeted market prices: based on Centrica’ Budgeted market prices: based business plan. Budgeted consumption: based on Budgeted consumption: based business plan. Budgeted market share: based on average ma Budgeted market share: based for growth forecasts supported by the aver experience of based on past Budgeted churn: Budgeted gross gross margin: for commodity margin,is based this prior to the approval of the business plan while adding histori immediat on past experience is based margin, this Centrica’s view of forward gas and power prices in Canada. of forward gas Canada. and power prices in Centrica’s view Budgeted consumption: based on past experi Budgeted market share: based on average ma Budgeted market share: based a adjusted for growth and decline custom Budgeted market prices: for existing Budgeted gross margin: for existing customer Budgeted gross margin: for existing business plan. business plan. of combination Budgeted prices: based on a approval of the business Budgeted customer numbers: based on past Budgeted customer numbers: based on customer numbers. in decline an expected marginal on Budgeted consumption: based Budgeted gross margin: based on the aver Budgeted gross margin: based of a po expectations management’s Budgeted franchise fee income: based on th income: fee Budgeted franchise adjusted for growth forecasts based Budgeted cost growth:on the based cost growth in Budgeted market share: based on the averag on the Budgeted market share: based for growth forecasts based on Budgeted gross margin: for existi this is based on achieved gross margin in the prior to th period cus market conditions. For tariff for Centrica’s view of the forward energy curve. for Centrica’s view The key assumptions in the value in use cal

14. Impairment testing of goodwill and int goodwill and of testing 14. Impairment

X X X X X Canada Direct Energy business services X X X Canada mass markets X X X X Texas residential energy X X X British Gas X British Gas Business X (ii) generatingunits noted above. These are dete be impaired. The impairment test involves determining the recove the test involves determining impairment be impaired. The use in Value use. in to sell or the value less costs fair value Goodwill and indefinite lived intangibles are tested for impairment are tested intangibles lived Goodwill and indefinite (iii) weighted average cost of weighted average cost calculations are increased in line with historic long-term growth long-term historic with in line increased are calculations forecasts flow to the cash applied rates Discount Netherlands. the on past experience as well as future expected market trends. Ca trends. market expected as future well as experience on past years. These business plans have been approv plans years. These business above are: covered by the most recent for generating units range from 8.5% to 11.1% on a pre-tax basis. Gr

) )

3 3 3 3 4 £m 3 87 (5 Total 506 509 . (191) (14 (166) ,22 ,510 ,679 e the e 7,189 3 3 3 6,89 pected ey US 3 £m £m ,161 (vi), (vii) (vi), 4,904 3 1,74 Storage, (iii), (iv), (v), (v), (iv), (iii), production production exploration and exploration

2 £m £m 3 244 (iii), (iv) (iv) (iii), Power 1,7 1,488 generation generation

e business plan, uplifted for ex uplifted plan, e business continued £m £m 89 515 426 home services group the over last three Plant, (iii) (ii), Belgium immediately prior to the approval immediately Belgium ear period prior toear period the of the approval continued oval of the business plan, adjusted for th adjusted for plan, oval of the business r to the the approval of business plan. r tothe of the approval business plan. business plan adjusted for improvements plan adjusted business y prior to the approval of the business plan equipment and vehicles expected market penetration in certain k in certain market penetration expected unts of the cash-generating units to exceed unts of the cash-generating units to e aforementionedassumptionse key on which th to the approval of the business plan. 8 (i) £m £m 3 16 22 tatements tatements improvement programmes including process improvement programmes including process S buildings buildings Land and Land

ately prior to the approval of th ately prior to the approval ricity markets going forward.ricity markets going er numbersprior to the approval of the ’s view of forward gas and power prices in ’s view of forward gas and power prices angibles with indefinite useful lives with indefinite angibles oss margin in the period immediately prio immediately oss margin in the period oss margin in the period immediately prio in the period immediately oss margin e gross margin in the periods prior to appr age achieved revenue growth in the Canada Canada the in growth age achieved revenue age achieved revenue growth for the three-y growth revenue age achieved ed gross margins immediatel in the period an, uplifted for growth targets based on an, uplifted Notes to the Financial Financial to the Notes oducts and reduction of customer churn. of customer churn. and reduction oducts Centrica plc Annual Report and Accounts 2006 historical trends adjusted for cost historical erage consumption per customer prior customer consumption per erage are based would not cause the carrying amo not cause the carrying based would are current knowledge, expected changes in th knowledge, current n of the Belgian energy market. e unbundling of the gas and elect of the gas and e unbundling ecommissioning liability ecommissioning liability – – – 87 PE S Property,and plant equipment

of the Business plan. state markets. Budgeted consumption: based on the av on the Budgeted consumption: based Budgeted customer numbers: based on custom Budgeted customer numbers: liberalisatio resulting from further on management Budgeted market price: based optimisation implemented. on the achiev Budgeted gross margin: based Budgeted gross margin: based on the averag based Budgeted gross margin: arising from th expected impact on Budgeted operating expenditure: based Budgeted revenue growth: based on revenue in the period immedi pr base, cross selling of growth in customer Budgeted revenue growth: based on the aver years prior to the approval of the business pl business plan, uplifted for additional product offerings. product for additional uplifted business plan, gr Budgeted gross margin: based on achieved Budgeted gross margin: based on achieved gr grossBudgeted based on achieved margin: Budgeted revenue growth: on based theaver home services ggregate depreciation and impairment S

1 December 2006 1 December 2006 1 December 2006 Exchange adjustments – (62) (26) (55) 68 Net book value 3 A 1 January 2006 17 168 143 2,895 1 January 2006 45 646 1,632 4,570 Cost 15. determination of the recoverable amounts determination of the recoverable amounts recoverable amounts. X Centrica is of the opinionbased on that, X X Europe – Europe – X X X Europe – Oxxio Europe – X X U X Canada home services X X 14. Impairment testing of goodwill and int goodwill and of testing 14. Impairment Disposals (2) (135) (3) (26) (2)Disposals (135) (3) Acquisitions (note 28) – – 31 3 Exchange adjustments Exchange adjustments – (31) (3) (19) Revisions and additions to d Revisions and additions 3 Chargeyear for the 1 87 107 311 Additions – 75 107 327 Additions – 75 107 Disposals (7) (144) (12) (28) (7)Disposals (144) (12) 3

£m £m (iii), (iv) (iv) (iii), Power generation generation £m £m owing categories of property, plan Plant, (iii) (ii), equipment and vehicles (i) £m £m 45 646 1,632 4,57017 6,893 28 168 478 2,895 143 1,489 1,675 3,223 3,670 buildings buildings Land and Land idiary of the Fund, without recourse to the Group, is secu recourse to the Group, is idiary of the Fund, without

rheater Income Fund (the Fund) within plant, equipment and and equipment plant, within Fund) (the Fund Income rheater ear are included within the foll ear are included

Centrica plc Annual Report and Accounts 2006 continued ecommissioning liability ecommissioning liability – – 7 34 41 n at 1 January January 1 n at

Assets held under finance leases leases Assets held under finance Theand buildings netland book value the comprises of following: and equipment: and equipment: The netvalue book Consumers’ of the fixed assets of The Wate a subs issued by Debt million (2005: £210 million). vehicles was £197 on these assets. Assets in the course of construction during capitalised the y

ggregate depreciationand impairment 1 December 2005 1 December 2005 1 December 2005 Aggregate depreciation at 31 December Aggregate depreciation at 31 December

Cost at 31 December 15. Property, plant and equipment equipment and Property, plant 15.

Net book value at 31 December Net book value Charge for the year Charge for the Aggregate depreciatio Disposals Cost at 1 January Additions (iv)

Power generation Plant, equipment and vehicles and vehicles Plant, equipment (ii) Long leaseholds Long leaseholds Freeholds 3 (i) Net book value Exchange adjustments Exchange adjustments 3 – 12 1 14 27 Disposal of subsidiary Disposal of subsidiary – (33) – – (33) Disposals (14) (54) (60) (2)(130) Chargeyear for the (14)Disposals (54) (60) 1 84 90 237 412 A 1 January 2005 30 159 112 2,646 2,947 3 Revisions and additions to d Revisions and additions Exchange adjustments – 47 17 49 113 Disposal of subsidiary Disposal of subsidiary – (86) – – (86) Disposals (15) (58) (315) (3)(391)–14 –Revaluation (15)Disposals – (58) (315) 14 Acquisitions 1 1 181 4187 Acquisitions1 Transfers from joint ventures 1 181 – – 249 – 249 Additions – 94 100 456650 Additions– 94 100 Cost 1 January 2005 59 648 1,379 4,030 6,116 Short leaseholds Disposals Storage, exploration and production

(iii)

– 3 6 9 (2) (2) £m £m £m £m 3 45 11 £m £m 16 36 16 (34) (12) ets Total 2005 220 22 434 411 2005 charge ar is nd gas nd gas Depreciation d 3 3 4 (4) (2) £m £m £m £m £m 2 71 86 24 16 3 (20) 2006 2006 79 864 407 3 loans value Net book Shareholder

£m £m 26 Goodwill Goodwill rest in the UK Statfjord oil a rest in the Investments in joint continued £m £m ventures and associates and associates ventures 185 26 12 171 nsideration paid was allocated to the ass allocated nsideration paid was Investments n and production assets was £124 million was £124 million n and production assets ovision and asset for decommissioningovision and asset an tatements tatements S purchasea further of 4.84% inte d becoming subject to depreciation finance leases and the associated depreciation charge for the ye charge associated depreciation and the leases finance s included within storage, exploratio s included within storage, Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 action was completed on 30 June 2006. The co action was completed on 30 June 2006. xed assets of £150 million, a £31 million pr million £31 of £150 million, a xed assets continued continued restricted (Spalding finance lease asset) asset) lease restricted (Spalding finance tion costs included within storage, tion costs included within storage, of property, plant and equipment: of natural gas resources transferred to producing assets an s capitalised during the year sts depreciated in the year sts depreciated in Interests in joint ventures and associates Interests in joint ventures

hare of net assets/costhare (2005: £85 million). Additions within storage, exploration and production include the and liabilities acquired. In addition to fi acquired. and liabilities recognised. capital were £3 million for working The net book value of decommissioning cost decommissioning The net book value of This trans field from BP for £153 million. Exploration for and evaluation S

1 December 2006 (vi) Exchange adjustments Exchange adjustments (2) – – Net book value of exploration and evalua of Net book value December exploration and production assets at 31 70

Increase in shareholder loans Increase in shareholder – – 11 (a) 1 January 2006 16. Exchange adjustments Exchange adjustments (vii) exploration and evalua of Net book value exploration and production assets at 1 January Exploration and evaluation cost (v) Netof assets to whichbook value title is liabilities for of assets pledged as security Net book value Power generation assets are subject to the following restrictions: Power generation and production Storage, exploration The net book valueof property, plant and equipment held under categories following the in included 15. Property, plant and equipment equipment and Property, plant 15.

Share of losses for the year 3 (12) – – Exploration and evaluation costs Exploration and evaluation co

£m £m 12 £m £m (96) Total Total 457 223 136 321 t nt is nt (150) (246) mber onal SA the Restated (i) Restated (i) f current

(i) (restated 2005 £m £m 3 loans (5) £m 2 (97) Total 109 299 408 220 (114) (211) Shareholder

£m £m SA SA was treated as a partial SA was treated as a partial £m £m 17 Goodwill Goodwill Segebel and the share of net assets share of net assets and the e assets and liabilities of Coots liabilities and e assets e Group also acquired a 55% join e Group also acquired Investments in joint £12 million, to increase share o share £12 million, to increase ventures and associates and associates ventures £m £m 2006 (14)– (25) (39) ion restated. The effect of the restateme ion restated. The effect 137– – 137 185 26 12 223 to the assets and liabilities of Segebel liabilities to the assets and £m £m 71 337 (36) (175) 12 months of the acquisitionand 12 months date, Investments acquisition, SPE SA acquired the Group’s 50/50 SPE SA acquired the Group’s acquisition, Limited for cash consideration of £11 million, for cash consideration Limited r 2006 interests its principally comprises Wind Limited Wind

with IFRS 3, Business Combinations, the provisi Combinations, the Business with IFRS 3, Barrow Offshore Barrow

The Group’s 60% share of the assets and liabilities of Hu and liabilities 60% share of the assets The Group’s e inaccordingly Humber Humber and Power Limited, Power acquisition of Luminus NV by NV by SPE of Luminus acquisition ure (Segebel SA) with Gaz de France. SA holds Segebel a e comparative informat ilities by £12 million. sition has reduced by £23 million, by has reduced sition the year. The Group’s share of th The Group’s the year. share of non-current assets by share of non-current d Segebel SA (energy supply).SA (energy d Segebel Th continued ions, the provisional fair values assigned values ions, the provisional fair Balance Sheet at the date of acquisition. at the date of acquisition. Sheet Balance million as a result of the restatement. as a result million n energy company. At the time of the energy company. At the time n e of non-current liab e Centrica plc Annual Report and Accounts 2006 the Group from that date.

lities of Segebel SA of Segebel SA lities were reassessed within osed of its 49% share holding in AccuRead osed of its 49% share holding in AccuRead ss assets and gross liabilities at 31 Decembe pipeline construction) during construction) pipeline 2 stated. The goodwill arising on acqui oup, resulting in a loss of £1 million. In accordance of £1 million. In loss in a resulting oup, (112) – –(112) (112) – (ii)

(i), (iii) (i)

hare of joint ventures’ assets and liabilities comparative information re comparative information liabilities by £27 million, and to increase shar by £27 million, and liabilities In accordance with IFRS 3, Business Combinat with IFRS 3, Business In accordance were reassessed within of the acquisitionand th 12 months date, by £27 million, to increase of current assets to increase share fair values assigned to the assets and liabi to the assets assigned fair values has increased by £23 acquired at acquisition On 28 September 2005, the Group entered into a 50/50 joint vent controlling stake of 51% in SPE SA, a Belgia The shares. NV, for Luminus business, supply energy venture joint (24.5%) disposal by the Gr resulting in a pre-tax profit on disposal of £8 million. profit on disposal of £8 million. a pre-tax resulting in On 19 September 2005, the Group acquired the remaining40% stak of subsidiary treated as a been Limited has Group Power Limited were consolidated in the On 11 October 2005 the Group disp

1 December 2005

16. Interests in joint ventures and associates associates and in joint ventures 16. Interests

(i) Interests ventures inassociates and joint Net (debt)/cash included in share of net assets (22) 58 162 Shareholder loans 23 – Share of non-current liabilities (6) (108) Share of current liabilities Share of current (30) (67) Share of non-current assets 63 236 Share of current assets 8 101 Limited at 31 December 2006 is £nil. venture interestCoots Limited in (CO The Group’s share of joint ventures’ gro The Group’s share of joint ventures’ generation) an (renewable power in Barrow Offshore Wind Limited (b) (ii) (i) Disposals Increase in shareholder loans loans Increase in shareholder Conversion of shareholder loans to equity shares 36 – – (36) – – 24 24 Additions Adoption of IAS 39 1 January 2005 as restated 117 (14) 51 – 24 – 192 (14) 31 December 2004 131 51 24 206

Share of profits less losses for the year 3 37 – – 37 Dividends received Dividends received (16) – – (16) Transfer to subsidiaries Transfer to subsidiaries (iii)

£m £m £m £m £m 74 14 21 47 37 (10) Total 2005 2005 382 108 196 (335) 1,218 1,239 nt, nt, Non-current d within

2005 2005 ) 3 7 £m £m £m e Group £m £m 6 29 77 25 44 (19) (12) 2006 2006 Total 3 611 640 3 168 270 ( Current

3,421 25 1,968 265 – –

244 –

944 25

2005 2005

– – 3 7 3 £m SA £m £m 1 16 (12) (19) not readily available to available not readily Segebel Non-current subsidiary undertakings and undertakings subsidiary continued 2006 2006 cost (2005: £77 million). Th – – 4 4 340 (4) (359) £m £m £m 02 33 3 ,590 Current 1,192 1,762 3 included within the Centrica Energy segme Centrica Energy within the included Wind Limited Wind Barrow Offshore Barrow tatements tatements

S Fund. These amounts are Fund. These amounts held by the Group’s insurance held by the Group’s insurance are of the investment in and results of Segebel SA are include results of Segebel in and investment are of the

cost to sell, being lower than continued Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 nsumers’ Waterheater Income results of Barrow Offshore Wind Limited is Limited Wind results of Barrow Offshore 2005: £184 million) during the year. int ventures and associates ventures and int – Cash and cash equivalents Trade and other receivables Trade and other receivables Inventories

hare of joint ventures’ result S

£17 million (2005: £25 million) held by The Co Group. be used for other purposes within the Cash and cash equivalents equivalents cash Cash and Other receivables 72 Cash and cash equivalents included £38 million (2005: £30 million) equivalents included £38 million cash Cash and Cash at bank, in transit and in hand in transit and in Cash at bank, Short-term deposits 19. Prepayments and other accrued income Prepayments and other accrued Trade receivables, net of provisions for impairment Trade receivables, net of provisions for impairment Accrued energy income 18. Inventories include £41 million which is carried at fair value less is carried which Inventories include £41 million Other raw materials and consumables Other raw materials and 17. Gas in storage and transportation within the Industrial and wholesaling sub-segment. The Group’s sh segment. the European Energy Tax The Group’s the share of investment in and Income Expenses (c) 16. Interests in joint ventures and associates and associates ventures in joint Interests 16. Share of post-tax results of jo Share of post-tax results Finished goods and goods for resale consumed £390 million of inventories ( inventories consumed £390 million of

7 £m £m £m £m

2005 532 655 386 171 e 2,922 1,178 2,390

Non-current 3.

3 3 6 £m £m £m 3 2006 181 107 404 48 Current 1,561 2,25 2,7 259 377 504 19 – 809 – – 250 282 – –– 422 655 1,735 655 2,267 2005 2005

– 3 3 £m 105 78 218 265 1,181 2,072 2,555 by The Consumers’ Waterheater Consumers’ by The Non-current million). At 31 December 2006, th million). 2006 2006 – – – – e Group Financial Statements. Group Financial e £m 56 25 100 181 181 Current ive interest rates is detailed in note 3 note ive interest rates is detailed in on 9 March 2006, £150 million notes on 2006, £150 million on 9 March ve years bearingbetween interest 4.700%

d £300 million notes on 24 October 2006. d £300 million notes illion). This debt is issued issued This debt is illion). of the Fund andits subsidiaries, without recourse to the Group. and are treated as debt in th and are treated demand of £48 million (2005: £62 demand of £1,300 million (2005: £1,000 million) which mature in 2010. mature £1,300 million (2005: £1,000 million) which

(v) have a maturity date of greater than fi a maturity date of greater than have

Centrica plc Annual Report and Accounts 2006 nsumers’ Waterheater Income Fund (the Fund), which is consolidated in the Group Group the in is consolidated which Fund), (the Fund Income Waterheater nsumers’

ncial instruments, and an analysis of effect analysis and an instruments, ncial during the year: £250 million notes issued during the year: £250 million (viii)

rate note on 8 September rate 2006 an currency loan on 19 December 2006. currency loan on 19 December (vi), (vii)

(vi), (vii)

(i)

(iii) (iv) n tolling arrangements) n tolling arrangements)

(ii) Bank overdrafts and loans overdrafts and Bank

Maturity profile of theborrowings: Group’s and 5.245% respectively. UnitsFund of the are traded on the Toronto Stock Exchange Trust,owned a wholly subsidiary of The Co on the assets is secured solely Statements. The debt Financial series and two These bonds were issued in The Group made a number of note issues a number of The Group made 4 September 2006, £67 million floating value of £102 million (2005: £382 million). has a face Commercial paper of £218 million (2005: £250 m value face bonds have a dollar Canadian The Group issued a £65 million dual Businesses’ recourse borrowings: Businesses’ recourse borrowings Bonds notes Loan Businesses’ non-recourseborrowings: Businesses’borrowings non-recourse Commercial paper Commercial paper

mounts falling due:

Group had undrawn committed bank borrowing facilities of Group had undrawn Businesses’ recourse borrowings include amounts repayable on repayable borrowings amounts include Businesses’ recourse After five years (b) After five years Between two and five years Within one year Between one and two years (a) (vi) (ii) The Group’s management of exposures to fina of exposures The Group’s management (b) (a) loans Bank overdrafts and A 20.

Units of The Consumers’ Waterheater Income Fund Income Waterheater Consumers’ The of Units Canadian dollar bonds Canadian dollar

Other bank loans: loans: bank Other (including power statio (including Obligations under finance leases leases finance Obligations under (v) (iv) (iii) (i)

– £m £m £m £m £m 47 15 2005 417 532 1,911 2,390 2,922 33). on in the in payments Non-current extend ould this ation. In minimum lease Present value of value Present the option

ointed by both g contract up 3 3 6 3 £m £m £m 3 68 41 2006 162 48 £m £m 1,979 2,25 2,7 Current payments Minimum lease 49 19 828 219 1,117 110 (289) 828 849 699 2005 2005

1,134 89 3,541 102 1,400 908 – – 99 13 34 874 – – 2005 2005 3 0 £m 25 3 – – – – 8 the Humber tollin £m 15 6 808 47 55 payments Non-current minimum lease lease minimum Present value of n). The Group has an option to has an n). The Group continued 2006 2006 £m 51 2006 808 248 767 (258) £m 16 1,066 982 849 185 payments ,291 either swapped into sterling or maintained swapped into either ating hours are subject to escalation based to escalation hours are subject ating Current station. At this time, the generator has 1,275 3 1,259 p policy for management of exposures(note Minimum lease be determined by an expert panel, app expert by an determined be e operator, prior to 30 e operator, September 2020. Sh based on effective operating hours of the st operating hours of the effective based on

contract (2005 included tatements tatements

S either the current or prior year. either the current Humber Power Limited: £20 millio

Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 in a number of foreign currencies and are currencies of foreign number in a this option, notice must be given to th to must be given this option, notice e tolling charges based on equivalent oper based on equivalent tolling charges e ncy investments, in accordance with Grou with ncy investments, in accordance tolling charges are payable, calculated payable, calculated charges are tolling paid in respect of the Spalding tolling in respect of paid g contract. Valuation of these options will Valuation g contract. otice the Groupotice the has an option to purchase the rictions under the finance leases in finance leases rictions under the continued tion of the remaining stake in remaining tion of the Trade and other payables

Future finance lease commitments lease Future finance Currency composition of the Group’s borrowings: Businesses’ recourse borrowings: Businesses’borrowings: non-recourse

a market of indices. There are no rest There are a market of indices. option be exercised, by serving further n tollin the to retain the station and terminate and th lease payments parties. The minimum the year, £18 million of tolling charges were the year, £18 million of tolling charges to the date of the Group’s acquisi To exercise the Spalding tolling arrangement. Transportation Japanese yen Japanese yen

Canadian dollars Canadian dollars 74 Accruals Deferred income Other payables accruals Other Trade payables 21. In addition to the minimum lease payments, lease In addition to the minimum Less future finance charges charges finance Less future Within one year five years Between one and (viii) Amounts payable: foreign currency as a hedge for foreign curre hedge for as a foreign currency Canadian dollars Canadian dollars areThe businesses’ borrowings denominated (b) US dollars Euros (vii) (a) Sterling 20. Bank overdrafts and loans and loans overdrafts 20. Bank Present value of lease obligations Present value of lease obligations After five years

£m £m (221) losses carried carried forward forward including including differences differences Other timing Other timing tax £m £m tax) 607 ect of the Group’s overseas ect of the Group’s Accelerated Accelerated (corporation (corporation depreciation depreciation ments thereon during the curren during the ments thereon £m £m (89) and other other and obligation obligation provisions Retirement benefit benefit Retirement of £32 million (2005: £nil) and liabilities of of £32 million (2005: £nil) and liabilities 2 £m £m 3 thereon Deferred Deferred tax effect tax effect corporation corporation is an analysis of the deferred tax balances (after (after the deferred tax balances analysis of is an ) 3 recoverable petroleum revenue tax (PRT). This sum is a re tax (PRT). This sum recoverable petroleum revenue £m £m (6 2005: £66 million) existed in resp h are inh excess of the final liability. PRT instalment payments (petroleum the profits of the period in which they are paid. The excess revenue tax) revenue ecognised by the Group and move by the Group and ecognised en recognised in respect of these temporary differences, due to temporary differences, due respect of these recognised in en temporary differences of £318 million (2005: £576 million) available differences of £318 million temporary orary differences is estimated to be £8 million (2005: £8 million) (2005: orary differences is estimated to be £8 million Decommissioning Decommissioning £m £m (89) thereon thereon Deferred Deferred tax effect tax effect corporation corporation Centrica plc Annual Report and Accounts 2006

e assets may be carried forward indefinitely. forward indefinitely. assets may be carried e – (18) – 6 –(11) 32 – ve been offset. The following ve tax £m £m 177 there were current deferred tax assets deferred were current there (petroleum Accelerated Accelerated revenue tax) revenue depreciation depreciation

Deferred and current corporation tax liabilities and assets and assets tax liabilities corporation and current Deferred

Current tax assets of £98 million (2005: £nil) include £94 million of of £98 million (2005: £nil) include £94 million Current tax assets At the balance sheet date temporary differences of £36 million ( sheet At the balance

in March 2007. of instalment payments made during the second half of 2006 whicof instalmentduring half payments the made second calculated by reference to the previous period’s profitability not (2005: £nil). investments. The deferred tax liability arising on these temp on investments. The deferred tax liability arising sheet date the balance At been provided.

Charge/(credit) to equity Exchange adjustments – – – – – – – – 143 – – – – (312) – (4) Charge/(credit) to income (3) 1 (4) 2 17 95 (110) (266)

unpredictability of future profit streams. Thes of unpredictability utilisation against future profits. No deferred tax asset has be future profits. No deferred tax utilisation against At the balance sheet date the Group had certain deductible date the sheet At the balance Deferred tax assets Deferred tax assets Deferred tax liabilities Deferred tax liabilities financial reporting purposes: Certain deferred tax assets and liabilities ha tax assets and liabilities Certain deferred profits Change to rate on UK upstream 31 December 2005 180 (72) (59) 24 (249) 480 (100) 243 Transfers (19) – –– – – – – ––– – – – of subsidiary Acquisition/disposal (19) Transfers – – – – – 54 – – 1 January 2005 Charge/(credit) to income (30) 229 20 (92) 3 (62) (1) 25 – (212) 418 (3) (93) (11) (44) 161

The following are the major deferred tax liabilities and assets r tax liabilities deferred the major are The following prior reporting period: 22. 31 December 2006 Exchange adjustments Exchange adjustments – – – – – 11 – 9 Charge/(credit) to equity – – – – (37) – 4 117

0 ay £m £m 16 12 46 85 25 3 95 2006 2006 of 102 1 3 551

a et 2007 t tion nt nt ished ntial roperties of acts marketing lity on 31 December 31 December sents n for n for nd 15 million) ums (4) £m £m £m £m (129) Utilised Exchange adjustments )

3 3 £m £m £m £m 1 (1

current current current current from non- Transferred Transferred Transferred to Transferred and storage facilities at the end at the and storage facilities cost reduction targets. The n). The majority of these s n). The majority £m £m £m 27 87 continued ead office. The provisionead office. The repre additions additions ation under the requirements of IFRS 3. of IFRS requirements under the ation Revisions and Revisions and h would have in resulted commitments to p s. The provision represents the net prese tions. The element relating to surplus p e individually significant) and provisio significant) e individually been included within the pension liabi pension within the included been ilities but are anticipated to occur between to occur are anticipated ilities but National Insurance provision was based on on provision was based Insurance National ce levels and technology at the balance she and ce levels liabilities arising in the pension schemes arising in the pension liabilities ceptional redundancy and other reorganisa ceptional redundancy ate centre (£3 million), British Gas Reside ate centre (£3 million), British el (£10 million, note 28). Acquisitions a el (£10 million, £m £m £m £m the sales contract loss provision was establ (26) (14) pence) and is expected to be utilised between 2007 between 2007 is expected to be utilised pence) and ease, including costs for dilapidations and including ease, cludes £5 million of notional interest. of notional interest. £5 million cludes ed £11 million released to the Income Statemen ed £11 million released to the the year the year reversed in in reversed reversed in in reversed tatements tatements Unused and Unused and S st (2005: £10 million). £m £m £m £m 45 ovisions relating to the cost of disposalovisions relating to the the AA (£ of 121 the year the year Charged in Charged in the property portfolio (£20 millio programme to achieve its stated portfolio of gas customers by the Group. Certaincontr of the decommissioning gas production decommissioning for the renegotiations, whichfor settlement are due in 2008 based of the British Gas Residential h 2) £m £m £m £m 3 and and (19) ( Acquisitions Acquisitions disposals (vi) disposals (vi) lated to theHewett disposal of the gas field. illion of notional intere illion of

3 £m £m £m £m cost to the date of the exit of the l and/or at prices above likely market rate and/or at prices above likely market ts are dependent on the lives of the fac on the ts are dependent 2006 2006 14 2006 2006 482 ision in respect of the disposal of Onet ision in respect of the disposal of r 2006 (31 December 2005: 254.75 uded within the provision for 2005 were uded within the provision ns included utilisation of pr utilisation ns included ng Term Incentive Scheme liabilities. The Scheme liabilities. Term Incentive ng In 2006 such liabilities of £17 million have ancy and other costs relating to reorganisa Notes to the Financial Financial to the Notes ion for a number of items (none of which ar which (none of items a number of ion for me for the year included £87 million for ex me for the year included £87 million certain long-term take-or-pay contracts whic Centrica plc Annual Report and Accounts 2006 1 January 1 January 1 January 1 January mprises staff reduction costs at the corpor staff reduction mprises ot considered to constitute a business combin based on proven and probable reserves, pri based on proven and probable reserves, re payments. The charge for the year in for the year The charge re payments. the money at the date of acquisition, and y fields. The movement in the year includ The movement in the y fields. liabilities and charges and charges liabilities 4 ––(15) 4 – – 27 (ii) 91 –5– 91 – (11) – 326 (24)10(4) 326 – – 87 (iv) (iii) 30 –26 (3) – (7) – –26(7) 30 (3) – 104 –87 (23) – 7 (73) –877 104 (23) – (i) (i) 35 (8)4 – – (6) – (6) (8)4 – – 35 35 (19)34 (3) – 6 (41) 6 (19)34 (3) – 35 (v) (v) Provisionsfor other

Provision has been made for the estimated net present cost of estimated net for the made Provision has been the Balance Sheet. was n in respect of them. The acquisition costs (note 6). charge co The exceptional to and changes (£16 million), British Gas Services (£48 million), Incl during 2007. are expected to be utilised costs. £13 million in respect of redundancy for the vacant building. The charge to inco The charge for the vacant building. and Onetel (£2 million), and release of a prov and Onetel (£2 million), and release disposals of decommissioningprovisions wholly re Acquisitions and disposals of other provisio Acquisitions and their useful lives. The estimate has been The estimate lives. their useful The sales contract loss provisionThe sales contract to the relates a acquisition of out of as being identified acquired were costs relatingto surplus redund properties, to the expected reference with was calculated Duringthe the Group year undertook a significant restructuring and 2042. The charge to income includes £10 m £10 includes and 2042. The charge to income In previous years, the Group renegotiated cost of estimated payments dueas consideration to suppliers date. The timing of decommissioning paymen date. The timing restructure involved and in roles of 1,544 a reduction the exit share price of 354.50 pence at 31 Decembe share price of 354.50 and 2009. on the reserves in a group of third-part on the reserves in a futu following a revision of the estimated Other provisions outstanding litigat include of Lo in respect payable National Insurance for gas that would be excess to requirements for gas that would be excess

(iii) (ii) 76 (vi) (i) Decommissioning costs Decommissioning Non-current provisions Non-current provisions charges for other liabilities and Restructuring costs

Current provisions Current provisions charges for other liabilities and Restructuring costs Sales contract loss provision 23.

Other Other Renegotiation provisions (iv) (v)

£m £m £m £m 22

0.8 2005 2005 2005 2005 275 224 lue lue

Number ting of Market value centive 12,818,797 12,818,797 Trust at (164,654,278) – 3,775,817,747 3,623,982,266 £m £m £m 2006 Cost 275 226

– – – – – – 56 6.4 151.3 3 15 3 2.9 2006 2006 2006 2006 (7.7) (18) (18) million million Number Number of shares of shares ,982,266 ,982,266 3 (8,950,000) 47,688,802 47,688,802 2005 2005 ,62 ,662,721,068 3 3 – – – £m mme is currently suspended. mme is currently 22 (22) the year 7.6 million shares were issued year 7.6 million the y has deemed the consideration received y has deemed the any to satisfy rightsto shares on the ves ordinary shares at prices ranging from 248.43 ranging ordinary shares at prices ere were nil million shares held by the shares nil million ere were Market value

– – – £m 22 (22) Cost ry shares in the by subscription Company or purchase, with ents. Dividends due on shares held in trust are waived in are waived trust in due on shares held ents. Dividends table reserves, of which £0.6 million related to the nominal va million related to the table reserves, of which £0.6 2006 2006 250.30 pence per share. The total cost of the purchases including – – – ses of awards under employee share schemes. The Trust received The Trust share schemes. ses of awards under employee 7.6 (7.6) million The share repurchase progra Number of shares ercise of share optionsercise of share and the matchingelement of the In Share

al of the Companyal of the for the year was as follows: tion costs are borne by the Group. During

31 December 2006 was 354.50 pence (2005: 254.75 pence). 31 December Centrica plc Annual Report and Accounts 2006 (ii) s or by capital contribution from the Comp order to fund the subscription. The Compan order to fund the

p each) p each) value of the shares vesting (£9 million). Th of the shares vesting value 81 81 / / 14 14 y’s long-term incentive arrangem y’s long-term incentive p each p each 81 81 rchased, and subsequently cancelled, 8.95 million cancelled, 8.95 subsequently and rchased, / / 14 14 deemable preference shares of £1 each deemable preference

(i) Called up share capital up share capital Called

a capital contribution from the Company in from the a capital contribution to the fair for the shares to be equivalent funds provided by way of interest-free loan Compan under the allocations made All administra the trust deed. accordance with order to satisfy exerci released in to the Trust and subsequently pence per sharewith to 254.98average of pence an per share, million which has been charged against distribu £23 expenses was reserve. capital redemption been recognised in the and has ordina to acquire Share Trust was established Employees The Centrica During the year, the Company pu year, the Company During the 31 December 2006 (2005: nil million). 31 December 2006 (2005: nil

llotted and fully paid share capital of the llotted and fully paid Company uthorised share capital of theuthorised Company 1 December 1 December (ii) Shares issued under employee share schemes share schemes employee under Shares issued

Consideration (£m) (net of issue costs £nil (2005: £nil)) Number (£m) Nominal value Ordinary satisfy the shares ex were also allotted and issued to Plan as follows: 3 Shares subscribed Shares purchased Shares purchased 1 January January 1 (i) The closing price of a Centrica ordinary share on The closing price of a Centrica Shares repurchased Shares repurchased 1 January January 1 The movement in allotted and fullycapit paid share 3,662,721,068 ordinary shares of 6 (2005: 3,623,982,266 ordinary shares of 6 A (2005: 4,455,000,000 ordinary shares of 6 re 100,000 cumulative 4,455,000,000 ordinary shares of 6 A 24. 3 Shares released under Long Term Incentive Scheme Long Term Incentive Scheme under Shares released

2003 2003 2005 2005 ch Years s average erm e were xed r value Weighted Weighted 24 March cipate. nt within within nt exercise price icant icant earnings earnings contractual life contractual cted life cted 003, where Average remaining Average remaining e related ards under the ards under the 2003 2003 Number 1 September of shares of shares 34,542,481 £2.05 28,289,511 8,631,053 (1,807,513) £1.99 (570,570) £2.30 £2.23 8,569,410 £2.10 £2.31 2005 2005 Number

pages 34 to pages 34 36. Ther £ 1 ect to the growth in 3 33 2004 2004 82% 3.09% 3.09% 01% 4.45% 4.44% £2.05 £2.85 £1.86 £2. £2. £1.94 average £0.45 £0.51 £0.41 £2.28 £1.80£2.24 £1.78 £1.47 £1.47 Weighted 18 March 18 March 815,399 635,599 13,319,276 exercise price se of options granted in 2 £2.05 34,542,481 7.7 continued 2006 2006 1 , the Long Term Incentive (LTIS), Scheme 3 14) exercise price exercise price 3 , remaining life was as follows: was life remaining Weighted average average Weighted 2004 2004 3 Number rcentage points. Options granted up to Mar points. Options rcentage mance conditions were included in the fai in were included conditions mance date of grant, subj e number of options becoming exercisable i becoming exercisable e number of options 77 employees are currently eligible to parti to eligible 77 employees are currently muneration Report on muneration ,610,597) ,06 6,220,098 3 6,454,1 3 4,542,481 1 September ( reassessed ignoring this period. The expe 3 24,088,668 (1 prices tatements tatements

S 2005 2005 1 April Range of exercise Range of exercise £2.40 – £2.49£2.50 – £2.59 £2.40 £2.51 3,786,488 291,235 5.6 9.7 £1.40 – £1.49£1.70 – £1.79£2.20 – £2.29 £1.47 £1.78 9,738,428 £2.26 20,320,269 406,061 7.3 8.2 7.7 three years, except in the ca three years, except in the

returnyield on is the zero-coupon UK governmentof a t bonds an (SIP) and theEmployee Share PurchasePlan (ESPP). These are is was felt to be unrepresentative because it included a signif included a because it unrepresentative is was felt to be ting the expected life of the options. The fair values and th values and the options. The fair life of ting the expected rica plc to employees of therica plc to employees Group. Options are granted with a fi 3 3 of grant. The contractual life of an option is ten years. Aw 8.8 9. 7.6 6. 7.4 4.7 2006 2006 two years. Exercise of optionstwo years. Exercise is subject to continuedemployme Years 2005 2005 25% 25% 25% 25% 25% 25% 30% 30% 27% 27% 35% 35% exercise prices and average 3 yrs5 yrs yrs 3 yrs 3 yrs 5 yrs 3 yrs 5 3 yrs yrs 5 5 yrs yrs 3 yrs 5 £0.50 £0.49 £0.47 £2.46£2.51 £2.28 £2.29 £2.46 £2.45 10 yrs 10 yrs 10 yrs 10 yrs 10 yrs 10 yrs 4.37% 4.37% 4.82% 4. 4.80% 4.70% 5.00% 5. 291,235 8,339,818 195,795 8, contractual life contractual 23 September Average remaining nciliation of option movements is as follows: as follows: movements is nciliation of option 5 9 ercisable on the third anniversary of the the third anniversary ercisable on 2006 2006 hted average share price was £2.92 (2005: £2.39). yrs – the Executive Share Option Scheme (ESOS) Share Option Scheme – the Executive 3 3 20 24% 25% Notes to the Financial Financial to the Notes 3 5 yrs 27 April Centrica plc Annual Report and Accounts 2006 £0.59 £2.99 £2.85 3 10 yrs cal volatility over the last 4.70% 4.10% ack-Scholes option pricing model. No perfor Number at senior management level and above and level and at senior management owth than by more 18 percentage points. Th ate Re in the on page 26 and Responsibility of shares 1999/2000. In this case the volatility was the volatility 1999/2000. In this case 6,220,098 291,2 exceeds RPI growth by between nine and 18 pe and by between nine exceeds RPI growth ,690,124 2,799,1 1,515,850 5,792, 3 1 24,088,668 ansactions during the period. period. ansactions during the

33 £1.47 £2.27 £2.40 £2.51 £2.85 £2. exercise price Weighted average

(i)

prices

Share-based payments payments Share-based

period of exceptionally high volatility in period to exercise. The risk-free rate of is the average expected A reco expected option life. the consistent with The expected volatility is based on histori Th was 43%. over historical volatility the preceding three years S O Range of exercise £2.20 – £2.29 £2.40 – £2.49 £2.50 – £2.59 £2.80 – £2.89 £1.40 – £1.49

S no other share-based payment tr no other share-based Expected life 78 For options exercised during period the the weig For options outstanding theend range at the of of the period, Exercisable at the end of the period of the period end Exercisable at the Outstandingstart of period at Granted (i) Share price at grant date grant Share price at Exercise price Number of options originally granted exercise price equal to the market price of the shares at the date price of the to the market exercise price equal for employees ESOS are generally reserved ex ESOS will become the Options granted under E Under the ESOS theBoard may grant options over sharesCent in Centrica operates six employee share schemes share schemes six employee Centrica operates Sharesave,Share the Award Scheme (SAS), the Share Pl Incentive – Corpor Report Directors’ in the described 25. Fair value per option per option Fair value Risk-free rate Expected volatility Contractual option life Forfeited Outstandingtheperiod end at of the Exercised Expected dividend yield Expected forfeitures Vesting period assumptions used in the calculations are as follows: are as follows: calculations in the assumptions used Grant date reduced on a sliding scale if EPS growth if EPS scale sliding reduced on a 2004 also permit retesting growth of EPS annually further for a the Group. Options were valued using the Bl estima account by into been taken exercise has Early calculations. per share over that period exceeding RPI gr exceeding per share over that period

ds. 2005 2003 2003 1 April Number to e rmance del. . The to both eserved e rds made icant icant between to ulation of of ulation cted life cted urn (TSR) urn (TSR) e conditions e conditions 003, where 2003 2003 1 September 28,002,488 26,434,295 157,276 8,864,551 (7,715,506) (1,223,789) (1,493,449)

2004 2004 ) 1 April 1 April 04% 4.31%82% 3.09% 3.88% 3.09% – 3 £1.17 £0.99 £0.89 £2.30 £1.80 £1.47 99) 99) 2006 2006 3 765,341 665,696 13,573,547 ,815 8, 4,295 3 Number performance period of the awar 3 42,414) 3 icipate. For awards made upmade icipate. For awards 3 ,827,70 RS 2 and dividends attach to th 3 8,26 t release of shares is subject t release se of options granted in 2 (7,5 (2, ( 26,4 20,989,594 2004 2004 Company’s total shareholder ret shareholder total Company’s ve been paid on them during the perfo them during been paid on ve 1 September nce. For this half of the award, the calc the the award, this half of For nce. that vest on 2006 awards made from (for 2005 2005 ernment bonds of a term consistent with th 1 April reassessed ignoring this period. The expe ares released is increased on a sliding scale sliding on a is increased ares released

e Group. Awards under the LTIS are generally r LTIS are generally under the e Group. Awards (ii) (ii) 30% 30% 30% 30% n/a n/a n/a n/a n/a n/a £nil £nil £nil £nil £nil £nil 2005 2005 20%30% 20% 30% 20% 30% 20% 20% 30% 30% 20% 30% 30% 30% 27% 27% 35% 35% 3 yrs yrs 3 yrs 3 yrs 3 3 yrs yrs 3 3 yrs3 yrs yrs 3 yrs 3 yrs 3 yrs 3 yrs 3 3 yrs yrs 3 3 yrs yrs 3 yrs 3 ares is consistent with except made to the awards end of 2005, e vesting of the remainingawards made sincehalf is 2006 of £1.20 £1.03 £1.25 £2.46 £2.28 £2.46 ees are currently eligible to part three years, except in the ca three years, except in the 4.80%4.37% 4.68% 4.37% 5.00% 4.82% 5. 4. ined from a model whichined calculates from a the correlation between 456,421 8,408,130 310,460 9, the period commensurate with the is was felt to be unrepresentative because it included a signif included a because it unrepresentative is was felt to be a non-market condition under IF under condition a non-market 23 September the date of grant. The likelihood of achieving the performanc Allocations were valued using the Black-Scholes option pricing mo option pricing the Black-Scholes using valued Allocations were h TSR performance is assessed, bu is assessed, h TSR performance (ii) ants is calculated subject to the ants is calculated 55 ntrica’s TSR is ranked between 50th and 25th. Shares are released .01 .01 n/a 2006 2006 0% £nil 3 2 May 3 3 , 21% 20% 3 £1.80 £ £ 3 4.70% 2.9 yrs 2.9 yrs 2.9 yrs 6,15 8 (ii) eased to reflect the dividends that would ha eased to reflect the dividends 3 Centrica plc Annual Report and Accounts 2006 n/a 2006 2006 0%

£nil hted average share price was £2.89 (2005: £2.40). 22% 20% 3 cal volatility over the last 19 May 19 May £1. £2.65 £2.65 er of awards expected to vest. For shares of awards expected to vest. er te, compared to the TSR of othershares inFTSE 100 the Index over the same period

4.80% movements in allocations is shown below: is shown below: allocations movements in 2.9 yrs 2.9 yrs 2.9 yrs return is the yield on zero-coupon UK gov award is made on the basis of TSR performa the basis of TSR is made on award 1999/2000. In this case the volatility was 1999/2000. In this case 1,456,064

3 3 (ii) 96 .0 .0 n/a 2006 2006 0% £nil 3 yrs yrs yrs 3 3 continued 22% 20% 3 3 3 3 ares in Centrica plc are made to employees of th to employees of plc are made ares in Centrica £1.66 £ £ 4.80% related assumptions used in the calculations are as follows: are calculations used in the related assumptions g a Monte Carlonumber The simulation of sh model. 654, 4 September

(i) hare-based payments payments hare-based

expected option life. A reconciliation of A reconciliation expected option life. is the contract life. The risk-free rate of The risk-free is the contract life. period of exceptionally high volatility in Centrica’s historical share price and each of the FTSE 100 over From 2005, the cross-correlationhas100 of the FTSE been obta The expected volatility is based on histori was 43%. Th over historical volatility years the preceding three S

For shares released during the period the weig TSR and EPS portions) the cash payment is incr is TSR and EPS portions) the cash payment is taken intoaccount in calculating the numb Number of shares originally granted Expected dividend yield Expected forfeitures Expected life Risk-free rate

Expected volatility 25.

(ii) Exercisable at the end of the period of the period end Exercisable at the Outstandingstart of period at Granted (i) allocated – EPS awards Fair value per share per share Fair value Exercise price Grant date date grant Share price at period. The fair values and the and values period. The fair awards, requiring the shares to be fair valued at market value on valued be fair to the shares awards, requiring 25% and 50th20th. 100% is ranked and Th between if Centrica’s TSR dependentearnings on per share (EPS) growth.considered This is TSR performance as compared to the of TSR other FTSE 100 Index sh usin are valued that allocations Performance conditions were included in the fair value calculations, through the use of a Monte Carlo simulation model. For awa For model. simulation Carlo a Monte of use the through calculations, value fair the in were included conditions Performance each of only half of from 2006, the vesting continuedemployment within Group at the the date of release. number of shares released is reduced on a sliding scale if Ce if a slidingnumber scale on of shares released is reduced whic the period in of the end following participants immediately 2005, the number of shares that are to be released to particip are to be released of shares that number 2005, the following the grant da years during the three Under the LTIS, allocations of sh LTIS, allocations Under the at seniorfor employees and above and level management 259 employ LTI of FTSE 100 FTSE 100 Average cross-correlation Average volatility of Contractual life Contractual life allocated – TSR awards Fair value per share per share Fair value Vesting period Exercised Outstandingtheperiod end at of the Forfeited – performance related related Forfeited – performance related performance – non Forfeited

2005 2005 2003 2003 Years 8 April average Weighted Weighted tion o save e exercise price icant icant options contractual life contractual cted life cted the funds the funds 003, where Average remaining Average remaining is three to 2004 2004 1 April Number of shares of shares 80,576,125 10,121,229 (7,869,934) £1.24 (8,981,271) £1.88 (97,954) £1.44 73,748,195 £1.33 7,273 £1.78 £1.30 £1.78 2005 2005 Number

39 7,407,793 37,280,748 2004 2004 £ 0 8 1 April 1 April 3 3 £1. £2. £1.14 £1.67 £1.78 £1.58 £1.07 average Weighted exercise price se of options granted in 2 continued 2005 2005 2006 2006 6 April days prior todays prior invitation which 59 exercise price exercise price e remaining life was as follows: e remaining life 3 (855) ,406 ployees of theployees of Group. Options are granted Weighted average average Weighted 6, 3 Number 1 08,655) 3 3 ,748,195 vings account each month, and may elect t may month, and each vings account 3 ernment bonds of a term consistent with th in which to exercise their options using (4, ey may withdraw the funds saved, and the withdraw the funds saved, and ey may reassessed ignoring this period. The expe 2005 2005 tionsusing Black-Scholes were valued op the 7 12,1 55,295,229 6 April (26,279,815) 40% 25% 40% 25% 40% 30% 30% 27% 27% 35% 5 yrs yrs 3 5 yrs 5 yrs yrs 3 3 yrs 5 yrs yrs 5 3 yrs yrs 5 £2.36£1.88£2.30 £2.36 £2.30 £1.83 £1.88 £1.83 £1.59 £1.07 £0.68 £0.64 £0.61 £0.58 £0.64 4.65%4.37% 4.64% 5.13% 5.04% 4.37% 4.82% 4.82% 3.90% 3.09% 5.5 yrs yrs 3.5 yrs 5.5 3.5 yrs yrs 5.5 tatements tatements

Range of S 4,329,658 5,791,571 3,854,6 exercise prices exercise prices 8 % 3 2006 2006 3 yrs yrs 2 25% 3 3 4.5% 4.1% 10 April £2.86 £2. £0.65 .5 yrs three years, except in the ca three years, except in the 3 73,748,195 £1.00 – £1.09 £1.70 – £1.79 2.1 £1.80 – £1.89 £1.90 – £1.99 £1.07 £1.30 £1.78 52,169,512 £1.86 2,722,085 £1.91 17,176,807 1,679,791 1.8 1.7 3.0 0.7 the calculations are as follows: are as follows: the calculations is was felt to be unrepresentative because it included a signif included a because it unrepresentative is was felt to be 3 3 8,548,648 .5 ice of the shares for the three for the three ice of the shares ions is as follows: ions is as follows: 1.9 0.9 2. 0.0 3 2. 2006 2006 8 Years exercise prices and the averag exercise prices 3 2006 2006 25% 40% 5 yrs 5 yrs 4.5% 4.1% 10 April £2.86 £2. £0.72 5.5yrs contractual life contractual ,587,711 3 Average remaining

er shares in Centrica plc to UK-based em plc to UK-based Centrica er shares in 3 hted average share price was £2.80 (2005: £2.33). Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 pay a fixed amount from salary into a sa from salary amount pay a fixed ,886 ,279 cal volatility over the last 3 3 Number

of shares movements in allocat movements in 08,557 08,557 return is the yield on zero-coupon UK gov 1999/2000. In this case the volatility was the volatility 1999/2000. In this case ees decide not to exercise theirees options, th 3 continued employment within the Group. Op within the continued employment 2,49 11, 55,295,229 26,461,884 15,027,62 the savings period, employees have six months have six the savings period, employees the related assumptionsthe in related used continued 8 3 £1.91 £2. £1.58 £1.07 £1.78 £1.86 exercise price Weighted average

(i)

9 3 Range of 0 – £2. hare-based payments payments hare-based 3 exercise prices expected option life. A reconciliation of A reconciliation expected option life. period of exceptionally high volatility in rate of The risk-free is the contract life. The expected volatility is based on histori Th was 43%. over historical volatility the preceding three years S £2. £1.70 – £1.79 £1.80 – £1.89 £1.90 – £1.99 £1.00 – £1.09

haresave saved, including interest earned. If employ interest earned. saved, including expire. Exercise of options to is subject four weeks prior to the grant date. Employees prior to the grant date. four weeks Number of options originally granted Fair value per option per option Fair value Expected dividend yield Expected forfeitures 80 For options exercised during period the the weig Exercisable at the end of the period of the period end Exercisable at the For options outstanding theend at the range of the of period, Outstandingstart of period at Granted (i) Exercise price Vesting period pricing model. The fair values and The fair values pricing model. Grant date grant date Share price at over three or five years. At the end of over three or five years. S Under Sharesave the Board may grant options ov pr the average market to 80% of price equal exercise with a fixed 25. Forfeited Expired Outstandingtheperiod end at the of Exercised Risk-free rate Expected volatility Contractual option life Expected life

2006 2006 £nil 2005 2005 2005 (961) 3 April 15% 2 yrs 2 yrs Number Number Number £2.84 £2.84 igible igible erved ng ng (13,826) (91,176) 863,516 208,329 780,14 223,116 ith the t within (138,554) onally value is value year was year 1,433,447 2,067,233 t to the within feited if shares vest

nal shares or ) ) – – 3 3 3 5 29 67 33 7 2006 2006 2006 2006 2006 £nil 3 3 3 3 yrs yrs ,096) 3 April 25% 3 3 3 £2.84 £2.84 8, 0,916 Number Number Number ( 3 3 69,16 (29, (40,729) (92,855) 208, 2 3 771,767 780, (199,711) (1 1,464,559 2,067,2 2,500,916 1,560,510

ive. There is no contractual There ive. me, but the entitlement to matchi tionsto calculate used the cos 2006 award, 452 employees2006 award, were el deductions. The Company then grants one deductions. The Company then grants one age fair value of these awards during the value of these age fair age fair value of these awards during the value of these age fair es is also subject to continued employmen es is also hase date. Matching shares vest unconditi shares vest Matching hase date. om the original purchase date. Matching ing after three years. On vesting, additio ing after es is also subject to continued employment subject to continued es is also conditionally subject to continued employment w employment continued to subject conditionally paid on theduring paid on allocations the retention period. The fair d on recommendation by the execut d on recommendation employees ofemployees the Group. under Awards generallySAS are the res ares may be withdrawn at any ti withdrawn at ares may be from previous awards. For the from previous ares may be withdrawn at any time, but matching shares are for time, but matching ares may be withdrawn at any The fair values and related assump The fair values rchase ‘partnership shares’ through salary Centrica plc Annual Report and Accounts 2006 ‘partnership shares’ through monthly salary shares’ ‘partnership

for two years. Vesting of matching shar within three years from the original purc s in the trust. Vesting of matching shar

up to a maximum of 20 matchingsharesto a maximum per employee per month.up Both partnership shares the market price at the grant date. The aver the grant date. market price at the the market price at the grant date. The aver the grant date. market price at the vesting after two years, the other half vest vesting after two years, hip shares are withdrawn within two years fr hip shares are withdrawn within tion of matching shares held in trust is as follows: is as trust held in shares tion of matching the allocations is as follows: the allocations continued tion of matching shares granted is shown below: shares granted is shown below: tion of matching bject to no performance conditions and vest un and conditions bject to no performance hare-based payments payments hare-based

IP S £2.97 (2005: £2.37). A reconcilia unconditionally for employees after being held for employees unconditionally valued at are shares the Group. Matching shares is forfeited if the related partners related if the shares is forfeited Forfeited Outstandingend of period at Shares sold and transferred out of the plan Shares sold and transferred out of the plan 25.

Unvested at start of period Granted ‘matching share’ for every two shares purchased. Partnership sh purchased. for every two shares ‘matching share’ E Under the ESPP, employees in North America pu Granted Unvested at start of period ‘matching share’ for every two purchased, for every two purchased, ‘matching share’ S UK may purchase Under SIP, employees in the For shares released during the period the weighted average share price was £3.40 (2005: £nil). Exercisable at end of period Exercisable at end Outstandingstart of period at Granted A reconciliation of movements in of A reconciliation Exercise price Grant date grant date Share price at Group are as follows: Group are as follows: therefore considered to be the market value at date of grant. to be the market value at therefore considered Group in two stages – half of the awards been that would have to reflect dividends are made a cash payment eligibility for SAS and each year’s award is made independently independently award is made year’s SAS and each eligibility for are su to participate. Allocations Under theSAS, allocationsto of shares in Centrica made plc are base levels, management employees at middle selected for certain SAS Shares sold and transferred out of the plan Shares sold and transferred out of the plan Forfeited Fair value per option per option Fair value Contractual option life Expected forfeitures Number of options originally granted Vesting period Forfeited Unvested at end of period the Group. Matching shares are valued at are shares the Group. Matching was £2.97 (2005: £2.36). A reconcilia the related partnership shares are withdrawn the related partnership shares for three year for employees after being held and matching shares are held in a trust initially. Partnership sh a trust initially. are held in and matching shares Vested Unvested at end of period

) ) 3 3 3 (9) £m £m £m 84) 65 2 (2 (2 Total Total 3 475 169 equity equity (645) (294) (154) ( 2,442 2,124 1,642 – – – – – – – – – – 1 £m £m £m £m 56 57 56 interest Minority Minority interest ) )

3 3 3 (9) £m £m £m 84) 65 2 86 (2 (2 Total Total Total 3 475 169 3 (645) (294) (155) ( 2, 2,068 1,585 continued £m £m £m £m holders of the Company of the holders holders of the Company Company of the holders 219 Other Other reserves reserves £m £m £m £m 16 tatements tatements S Capital Capital reserve reserve redemption redemption £m £m £m £m 467 Merger Merger reserve reserve £m £m £m £m 657 Share Share premium premium Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 – –––169 – –– – – (294) – –––22 –2 – – –––22 – – –– – –– – – 13 (126) – 13 –– (126) – (126) 13 (74)– (74) (74) – –––(23) – £m £m £m £m 226 Share Share capital capital equity to Attributable equity to Attributable reign operations reign operations Reserves Reserves

Transfers to Income Statement Purchase of treasury shares Share issue Value services provided of – – – 1 – – 20 – – – – (3) – 21 (3) 21 – – 21 – (3) 21 – 21 Value of services provided Value of services – – – – 23 Share issue Exercise of awards – 3 – 62 – – – – (9) – Net fair value losses – – – – (645) 1 December 2006 Employee share option schemes: Tax on items taken directly to/ from equity 82

Repurchase of shares –– (10) –of –Repurchase –(340)Dividends – –31 December 2005 10 (340) (388) (340) (388) – 224 (388) 595 467 15 1,085 2,386 56 2,442 233 575467552,118 5 783 233 Profit for the year Employee share option 2,063 schemes: – – – – 1,012 1,012 1 1,013 Statement Tax on taken items directly to/ from equity – – – – (84) (84) – (84) Cash flow hedges: Cash flow Net fair value gains Transfers to Income – – – – 408 408 – 408 acquired assets assets Gains on revaluation of acquired of available Gains on revaluation – –for sale investments – – 14 14 – 14 translation of fo Actuarial losses on defined schemes pension benefit Adoption of IAS 32 and IAS 39 1 January 2005 as restated on Exchange differences – 233 – 575 467 – 5 – 630 (179) 1,910 (179) (164) 55 1,965 (343) 31 December 2004 233 575 467 5 809 2,089 219 2,308

Repurchase of shares shares Repurchase of (1) – – 1 (23) Loss for the year – – – – (155) 31 December 2005 on Exchange differences translation of fo 224 595 467 15 1,085 26. 224 595467 15 767 224 Cash flow hedges: hedges: Cash flow Dividends – ––Dividends – – (384) Actuarial gains on defined on defined Actuarial gains schemes pension benefit – – – – 475 3

£m £m £m 26) 3 ( reserve reserve reserve hedging hedging hedging of shares includes transacti of shares Cash flow Cash flow £m £m £m (26) reserve reserve d to the capital redemption reserve an Foreign Foreign Foreign currency currency translation translation translation ntrica plc and was recorded at the nominal nominal at the was recorded ntrica plc and lue of the Company’s shares issued and th of the Company’s shares lue nesses were transferred to GBGH, a subsid £m £m £m 10 (3) 301 475 783 10 (26) (326) 1,109 10 10 (3) 301 777 1,085 reserve reserve , was credited to a merger reserve. , was credited Revaluation Revaluation ion reserve adjustment. ion reserve uently cancelled. The repurchase The cancelled. uently tain businesses (grouped together under GB Gas Holdings Limit Humber Power Limited acquisition following the to fair value, sections 131 and 133 of the Companies Act 1985, no premium was recorded as a revaluat Centrica plc Annual Report and Accounts 2006

e companies comprising the Centrica busi the comprising e companies mpanies Act 1985, the Company has transferre share capital of GBGH was transferred to Ce was transferred share capital of GBGH lidation, the difference between the nominal va nominal between the the difference lidation, ium of GBGH at theium date of demerger of d loss reserve of £nil (2005: £1 million). d loss reserve of £nil (2005: £1 million). of foreign operations of foreign – (3) 16 – 13 n of foreign operations n of foreign – (23) – – continued

Exercise of awards Exercise of awards – – – (9)

1 December 2005 1 December 2006 of the remaining 40% stake in the company, was of the remaining 40% stake in the company,

provided Value of services – – – 23 26. Reserves

During 2005, thethe revaluation Group’s existing of interest in Revaluation reserve amount equal to the nominal value of shares repurchased and subseq and repurchased of shares value to the nominal amount equal costs charged directly to the profit an Capital redemption reserve with section 170 (1) of the Co In accordance amount of share capital and share prem capital and amount of share of shares issued to BG plc shareholders. In accordance with recorded on the shares issued. On conso (GBGH)) to Centrica plc. Prior to demerger, th BG plc. Upon demerger theundertaking of Merger reserve On 17 February cer 1997 BG plc (formerly British Gas plc) demerged 3 Dividends – – – (340)(340) Repurchaseshares of Dividends – – – – – – (388) (388) Value of services provided – – – 21 21 Employee share option schemes: Employee share option schemes: shares Purchase of treasury – – – (3) (3) Profit for the year – – – 1,012 1,012 Tax on items taken directly to/from equity (4) – (117) 37 (84) Net fair value gains Transfers to Income Statement – – – – (74) 408 – – (74) 408 Cash flow hedges: Cash flow Gains on revaluation of acquired assets for sale investments of available Gain on revaluation – 14 – – – – 2 – 2 14 Actuarial losses on defined benefit pension schemes – – – (126) (126) 1 January 2005 as restated on translation Exchange differences – – 68 562 630 31 December 2004 Adoption of IAS 32 and IAS 39 – – – – 68 (247) – (179) 809 809 Other reserves

Loss for the year – – – (155) Net fair value losses – – (645) – Cash flow hedges: Cash flow Exchange differences on translatio Exchange differences Other reserves Other reserves 1 January 2006 10 (3) 301 777 3 Employee share option schemes: schemes: Employee share option Tax on items taken directly to/from equity – – 312 (143) Transfers to Income Statement – – (294) – Repurchase of shares Repurchase of – – – (23) Dividends – – – (384) Dividends– – – Actuarialon gains defined benefit pension schemes – – – 475

) ) 3 3 3 1 (9) £m £m £m £m 84) 2 56 57 (2 Total 3 777 475 561 (14 (155) ( reserve reserve 1,109

). n 9 million 2 million Profit and loss loss and Profit ty (formerly Profit and loss Profit and on credit) w hedges

hin the profit 3 £m £m £m 52 Other Other

– (155) – (23) – (384) 8 £m £m £m 42 735 42 1,067 23 – 3 (27) 18 reserve reserve reserve reserve Share options Share options Share options (formerly Goldfish Bank Limited (formerly Goldfish Bank continued – – 1,012– 1,012 – – (340) 42 735 (340) 777 £m £m (15) 24 466 475 £84 million charge), of which a charge of a charge which £84 million charge), of in reserves against exchange gains of £8 of gains against exchange reserves in by exchange translation differences on on differences translation by exchange of IAS 39. Exchange losses of £105 millio Exchange losses of of IAS 39. r sale investments were included wit investments r sale Treasury shares shares Treasury ilable for sale investments and cash flo sale investments and cash for ilable d benefit pension schemes (2005: £37 milli schemes pension d benefit tatements tatements under the requirements of IAS 39. of under the requirements S ments used for hedging purposes. ments used for hedging interest held by Lloyds TSB Bank plc in the dormant legal enti d its subsidiary, GF One Limited hemes recognised in the profit and loss reserve amounted to £43 profit hemes recognised in the ounted to a credit of £169 million (2005: of £169 million (2005: ounted to a credit Notes to the Financial Financial to the Notes foreign currency net investments, offset net investments, foreign currency overseas undertakings have been offset been undertakings have overseas Centrica plc Annual Report and Accounts 2006 actuarial gains on the Group’s define actuarial d tax arising on gains and losses on ava losses on gains and d tax arising on £2 million (2005: £2 million) on available fo £2 million (2005: £2 million) on available t investment hedges under the requirements under the hedges t investment ments designated as cash flow hedges cash flow ments designated as currency borrowings and other instru currency ble for sale investments – – 2 2

continued Minority interests

Aggregate tax taken directly to reserves am Aggregate tax taken directly to 1 December 2006 1 December 2006 Goldfish Holdings Limited) pending winding up of the company an and a credit of £312 million relates to deferre of £312 million relates and a credit £143 million relates to deferred tax arising on (2005: £146 million gain) on net investments in net million gain) on (2005: £146 Tax on items taken equity directly to/from – (143) 84 Profit on ordinary activities after taxation 3 economic related a 30% to December 2006 interests at 31 Minority 1 January 2006 (2005: £121 million charge). (2005: £121 million charge). 27. and loss reserve. Profit and loss reserve sc pension benefit on defined arising gains Cumulative actuarial gains of (2005: £36 million loss). Cumulative Value of services provided Repurchaseshares of Dividends 31 December 2005 – – 21 – – (388) 21 (388) Employee share option schemes: Employee share option schemes: Purchase of treasury shares Exercise of awards (3) 18 – (3) – (15) (3) – Tax on items taken directly to/from equity Profit for the year – – 37 37 1 January 2005 as restated Actuarial losses on defined benefit pension schemes of availa Gains on revaluation – – (15) (126) (126) 24 553 562 Profit and loss reserve 31 December 2004 Adoption of IAS 32 and IAS 39 – (15) – 24 (247) 800 (247) 809 3 Loss for the year Employee share option schemes: Exercise of awards 1 January 2006 Actuarialon gains defined benefit pension schemes – 475 Profit and loss reserve Profit and loss reserve (2005: £133 million loss) on foreign (2005: £133 million loss) Cash flow hedging reserve value movements on instru Comprises fair Foreign currency translation reserve on differences exchange translation Comprises ne as and derivatives classified borrowings 26. Reserves provided Value of services shares Repurchase of Dividends

of Frio Pipeline Co on 10 October 2006 (c 2006 Frio on Co Pipeline 10 October of construction and delivery of assets rela inated. This information is inated. This information year until 2008, and recognised a provisio until 2008, and recognised year ris Energy Centre, a 244 MW gas-fired combin revenue and costs have been included as if the business were acquired on 1 Januar acquired were the business as if included costs have been and revenue ecause the Directors have not yet reached a the Directors have not yet ecause ent of £8 million, net of a £3 million tax cred of a £3 million net ent of £8 million, All intangible fixed assets were rec fixed assets intangible All gy Limited (consideration £1 million, goodw om 2 February 2006 to 31 December 2006. om 2 February 2006 to 31 December 2006. the Group exited this agreement for a paymen this agreement the Group exited ril 2006 to 31 December 2006. olutions Ltd Ltd olutions S cquisitions cquisitions Acquisitions and Acquisitions disposals

Disposals During 2006 the Group paid £50 million of defe The residual excess over the net assets acquired on each acquisi on each the net assets acquired over The residual excess stated are provisional b The fair values The acquisition method of accounting was adopted in all cases. Th cases. in all method of accounting was adopted The acquisition The pro-forma consolidated results of theif the Group, 2006 acq as A Other acquisitions Tenaska III Inc and Willowtex Pipeline Co Entergy

Limited, inwas disposed which 2005. Assets are exp (ii) £40 million related to the acquisition of CPL/WTU in 2002. £40 million related to the acquisition of CPL/WTU combined Group. and intercompany transactions had been elim transactions and intercompany at made actually been the purchases occurred had that would have the fair value exercise. exercise. the fair value of these acquisitions are as shown below. are as shown of these acquisitions Willowtex Pipeline Co. The Group also acquired the assets includin the also acquired The Group Pipeline Co. Willowtex section (c). are described in Duringthe the Group year the acquired Paris Energy Centre an

resulted in a charge to the Income Statem a charge resulted in Duringmade to the 2006 adjustments consideration were received of the AA, for which provision ha in respect a £15 million payment Discontinued operations During 2006 the Group paid £3 million for the During 2006 the Group paid £3 million Continuing operations policies. In preparing the pro-forma results, revenues of £16,513 million and a loss after tax of £154 million. The revenues of £16,513 million and a loss after tax of £154 million. The the voting share capital of Coastal Ener the voting share capital of from their resp after tax of £1 million to the Group The Group acquired the upstreamThe acquired Group gas assets the IncConditioningHeating on 16 Octo andassets of Mr. Air the (c) The Group acquiredassets including the more than 100,000 resident Net assets acquired Cash consideration Trade and other payables: current payables: current Trade and other payables: non-current Trade and other Trade and other receivables: current receivables: current Trade and other Intangible assets (note 13) receivables: non-current Trade and other (b) Pipeline Co owns a 16 mile natural gas pipeline exclusively se gas pipeline natural a 16 mile Co owns Pipeline period fr Group for the £2 million to the 2 February 2006. Tenaska III Inc owns the Pa 2 February 2006. Tenaska III Inc owns the Cash consideration in the partnership 100% of The Group acquired Net assets acquired Property, plant and equipment Property, plant and equipment Inventory (a)

(i) 28. and has been released. £33 million has been received in received has been been released. £33 million and has the connections. During the year the connections. provide 225,000 customer connections each provide 225,000 customer connections each areas and South Texas from Entergy Solutions Ltd on 24 April 2006. for the period from 24 Ap

– 1 6 1 3 (9) (3) (4) £m £m £m £m £m £m 76 17 42 13 13 21 12 16 (37) (17) (48) (53) (22) 2005 2005 2005 2005 406 299 (455) (520) (529) (356) (335) (269) (320) (448) 1,957 1,920 1,936 1,944 1,144 1,131 nts nts ighly ting to

) ) ) ) – – – – – – – – – – 3 3 3 3 3 4 3 3 7 7 ( ( £m £m £m £m 11) 16) 12 7 2 84 3 3 (17) (8 2006 2006 2006 2006 3 3 7 7 180 192 506 196 911 (597) (597) (717) (720) (260) (149) ( ( (11 1,965 1,47

bank and other bank short-term h ntracts, including those rela continued tatements tatements S isingco from re-measurement of the year financed by new finance leases. Cash and cash equivale Cash and finance leases. by new the year financed the Balance Sheet) comprise cash at the Balance Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006

(i) result of joint ventures and associates associates of joint ventures and result of joint ventures and associates of joint ventures American storage activities. vements in working capital vements in working capital joint ventures and associates associates joint ventures and joint ventures and associates joint ventures and Notes to the Group Cash Flow Statement Cash Flow to the Group Notes

Includes net £5 million (2005: £nil) unrealised losses/(profits) ar unrealised losses/(profits) (2005: £nil) net £5 million Includes proprietary tradingNorth and Net cash flow from financing activities Reconciliation of operating Group profit netto cash flow from operating activities Systems write-down Net cash flow from investing activities

Group operating profit before share Group operating profit Movement in provisions and equipment property, plant Depreciation of costs scheme Employee share Movement in provisions Operating cash flows before mo costs Employee share scheme Less share of losses/(profits) of Less share of 86 liquid investmentsliquid with a maturity of three months or less. Thereadditions were no to property, plant and equipment during of on the face class of assets presented as a single (which are (c) operations Continuing operations Discontinued Discontinued operations (note 28) (b) operations Continuing Net cash flow from discontinued operating activities Total cash flow from operating activities Increase in receivables Increase in receivables Amortisationassets of intangible Discontinued operations Operating profit before share of (i) Net cash flow from continuing operating activities Cash generated from continuing operations operations continuing from Cash generated Income taxes paid Petroleum revenue tax paid Net interest received Increase in inventories Increase in inventories in payables (Decrease)/increase Amortisation assets of intangible Group operating profit including share of Add back: (a) operations Continuing 29. Payments relating to exceptional charges Payments relating to exceptional charges Net cash flow from investing activities Re-measurement of energy contracts Profit on sale of businesses (note 28) Profit on sale of property, plant and equipment and other intangible assets and equipment property, plant Depreciation of Net cash flow from financing activities Cash generated from discontinued operations Operating cash flows before mo Add back: Increase in receivables Increase in receivables

% 87 £m £m 45 46 2005 2005 532 on

Years (655) 4.35 2.85 4.85 2.85 ose, Female

1,239 pril (2,267) (1,592) (1,060) e ich the ich ture tion 31 December embers

e employees % 3 7 .00 .00 2006 Male £m 3 49 Years 4.00 3 5.00 3 2006 640 48 (181) (2,555) (2,010) (1,527) 31 December

18.8 20.6 22.7 24.5 e effect on scheme liabilities liabilities on scheme e effect Years 21.7 22.9 Female 25% by 4% Increase/decrease 3 0.25% Decrease/increase by 6% nefits to certain employees whose benefits nefits to certain employees whose benefits Male Years by 1 year by 2% Increase/decrease 20.2 21. nsion schemes31 March 2004, at th by 0.25% by 6% Increase/decrease (2005: 19,850) and 11,050 female (2005: 19,850) and 11,050 of the three main schemes: the Centrica of the three main has a commitment to provide certain pensi has east every three years, on the basis of wh on the basis every three years, east eet date have been based on a combina on a based date have been eet . Investments have been valued, for this purp been valued, for . Investments have d include a medium cohort allowance for fu cohort a medium include d section) was closed to new members from 1 A new members section) was closed to decrease by 0.25% decrease by 2% Increase/decrease valued for the purposes of IAS 19. valued for mptions are equivalent to future longevity for m to future mptions are equivalent the latest trends in scheme experience and other relevant other relevant and experience scheme in trends the latest Change in assumption Indicativ rt of the periodic actuarial valuation of the pension schemes. pension of the valuation actuarial periodic rt of the at that date. These schemes are defined benefit schemes, and benefit schemes, are defined at that date. These schemes Marketing Limited pension plan at 14 June 2005. These have been Centrica Engineers’ Pension Scheme and the Centrica Management Centrica the and Engineers’ Pension Scheme Centrica

sufficient to fund the benefits payable under the schemes. under the payable to fund the benefits sufficient following dates: the approved pe following s which, togethers with the specified contributions payable by th ions by 0. Increase/decrease were approximately 20,850 male approximately 20,850 were continued an unfunded arrangement which provides be which an unfunded arrangement Centrica plc Annual Report and Accounts 2006

are subject to independent valuations at l are subject to independent limited by the earnings cap. The Group also ing the pension liabilities at the balance sh balance at the liabilities ing the pension Direct Energy Marketing Limited (Canada). (Canada). Limited Marketing Direct Energy tatement tatement of the schemes reported deficits when havehavingregard to been set ees at 31 December 2006 were members of one ees at 31 December rposes of meeting the requirements of IAS 19 rposes of meeting S heme experience and other relevant data, an other relevant and experience heme e Centrica Engineers’ Pension Scheme (final salary Scheme (final Pension Engineers’ e Centrica published by the Institute of Actuaries. The assu published by the Institute of Actuaries. The loans and other borrowings and loans d beneficiaries. d beneficiaries. Pensions

The other demographic assumptions Net debt The latest full actuarial valuations were carried out at the The Centrica Unapproved Pension Scheme is Pension Scheme Unapproved The Centrica

Longevity assumption Increase/decrease Inflation assumption Inflation assumption Increase/decrease Discount rate by Increase/decrease Net debt excluding non-recourseNet debt excluding borrowings

Current liabilities – bank overdrafts and loans Current liabilities 29. Notes to the Group Cash Flow Cash Flow Notes to the Group 29.

Rate of increase in pensions in payment and deferred pens in payment and deferred in pensions Rate of increase Rate of increase in employee earnings employee earnings in Rate of increase Increase/ data. The assumptions are reviewed and updated as necessary as pa necessary as updated and are reviewed assumptions data. The Impact of changing material assumptions At the most recent actuarial review of the At the schemes there most recent (2005: 11,050) members an Currently aged 45 Currently aged Life expectancy 65 for a member: at age 65 Currently aged in normal health approximately as follows: health in normal of standard actuarial mortality tables, sc improvements in longevity, as The assumptions relating to longevity underly The assumptions relating to longevity Inflation assumption Inflation assumption Rate of increase in pensions in payment and deferred pensions in payment and deferred in pensions Rate of increase Discount rate Rate of increase in employee earnings earnings employee in Rate of increase 2006, and a career average salary section was added to the scheme average salary section was added to the scheme 2006, and a career Pension Scheme (a final salary scheme) were closed to new members from 1 April 2003. The Centrica Pension Scheme has an open an open has Scheme Pension Centrica The 2003. April 1 new members from to scheme) were closed salary (a final Scheme Pension Th career average salary section. Pension Scheme (the approved pension schemes). The Centrica Pension Scheme (final salary section) and the Centrica Management Management Centrica the and section) salary (final Scheme Pension Centrica The schemes). pension approved (the Scheme Pension Substantially all of the Group’s UK employ of the Group’s Substantially all the Scheme), the Centrica Staff Pension (formerly Pension Scheme 30. Less non-recourse borrowings Less non-recourse borrowings (note 20) Non-current liabilities – bank Non-current liabilities Current– other financial assets assets (d) assets – other financial assets Non-current Net debt including non-recourse borrowings Current assets – cash and cash equivalents cash – cash and Current assets Unapproved PensionEnergyat 6 April 2005 Scheme andDirect the are tax-approved funded arrangements. They arrangements. are tax-approved funded Major assumptionsthe actuarial valuation used for at market value. At 31 December 2006, all at market value. At 31 December 2006, updated to 31 December 2006 for the pu and post retirement benefits to employees of under the main schemes would otherwise be would schemes under the main qualified actuary certifies the certifies qualified of employers’ rate actuary contribution to be assets, are expected the schemes’ and proceeds from

– (3) £m £m £m £m £m £m 21 14 (36) 2005 2005 2005 2005 122 249 307 150 136 (126) (820) (571) (153) (454) over oth (3,390) Valuation fore current directly ected ded nture nture lts, UK equities is equities er were: r 3 5 9 % £m £m £m 18 95 3 3 8.04.1 841 150 7.9 1,182 7.3 2,570 (20) (26) 6.33.7 83 73 4.7 241 2006 2006 2006 2005 2 475 4 14 141 168 145 (194) of return per annum per Expected rate

3 £m 68 52 89 12 2006 2006 857 3 21 (296) (207) ,284) 3 1,486 2,988 ( Valuation Valuation ed within the Statement of the ed within mpany actuary. The median return The median mpany actuary. the expected rate of return the on expected continued 3 3 % 7.8 7.8 5. 4. 6.2 5.0 7.2 2006 of return recognised in Group operating profit be recognised in Group operating per annum rket investments, held by the Law Debe rket investments, held by the Law Expected rate ed rate of return on bonds was measured was measured of return on bonds ed rate to unfunded pension arrangements. Inclu pension to unfunded rate of return on property takes into account b rate of return on property takes into account kes into account the actual mixture of UK gi mixture of actual kes into account the tional restructuring costs arising in yea the tional restructuringarising costs tatements tatements S The expected rate of return on cash is comparable to is comparable cash of return on expected rate The oyees to commute a larger amount of their pension to a cash to the assumption will be reflect to the assumption Accordingly, the made in assumptions calculating the Group’s ed within excep calculated by the independent co the independent by calculated d the present value of the liabilities in the schemes at 31 Decemb at the schemes in liabilities value of the d the present erage based on the actual plan assets held and the respective exp assets held and plan erage based on the actual set classes were derived as follows: set s reflected in restructuring provisions within the Balance Sheet. In 2006 it has Balance has Sheet. In provisionsit 2006 the within in restructuring s reflected Notes to the Financial Financial to the Notes respect of the Centrica Unapproved Pension Scheme. Unapproved Centrica respect of the revised, and a gain of £20 million has been of £20 million has a gain revised, and Centrica plc Annual Report and Accounts 2006 ntal growth and depreciation.

ent value of theliabilities schemes’ (i) ected to be materially dissimilar. The expect ected to be materially dissimilar. e Statement of Recognised Income and are £29 million (2005: £31 million) of money ma money million (2005: £31 million) of are £29 ove are £27 million (2005: £32 million) relating d corporate bond stocks. The rate above ta d corporate bond stocks. The rate above ecognised in reserves at 31 December ecognised in reserves s held at the balance sheet date. The expected date. The expected sheet balance s held at the /charged to notional interest s to loss on curtailmentss to loss on includ ing on the scheme liabilities liabilities ing on the scheme rn on pension scheme assets scheme assets pension rn on

classes. The return on separate as

(i) continued Recognised Income and Expense. Recognised Income The schemes’ were amended from 1 April rules 2006 to allow empl lump sum on retirement,with in line changes to the Finance Act. have been liability pension defined benefit Future revisions re-measurements. and certain exceptional items £17 million of the liability relate liability £17 million of the amount(2005: £13 million). wa 2005, this In liability. pension with the been included Included within schemes’ liabilities ab

nalysis of the amount charged to operating profit nalysis of the actuarial gain/(loss)recognised in the nalysis of the amount (credited)

tatement of Recognised Income and Expense 0. Pensions A within other non-current financial assets financial non-current within other Trust onof the behalf Company, as security in bank interest rates. capital growth and allowance for expenses, re for capital growth and allowance from actual market yields for UK gilts an from actual market corporate bonds and overseas bond based on the expected median return over a ten-year period, as return over a median based on the expected was not exp a longer period than ten years Net pension liability liability Net pension Fixed-interest bonds Fixed-interest bonds Property 88 Cumulative actuarial gains and losses r and gains Cumulative actuarial Experience gains and losses aris and Experience gains Changesassumptionsin underlying the pres A S expected retu Actual return less Expected return on pension scheme assets assets scheme pension on return Expected liabilities Interest on pension scheme Net credit to notional interest cost A (i) Plan amendment Plan amendment Current service cost cost Current service The overall expected rate of return on assets is a weighted av is The overall expected rate of return on assets returns on separate asset (i) Associated deferred tax asset recognised in the Balance Sheet Sheet Balance in the Associated deferred tax asset recognised Present value of defined benefit obligation obligation benefit Present value of defined 31 December UK equities equities Non-UK The market value and expected rate of return of the assets an of rate of return expected and value The market 3 Loss on curtailment Loss on curtailment Net liability recognised in the Balance Sheet the Balance recognised in Net liability Cash and other assets Cash and other of plan assets Total fair value Net charge to operating profit Interest-linked bonds Interest-linked bonds Expense before adjustment for tax Expense before adjustment for Actuarial gain/(loss) to be recognised in th

£m £m 21 134 (64) 2005 2005 2003 2004 2005 307 64 202 (126) 90 (281) (820) (719) (1,138) 0.6% 4.9% 1.8% 3.7% 3.3% 8.0% 2,570 2,0412,570 2,353 (3,390) (2,760) (3,491) 11.9% 3.1% 8.6% rrent service cost is expecte rrent service £m 95 2006 2006 145 475 .2% (296) ,284) 3 4.4% 3 2,988 ( 14.5% t and future contributions shouldsuf be h 2006 are currently underway. Until the val Until the h 2006 are currently underway. salary section) was closed to new salary section) from 1 April 2006. U members was closed IAS 19 for closed plans, the cu IAS 19 for closed plans, the r the independent scheme Trustees by a professionally qualifie Centrica plc Annual Report and Accounts 2006

id in accordance with the 2004 funding plan. plan. 2004 funding with the accordance id in sign a funding plan to ensure that presen to ensure plan a funding sign ns of the approved schemes as at 31 Marc s (% of pensionable salary)s (% of pensionable continued

The Centrica Pension Scheme (final salary section) and the Centrica Management Pension Scheme were closed to new members to closed were Scheme Pension Management Centrica and the section) salary (final Scheme Pension Centrica The

greed future contribution rate tatement of Recognised Income and Expense: 0. Pensions 1 December 1 December Plan amendment amendment Plan Centrica Engineers’ Pension Scheme – CERIS section section CERIS – Scheme Pension Engineers’ Centrica Employer contributions Employer S Total actuarial gain/(loss) recognised in the

Percentage of scheme assets 3

the unit projected method, used to value pension liabilities under from 1 April 2003. The Centrica Engineers’ Pension Scheme (final meet future liabilities. Actuarial valuatio Actuarial meet future liabilities. be pa to will continue contributions concluded, actuary. The purpose of the valuation is to de A full actuarial valuation is carried out at least triennially fo out at least triennially carried is valuation A full actuarial Centrica Pension Scheme – CRIS section section – CRIS Scheme Pension Centrica Centrica Pension Scheme – Final salary section section salary – Final Scheme Pension Centrica A for the three main defined benefit schemes 3 Settlements/curtailments paid from fund contributions Plan participants’ Actuarial gain Actuarial Expected return on scheme assets 1 January January 1 Movements in the year: Movement the year in plan assets during 3 Actuarial (gain)/loss (gain)/loss Actuarial contributions Plan participants’ Loss on curtailment Current service cost service Current Movements in the year: Movement in the defined benefit obligationduring the year January 1

Percentage of the present value of scheme liabilities liabilities of scheme Percentage of the present value Amount (£m) (£m) Amount Amount (£m) (£m) Amount liabilities of scheme value Percentage of the present Amount (£m) (£m) Amount History of experience gains and losses History of experience Difference between the expected and actual scheme assets: return on

Defined benefit obligation obligation benefit Defined History of deficit History of Plan assets Settlements/curtailments paid from fund Centrica Management Pension Scheme Scheme Pension Management Centrica Centrica Engineers’ Pension Scheme – Final salary section section salary Final – Scheme Pension Engineers’ Centrica Benefits paid Benefits Benefits paid Benefits Interest on scheme liabilities Experience gains and losses on scheme liabilities: Experience gains and Deficit over time as members approach retirement. over time as members approach retirement.

1 al £m £m £m 73 16 80 25 2005 2005 160 192 425 mbe

g ion ansfer pect 2006 ent stimated at the risk , will , will rd field, ods were: £99 million Gas roup. The nd until the the nd until tangible llion redit rating ion to the – 0 £m £m 17 67 3 80 2006 2006 172 160 412 ating which is which ating contingent on actu Other Other

power, renewable obligation isions have been made, where been made, isions have sources Limited and British for each of the following peri lation to the acquisition of in lation to the continued tain at least one credit r tain at least ing tax counsel, and believes th believes ing tax counsel, and ecommissioning costs of the Moreca ecommissioning costs £nil. Payments made for physical power Payments made £nil. r these contracts are r ng to gas storage contracts in North storage to gas in North contracts ng rred to in note 20. A fixed collateral paym a technicalconcerning matter intra-group tr truction of a power station at Langage, truction of a power , plant and equipment amounting to £447 mill amounting equipment and , plant spect of the redevelopment of the Statfjo spect oviders. Other commitments at 31 December oviders. Other commitments licence holder for the Morecambe gas fields holder for the Morecambe licence Department of Trade and Industry decommissionin 2005: £137 million). Commitments in relat Commitments million). 2005: £137 tatements tatements ces Limited, have agreed to provide security, in res provide security, in to have agreed ces Limited, different forms and will remain in force unless a S e providers to purchase physical e providers to purchase normal activities, for which prov for which normal activities, gas fields should liabilities not be fully discharged by the gas fields should liabilities not be fully discharged G Group plc in respect of the d Group plc in respect ent of Centrica plc failing to re plc failing ent of Centrica wind farm. Commitments in re wind farm. £1,000 million). Hydrocarbon Re teral of £240 million (2005: £245 million) is required if the c teral of £240 million (2005: £245 million) is demand any sum which the Company does not pay in accordance Company does not pay in accordance sum which the demand any r non-cancellable operating leases oup has taken the advice of lead the advice oup has taken e stream from the Morecambe gas fields falls below 150% the e of n (2005: £103 million), carbon emissions certificates of £122 emissions certificates of £122 n (2005: £103 mi million), carbon of £91 million (2005: £nil). of £91 million (2005: ts of £44 million (2005: £49 million) relati £49 million) ts of £44 million (2005: minimum lease payment included above is lease minimum rred and disclosed as contingent rents. as contingent and disclosed rred the provisions are individually significant. significant. the provisions are individually ntracts for the acquisition of property the acquisition of ntracts for om renewable sources. Payments made unde n with the finance lease obligations refe lease obligations finance n with the subsidiary, Hydrocarbon Resour subsidiary, Hydrocarbon Notes to the Financial Financial to the Notes an expense in the year were as follows: in the year were as an expense Centrica plc Annual Report and Accounts 2006 t include £219 million in respect of the cons million in respect £219 t include International Limited, as which, original Limited, International of intangible assets of £1,082 million ( assets of £1,082 intangible of ng to contracts with out-source service pr ng to contracts with r Majesty’s Revenue and Customs (HMRC) on r Majesty’s Revenue and payments expected to be received and Inner Dowsing wind farms, £72 million in re Inner and been irrevocably relevant discharged and the

(i) e gas fields has been revoked. e nature of the security may take a number of guments is remote or slight. guments is remote g sub-leases at 31 December at 31 g sub-leases ission reduction certificates Commitments and contingencies contingencies and Commitments

The Groupa number has of outstanding disputes arisingof its out certificates and levy exemption certificates fr certificates and production, and thereforecommitment the to a are charged to the Income Statement as incu The Groupentered has into long-term arrangements with renewabl Guarantees and indemnities Operating lease commitments Commitments Contingent liabilities Decommissioning costs At 31 December 2006 the Group had commitmen the Group had At 31 December 2006 The Group has given guarantees in connectio given guarantees The Group has

America, and £21 million (2005: £nil) relati America, and £21 amount to £52 million (2005: £13 million). appropriate, in accordance with IAS 37. None of accordance with appropriate, in that HMRC will succeed in its ar succeed in that HMRC will (2005: £nil) and certified em certified (2005: £nil) and acquisition of property, plant and equipmen plant and acquisition of property, of the Lynn in respect of construction of Doune the Braes of in respect of the acquisition and £42 million £869 millio of certificates obligation renewable assets include 90 amounting to £240 million (2005: £245 million) is required in the ev colla further BBB+/Baa1 level, and not on credit watch above the falls further. The Company has £1,300 million of bilateral credit facilities (2005: has £1,300 million of bilateral credit The Company Trading Limited have guaranteed, jointly and severally, to pay on agreements. with the facility (e) (d) with He in dispute The Group is currently pricing of gas produced withinthe UK Continental Shelf.Gr The (i) under non-cancellable operatin under non-cancellable payments recognised as payments sub-lease Lease and lease Minimum The total of future minimum sub-lease The total of future minimum After five years Within one year years five Between one and At 31 December the total of future minimum lease payments unde (c) (b) BG to provided certain indemnities and The Group has guarantees wholly-owned its Company and gas fields. The (a) co had placed 2006, the Group At 31 December for the acquisition million), and (2005: £108 31. – renewables rents Contingent – other rents Contingent cost of such decommissioning. Th costs of such decommissioning have notice in respect of the Morecamb of such guarantees and indemnities, to BG to indemnities, of such guarantees and have exposure to decommissioning costs relating to the Morecambe security is to be provided when the estimated future net revenu

8,500 ed on relating to to relating racts 16,500 10,600 35,600 out from related related from transactions t venture venture t actual actual Bank Bank luded in s. They nson plc plc nson amounts owed the Group or doubtful debt to 23 wholesale wholesale mmitments Provision for bad for bad Provision

ation in credit ation in ies. a related party £m £m £m £m 00 2006 3 parties parties services 7,800 4, to related 16,100 10,400 3 goods and and goods Purchase of Purchase Amounts owed owed Amounts

– –– – 2 – – –– – – – – –– – – – 28 – – 3 58 – 3 86 2 £m £m £m 12 158 1 – – 46 – – goods goods parties parties Sale of Sale of niques. Contractual co niques. Contractual from related related from Amounts owed owed Amounts ope and in basis from the principal valu from the principal basis ope and in s counterparties in relation to s counterparties One Limited, (formerly Goldfish (formerly Limited, One – – – – – – – – – 2 1 3 companies have entered into cont have companies £m £m 2006 2006 2006 Other Other parties fields and power stations and procurement stations power and fields from related transactions Provision for s. Barrow Offshore Wind Limited is a join is Offshore Wind Limited s. Barrow The resulting monetary commitment The resulting monetary is bas amounts owed plc. Both Mitchells & Butlers plc and Ha & Butlers plc Mitchells Both plc. non-gas indexation. Further information ab information Further indexation. non-gas debt relating to bad or doubtful tlers plc. Hanson plc is a related party of uction and energy transportation liabilit acts are within the scope of IAS 39 and inc a loan facility. Mitchells & Butlers plc is & Butlers plc Mitchells a loan facility. – – – – – – – gas and electricity at fixed and floating price at fixed and floating gas and electricity 2 3 5 8 8 £m £m d using valuation tech d using valuation parties services to related goods and Purchase of of Purchase basis, as follows: Amounts owed other event collateral in the deterior a significant of – – – – – 5 9 3 £m £m 2 77 40 49 49 to certain limitations, to variou (Energy Centres) operations in July 1999, guaranteesbeen have goods ured contracts depends on a number of factors, includingthe Sale of Sale parties stream activities, certain Group certain Group stream activities, its 30% economic interest in GF its 30% economic interest ns with related parties whoof the are not Group: members ectors’ Report – Principal Risks and Uncertainties on pages 21 from related e balance owing to the owinge balance third party at the point of deterioration. Amounts owed

er gas procurement contracts differs in sc er gas procurement contracts

on an undiscounted ties as a result of reassignment of leases. of reassignment of leases. ties as a result Centrica plc Annual Report and Accounts 2006 contracted to pay at estimated future prices. contracted to pay at estimated future prices.

h a mixture of productionh a mixture of from owned gas also a non-executive director of Hanson also a non-executive ca plc is also Chairman of Mitchells & Bu also Chairman of Mitchells plc is ca or provide credit support or or provide prices and long-term gas contracts with prices and long-term for business usage on an arm’s length basi usage on an arm’s length business for continued hore Wind Limited relate to loan facilities. relate to loan Wind Limited hore and to thirdgas prod in parties respect of Only certain procurement and sales contr sales certain procurement and Only ined to be extractable on an economic basis. to be extractableined on an economic calculating principal values are estimate values are principal calculating actions with Lloyds TSB Bank plc relate to Lloyds TSB Bank plc relate with actions rties at 31 December were as follows: rties at 31 December were include short-term forward market purchases of forward market purchases short-term include conditions precedent are excluded. conditions precedent are excluded. Related party transactions Related party transactions

The estimated commitment to make payments und to make payments commitment The estimated Commodity purchase contracts Other Commodity purchase commitments are estimated, Commodity purchase commitments Following the closure of the British Gas Energy Centres Limited In connection with their energy trading, transportation and up

1. Commitments and contingencies contingencies and Commitments 1. which are subject to fulfilment of to fulfilment are subject which of energynote derivatives disclosed in 33. note 33. In addition, the volumes used in the minimum quantitiesthat the of gas Group is

Humber Power Limited (to 19 September 2005) 3

Lloyds TSB Bank plc is a related party of the Group because of party of the Group because Lloyds TSB Bankis a related plc Mitchells & ButlersMitchells plc Lloyds TSB Bank plc Balances outstanding with related pa with related Balances outstanding Mitchells & ButlersMitchells plc Lloyds TSB Bank plc

During the year, the Group entered into the following transactio 32. The total volumeunder long-term of gas to be taken struct certain reserves of gas that are eventually determ Within one year years five Between one and also include gas contracts indexed to market contracts indexed gas also include the Group’s procurementnote strategy is contained in 33 (i). The Group procures gas and electricity throug electricity gas and The Group procures contracts. Procurement contracts (g) The Group’s use of financial instruments is explained in the Dir the in is explained instruments of financial The Group’s use and in note 33. (f) signed on certain former Energy Centres’ proper Energy former signed on certain under which they may be required to prepay they may be required under which th upon is contingent support credit of extent The worthiness. energy trading and procurement activities, activities, and procurement energy trading Group companies have given guarantees and indemnities, subject subject indemnities, and have given guarantees Group companies Barrow Offshore Wind Limited Limited Wind Offshore Barrow Hanson plc plc Hanson

AccuRead Limited (to 11 October 2005) Barrow Offshore Wind Limited Limited Wind Offshore Barrow Hanson plc plc Hanson

After five years of the Group. Transactions with Barrow Offs of the Group because the of Centri Chairman Limited) a subsidiary of the Group. Trans Limited) a subsidiary purchase gas and electricity from the Group purchase gas and because the Chief Executive of Centrica plc is of Centrica plc Chief Executive because the

7 3 3 £m £m 13 l 2005

stic and ase the rement 39 posures ntract, uction ined in electricity dged pect of interest ties on nters into nature also also nature adversely ity price risk om changes om changes tially reducing tially reducing other entity. R) and Profit at 8 5 3 r procurement £m 16 2006 normal course of normal

racts are by their in commodity prices, in h flow hedges. The he The hedges. flow h of long-standing target ranges individuals at 31 December 2006 continued ing purposes. The Group also e liability at 31 December 2006 irements the Group entered has into physica on certain cash flow hedges of future hedges of future certain cash flow on in exposure some to other commodities gas and electricity from the Group for dome from the Group for and electricity gas oted prices for the commodities and indices and oted prices for the commodities s to be procured at market prices. Procu to be procured at market prices. s g instruments are fixed-price forwardinstruments are fixed-price purch g re oil production where the forecast prod where production re oil are subject to volumetric on limits open ex of £0.2 million (2005: £0.1 million) in res of £0.2 million (2005: ruments which are within the scope of IAS of IAS are within the scope which ruments specific depletion cont depletion specific rticular for gas and electricity. Commod gas and electricity. rticular for y risk and liquidity risk arises in the in the liquidity risk arises y risk and pported by the use of Value at Risk (Va at Risk pported by the use of Value ntracts are subject to change resulting fr ntracts are subject to change resulting posure to fluctuations posure to the commodity which is the subject of the co at market prices for commodities will move at market s accounted for as cas s accounted tatements tatements optimise the use of the contracts. of the contracts. optimise the use S h provides fuel diversity to electricity supply; to electricity provides fuel diversity h ing lower than originally expected. ing lower than originally expected. oil and oil products, coal and general indices such as such indices general coal and and oil products, oil ty not being fully matched by equity production o matched by equity production being fully ty not tric limits set as a combination combination set as a tric limits from owned gas fields and power stations, energy procurement power stations, energy and from owned gas fields ecutive Committee, a total of 13 Committee, a total ecutive the normal course of business. A financial instrument is def instrument A financial business. of course the normal e entityand a financial liabilityequity or instrumentan of d the time at which the purchase cost is fixed, thereby poten cost is fixed, purchase which the at d the time nts are also entered into for trad nts are also entered uded within the Directors’ Report – Principal Risks and Uncertain Directors’ Report – Principal Risks the uded within ing instruments was a £484 million a £484 million ing instruments was ard) based on energy market price indices. ard) based on energy market price indices. rmined based on historicrmined12 months on or forward quoted based gas prices up in to advance contract risk. The fair values of field- values of contract risk. The fair on, which stabilise prices but also result prices but also stabilise on, which ed with gas and electricity purchase requ ed with gas and

racts constitute derivative financial inst Notes to the Financial Financial to the Notes y credit risk, interest rate risk, currenc y credit risk, interest -term gas contracts includes -term gas contracts includes Centrica plc Annual Report and Accounts 2006 ment personnel and their families purchase their families and personnel ment prices are determined based on forward qu are determined based on forward prices g has been discontinued for hedges of futu for hedges discontinued has been g e volume of gas and electricity which remain electricity which of gas and e volume oprietary trading activity. These exposures d timescale. Hedge ineffectiveness has arisen Hedge ineffectiveness d timescale. rchase contracts, certain of which it ha rchase contracts, certain of which riods and pricing. The risk is primarily th The risk is primarily pricing. and riods rtfolio is to in order actively managed nal risks associated with gas production. and electricity. The volumetric limits are su volumetric limits electricity. The and who served in the year received emoluments the served in who ial Statements. The fair values of these co Statements. The ial ures resulted in forecast demand be resulted in ures irement to meet customer demand. The hedgin to meet customer demand. irement the Group relates to commodity prices,the in pa continued ntracts which are indexed to the market price of to the market indexed ntracts which are financial instruments are entered into to reduce ex into to reduce are entered instruments financial red, thus stabilising procurement and sales prices and eliminating exposure once the price has price the once exposure eliminating and prices sales and procurement stabilising red, thus rchases and sales of gas and electricity at fixed prices; of gas and electricity sales rchases and acts to buy carbon credits; racts whose prices are indexed to coal prices whic indexed to coal racts whose prices are contracts with wind farms at a fixed or variable price; at a fixed or variable contracts with wind farms management personnel management ntracted or forecast retail electrici sales of gas and Financial instruments

Commodity price risk up months to 12 the in period in advance of whichdelivered; and the gas is Producers Price Index (PPI). The contract Commodity price from pr risk also arises commodity priceTo manage the risk associat Certain of these procurement and sales cont procurement and Certain of these long-term financial swaps (up to five years forw long-term financial swaps (up po contract the in The volume variability long-term gas contracts with non-gas indexati long in non-gas indexation The and indices. long-term gas contracts whose prices are dete is delive of the period the gas been determined; long-term electricity cont long-term electricity short and long-term contr short-term forward market pu Commodity contracts are subject to legal and to legal and Commodity contracts are subject The Group monitors exposure to commodity price volume risk using Commodity pricethrough mixture risk is managed of production a

2. Related party transactions transactions party 2. Related purposes on an arm’s length basis. 92 item is the forecast future purchase requ future purchase item is the forecast commodity cash flow hedg contracts. The net fair value of flow hedgin (2005: £481 million asset). Cash and to VaR limits. and to VaR limits. electricity and carbon pu gas, and financial whose fair value is recorded in the Financ of delivery. in advance is not fixed price the and for which X X X X X X X (a) facing risk financial The most significant arises as a result of co Further detail on the Group’s risk management policies is incl pages 21 to 23. (i) Risks the Group’s business. Derivative the Group’s business. instrume Derivative financial rates and foreign exchange rates. in operations Group’s the to finance instruments financial primary on of asset financial a to rise gives which contract any IAS 32 as 33. price risk, counterpart Exposure to commodity Key management the members of personnel Board and Ex comprise (2005: 15). A relative of a Board member the Group. Key manage their employment by Remuneration of key of Remuneration Short-termbenefits Post-employment benefits 3 Share-based payments Share-based payments was not expected to occur in the anticipate was not expected to occur in the temperat unseasonably high sales where subject to reserves risk and other operatio in commodity prices, except for co in commodity prices, except for specific shorter-term targets for both gas contracts with equivalent volumes, time pe time contracts with equivalent volumes, an tariffs are set are fixed or that sales prices between the time expected margins. and energy sales contracts. This reduces th and energy sales contracts. This reduces contracts include: Risk (PaR) methodologies.

e fair values fair e The maximum The 5 2 7 6 £m 49 3 26 41 3 2006 640 744 3 805 642 102 , unterparty defaults defaults unterparty 3 2,5 ageing of receivab eral principally un it worthiness is ascertain rating, and are subject to app rating, and are subject justment is made to financi justment is e fair values of contracts with e fair values ion) of cash collat ion) of cash rnal information. An rnal information. instrument is to upgrade the cred teral paid or received is interest beari various forms of bank and Parent Compa various A credit risk adjustment is made to th A credit risk adjustment il the obligations of any defaulting party. defaulting il the obligations of any account of collateral, is represented by th represented is account of collateral, erparty with a credit rating of A+ for which cash cash erparty with a credit rating of A+ for which potential for a customer defaulting on the it risk at 31 December 2006 (2005: none). e Group by those counterparties, less any amoun less any those counterparties, e Group by a specific counterparty will be lost if a co will be lost counterparty a specific residential customers, residential customers, cred 31 December 2006 Centrica had pledged £61 million had 31 December 2006 Centrica erparty. No credit risk ad erparty. No credit risk llateralised on Letters of Credit provided on b by banks on Letters of llateralised party and by category of credit party and off exists and also includes th also includes off exists and 100% of its credit risk is with counterparties in related ener up a credit risk mitigation up a

naged by checking a company’s credit worthiness and financial stre and financial credit worthiness company’s a naged by checking AS 39, without taking ngle European energy count energy ngle European or netting provisions to reducenet credit risk and settles payments with counterp Centrica plc Annual Report and Accounts 2006 ing an appropriate mix of internal and exte and appropriate mix of internal ing an mitigate credit risk including margining, mitigate credit risk including

tions on derivative contracts. Most colla the business relationship. For the business relationship. e credit rating of the count credit rating of e ) and had received £33 million (2005: £537 mill £33 million (2005: had received ) and erators are contractuallyto fulf required erators course of operations as a result of the of operations as a result of course

s are with A-rated counterparties or better. s are with A-rated counterparties no other significant concentrations of cred alone rating of the counterparty. At of the counterparty. alone rating the financial benefits of contracts with of benefits the financial monitored by individual counter monitored by individual in the Financial Statements. in the Financial the exposure to credit risk. ract. This includes any cash amounts owed to th any cash amounts ract. This includes continued

(i) 1 December 3

At 31 December 2005 £291 million related to a si At 31 December 2005 £291 million related to a held. collateral of £221 million was

Credit risk Centrica also uses master netting agreements Centrica also . Financial instruments

Energy derivatives: 33

(i) Embedded derivatives North America North UK and Europe Loans Loans North America North UK and Europe Year ended receivables: Trade and other sheet carrying amount for all financial assets. assets. financial all amount for sheet carrying or withinstitutions. There financial were the scope of I within instruments credit exposure of financial With the of retail customers, exception the Group considers that Credit risk exposures Collateral Centrica employs a variety of other methods to Exposure to credit risk arises in the normal Exposure to credit risk is ma customers, credit risk case of business In the balance. Downstream businesses of financial instruments in accordance with th accordance in instruments of financial Counterparty credit exposures are Counterparty credit exposures exposure of significant limits. The majority Energy wholesale and trading Counterparty credit risk is the risk that risk credit risk is the Counterparty cont under the on its obligations (b) Foreign exchange derivatives derivatives exchange Foreign Interest rate derivatives Available for sale assets Available for sale equivalents cash Cash and Guarantees and Letters of Credit. In all cases the aim of setting cases Letters of Credit. In all Guarantees and both before commencing to trade and during to trade and during both before commencing under a joint operating agreement where op under a owed to the counterparty by the Groupa legal right whereset- of are recorded counterparties which where master netting agreements are held. where master netting agreements are held. of any restrictions over its use. of any restrictions over its use. calls to cover exposure to mark-to-market posi calls to cover exposure to mark-to-market collateral (2005: £687 million of which £624 million related to cash co collateral (2005:which £624 million related to cash £687 million of gas production relating to South Morecambe better equivalent rating than the stand- better equivalent rating than the is monitored and used to manage normally before commencing to trade by reviewnormally before commencing

s. £m £m onds 5 years More than rling n the n the ce value ce value the $ 129 million.$ 129 4 million liability). £m £m : £3 millionasset) ubject interest to ffective interest ffective 2-5 years the value the of future

£m £m advance of the maturity date erling bonds with a fa 1-2 years 1-2 years continued – – (218) – – –(251) (709) –7 12 –7 – – – (65) (5) (5)(37) – s in 2009 and it is expected that the b s £m £m 481161 – – 4 6 – – – 2 – (33) – – – (30) – (3) – (68) – – – (20) 6 14 – (18) (20) (70) (326) 229 (8) (39) (182) 614 – – – borrowings while borrowings ensuring that (483)125 – 358 (374) – – – (100)(152) – – – – – – Within 1 year at 31 December 2006 (2005: £4 xes the interest payments at 5.1% interest payments xes the in this balance are st in this balance the bond will re-price in March 2009. The ste the bond will re-price in March ) ) – – – 4) 3 £m 33 33 3 74) 10 48 2 61 tatements tatements (68) (65) ( (47) ( the value of an asset or liability or in or liability of an asset value the Total 3 614 million liability at 31 December 2006 (2005 (4 ( (218) (100) (960) (152) S repaid between 2008 and 2010 in 3 % .8 .7 .5 3 5.1 5.8 4.5 1.8 4.5 4.9 4.5 5.4 4.5 5.1 3 1.6 6.0 5.5 5.6 0. 5.0 3 fixed rateinterest of of 4.0%notional ona face value US of 1 Effective rate risk on long-term recourserate risk on illion of issuance costs, and at fair value where hedged. hedged. value where and at fair costs, of issuance illion interest rate ring financial liabilities, the following table indicates their e table indicates following the liabilities, ring financial ruments was a £28 million liability rumentsa £28 million was

(iii)

ion of financial instrument at 31 December 2006. ion of financial instrument at 31 erparty has an option to redeemerparty has an these bond (i), (ii)

(i) the periods in re-price or mature: which they

Notes to the Financial Financial to the Notes the repayment amount at £67 million and fi and million repayment amount at £67 the (iii) Centrica plc Annual Report and Accounts 2006 s. Any financial asset or liability on which interest is paid or received will be s is paid or received interest or liability on which asset Any financial s. e event that the option is not exercised is event that the option e

(iii)

ed at a face value of £150 million. value of ed at a face terest rate hedging instruments was a £12 ated at a face value of £965 million. Included with value of £965 million. Included ated at a face Group suffers financial loss due to changes in loss due to changes financial Group suffers mains within – 70% range. a 30% continued

(i) (i), (ii) (i),

(i), (ii)

(i)

(viii) (iv) (i), (vi)

(vii)

(i), (v) 1 December 2006 3

(i) of the sterling principal amount. amount. of the sterling principal The bonds have a face value of £219 million and are expected to be The floating rate note is stated at a face value of €100 million. of €100 million. value The floating rate note is stated at a face A swap has been entered into which fixed which into entered A swap has been Floating rate sterling bonds are stat Floating rate sterling bonds are The dualcurrency hasface loan a value of ¥15 billionand pays a Interest rate swaps, cross-currency interest rate swaps and forward rate agreements are used to manage interest rate risk withi bonds are stated in the Group Balance Sheet net of £9 m Sheet Balance Group bonds are stated in the Fixed rate sterling bonds are st that mature in 2029. The count of £250 million In th on this date. will become repayable These assets/liabilities bear interest at a floating rate. at a floating rate. interest bear These assets/liabilities Excludes non-interest bearing balances. Excludes non-interest rate derivative on swapped port Effect of interest Interest rate risk

. Financial instruments

and the net fair value of cash flow interest rate hedging inst (viii) (vi) (vii) exposure to fixed interest rates re exposure to fixed interest netfairin of value Group. The fair value (v) cash flows due to movements in interest rate movements in interest to due cash flows rate risk. Theto actively manage Group’s the is policy interest Non-recourse borrowings Sterling bonds US dollar commercial paper Effect of interest rate swap on bank loans rate swap Effect of interest 94 (iv) (i) (ii) Effect of interest rate swap on finance lease obligations lease on finance rate swap Effect of interest bonds Canadian dollar Effect of interest rate swaps on sterling bonds rate swaps Effect of interest Euro floating rate note Sterling bonds – fixed Available for sale government bonds government Available for sale Loans Effective interest analysis rate and interest-bea assets financial In respect of income-earning (c) the risk is the risk that Interest rate 33 Cash and cash equivalents cash Cash and Loans – fixed other receivables in included Margining collateral Margining collateral included within other payables within included Margining collateral Dual currency loan – fixed lease obligations Finance Bank loans and overdrafts and Bank loans Bank loans – fixed – fixed Bank loans (iii) Finance lease obligations lease Finance obligations Year ended rates at the balance sheet date and the earlier of earlier date and the sheet rates at the balance

More than ency ion 15 million ign

changes n reign

8 (2) lar commercial derivative £m 96) iming (95) 2006 £m £m 3 ( (485) Year ended 31 December December Year ended 31 l instruments of a l instruments in the value in the 2-5 years

– 14 – dian and European European dian and £m £m was brought to an with changes in fore 1-2 years 1-2 years es all significant exposures significant es all – ards and medium-term cross-curr ards and medium-term £m £m n) and derivative financia 2006 was a £1 million liability liability 2006 was a £1 million Within 1 year ent with the bank ent with the Group Balance Sheet net of £4 million net of £4 million Sheet Group Balance the foreign currency debt or entering into fo currency debt or entering into foreign e Group’s policy is to protect the sterling wholly-owned US, Cana a specified basis. The net fair value of net fair value basis. The specified a bilities represent short-term cash flow t short-term cash flow represent bilities £m £m £377 million) comprise £49 million US dol £377 million) comprise £49 million Total n currency cash flows vary ere were no material unhedged financial assets or or assets financial unhedged material ere were no ncies, except for £28 million of assets denominated i ncies, except for £28 million of assets % 2006 and the arrangem Effective ort-term foreign exchange forw e sterling value of borrowings or derivatives are used to offset e sterling value interest rate interest a result of changes in the value of an asset or liability or asset of an the value in a result of changes hedges. The Group commercially hedg ing instruments at 31 December ing instruments net investment hedging instruments at 31 December 2006 was a £1 dity contracts. 2.4 – 240 – – (240) ngs of £117 million (2005: £377 millio (xi) ion of financial instrument at 31 December 2005. ion of financial instrument at 31 4.23939– –– 4.23939– 4.4 (537) (537)– – – (ix) (ix), (x) (0.4) – (207)– – 207 Centrica plc Annual Report and Accounts 2006 floating rate note (2005: £nil).

(xi) in the cash flow hedging reserve, which includes fair value gains and losses in relat losses in and value gains fair includes reserve, which flow hedging cash the in of £415 million. These bonds are stated in bonds are stated of £415 million. These euros. Th dollars, Canadian dollars and the Group’s functional curre the Group’s functional 0.4 –– (6) – 6 activities where practicable. Th activities where practicable. erseas investments through holding either through holding erseas investments (xi) foreign currency exchange rates. Through rates. Through currency exchange foreign

minated in euros). The euro assets and lia euro assets and euros). The in minated ). The borrowings of ). The £117 million (2005: e of a specified foreign currency amount on specified of a e d electricity commo d electricity 3.7 55– – – s are used to hedge the risk that future foreig s are used to hedge the risk d currency hedges is as follows: hedges is as follows: d currency (ix) fair value where hedged. fair 4.5 –– 1,075 1,075 – continued 4.3 –– (377) (377) – (ix) 5.5 –– (63) (63) – 4.6 –– (377) (377) – (ix), (x) (ix), (ix) (ix) 4.9 (250) – – (250)–4.9 (250) – – (xiii) 36.0 (637) (637) – ––36.0 (637) (637) – (ix), (xiv) 5.9 (422) – – –(422)5.9 (422) – – (xii) 1 December 2005 3 sale government bonds 4.3 14 r 4.74646– –– 4.74646– (ix)

of issuance discount, and at and discount, of issuance The to be repaid between 2008 andexpected bonds 2010 are in advance of the maturity dates. during 2005. The bank ceased to be a limited partner during during 2005. The bank end on 11 August 2006. Sterling bonds are stated at a face value value Sterling bonds are stated at a face was formed which partnership, limited a LP, Gas Production Centrica in the bank’s interest a to related bank loans Other These assets/liabilities bear interest at a floating rate. at a floating interest bear These assets/liabilities bearing balances. Excludes non-interest rate derivative on swapped port Effect of interest

Currency risk

The maturity analysis of amounts included The maturity analysis of amounts included . Financial instruments

vailable for sale floating rate note vailable fo valueby entering of overseas investments into net investment liabilities at 31 December 2006 other than in at 31 December 2006 other liabilities deno liabilities euros (2005: £92 million of to foreign currencies arising from operating to foreign currencies arising of future cash flows due to movements in flows of future cash to US subsidiaries, the Group has exposures (xiv) (xiii) (xii) Margining collateral included within other payables other within included Margining collateral Effect of interest rate swaps on sterling bonds rate swaps on sterling Effect of interest Effect of interest rate swap on bank loans Effect of interest Cash and cash equivalents cash Cash and Bank loans – fixed 3.8 (63) (8) (24) (28) (3) 33

One to two years Less than one year Less than one year Cash flow hedging reserve Forward foreign exchange contract Forward foreign exchange valu by fixing the sterling exchange rates Cash flow hedges Net investment hedges its ov of the carrying value hedges Centrica differences and the fair value of gas an of the fair value and differences (d) loss as financial Group suffers the risk that the Currency risk is (x) (xi) (ix) Effect of interest rate swap on finance lease obligations lease rate swap on finance Effect of interest Sterling bonds Loans A A Year ended Year ended Two to five years Canadian dollar bonds Canadian dollar Non-recourse borrowings Finance lease obligations – fixed Financelease obligations lease Finance obligations 5.9 (451) (16) (18) (65) (352) US dollar commercial paper US dollar commercial Bank loans and overdrafts and Bank loans bank loans Other Margining collateral included in other receivables in included Margining collateral More than five years More than five

to commodity, interest rate risk an (2005: £8 million liability). (2005: £8 million liability). financial instruments designated as currency cash flow hedg cash flow designated as currency instruments financial paper (2005: £377 million) and £68 million euro paper (2005: £377 million) and £2 million asset (2005: £91 million liability £2 million asset in the sterling value of the investments. The net fair value of liability (2005: £468 million liability), consisting of borrowi currency derivatives or a mixture of both. Centrica enters into sh interest rate swaps to hedge the net investments. Changes in th

g £m £m £m £m rs

uro uro illion Fair value Fair Fair value Fair facilities

committed committed o ensure 6 million 200 million 2005 2005 £m £m £m £m 46 46 45 45 1,239 1,239 3,150 3,150 quidity requirements requirements quidity Carrying value Carrying Carrying value Carrying

(271) (763) (271) (755) (377) (828) (377) (250) (282) (856) (261) (282) (3,369) (3,369) (422) –– (425) 2005 2005

)

3 7 l paper programme of US$2,000 programme of US$2,000 l paper ( £m £m 49 3 41 640 3 (275) (159) (100) (814) (227) (265) ,017) , 3 3 ( (1,176) illion (2005: US$2,000 illion (2005: US$2,000 million). At Fair value value Fair Fair value value Fair non-recourse debt) over £ non-recourse debt) continued rcial paper issued was held in US dolla in issued was held rcial paper ) 2006 2006 2006 2006 within the Group. The EMTN includes a e includes The EMTN Group. within the 3 7 ( £m £m 49 3 41 ,300 million (2005: £1,000 million). These 640 3 (275) (161) (100) (808) (218) (265) ,017) , 3 3 e commercial paper programme and bonds totallin programme paper commercial e ( (1,181) (2005: £274 million) and provisions of £40 (2005: £274 million) and tatements tatements Carrying value Carrying value S ilities. Cash forecasts identifying the li identifying forecasts Cash ilities. December Year ended 31 December Year ended 31 ed for different scenarios and are reviewed regularly t reviewed and are scenarios ed for different r 2006 consisted of a US commercia east 50% of net debt (excluding east 50% of net debt mprise trade and othercarrying receivables with value a of £265 m theamounts carrying included in are the Group Sheet Balance stments in Europe. stments in (EMTN) programme of US$3,000 m (EMTN) programme

(iv) committed bank borrowing facilities of £1 Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 h America and other exposures to US dollars America and other exposures to US h cash forecasts are stress-test forecasts cash tstanding under the EMTN programme. The comme The EMTN programme. under the tstanding US$658 million) had been issued under th had been issued US$658 million) e the Group’s net inve bles with a carrying value of £329 million bles with a carrying

least a 12-month period. The Group’s includes policy maintainingminimumof a level (including power station tolling power (including p will not have sufficient funds to meet liab funds sufficient p will not have

(i), (ii) continued (vi)

(i), (ii)

(ii) the Group has access to a number of uncommitted facilities. facilities. of uncommitted to a number Group has access the (ii) (iv) (iii), (iv), (v) (iii), (iv),

(vii)

(i), (ii) (iv)

(ii), (iii) (ii), The principal debt facilities in use by the Group at 31 Decembe in facilities debt The principal Liquidity risk

. Financial instruments

Available for sale assets Available for sale Bonds 96 arrangements) Businesses’ non-recourse borrowings bonds Canadian dollar Fund Income Waterheater Consumers’ The of Units leases finance Obligations under overdrafts and Bank loans bank loans: Other payables Trade and other Businesses’ recourse borrowings Primary financial liabilities amortised cost: measured at liabilities Financial Loans and receivables: receivables: Loans and receivables Trade and other Primary financial assets analysed below. Balancesscope of IAS 32 excluded co from the other paya (2005: £296 million), trade and (2005: £354 million). (ii) Fair values (ii) Fair Theof the fair values Group’sinstruments financial together with At December31 2006, the Group had undrawn mature in 2010. In addition Term Note Medium million) and a Euro million (2005: US$2,000 Borrowings (e) Grou the risk that the is Liquidity risk The are produced frequently. of the Group 33 Loan notes notes Loan paper Commercial Provisions Cash and cash equivalents equivalents cash Cash and Loans floating rate note whichused to hedg was 31 December 2006, US$200 31 December 2006, million (2005: ou were £415 million) £1,183 million (2005: to hedge the Group’s net investmentsNort in facilities of £800 million less available cash resources and that at l and that cash resources less available facilities of £800 million spread over a range of maturities. should be long-term, sufficient financial headroom exists for at headroom exists financial sufficient

Fair value Fair 18,150 19,609 45,345 AS 39. of or or existence existence m the 3 t the risk £m £m 55 2006 2006 156 89 226 3 £m £m 1,275 7,502 20,125 21, 48,982 Carrying value Carrying (20) 44 (1) (20) 488 (1) 488 33 1,873 1,873 –– 44 (45) (102) (45) (102) –– 18 18 210 (7) 210 (7) 341 341 (1,664) (1,664) 2005 2005 )

– 3 5 2 (4) (4) £m 42) 15 16 11 (57) (40) (10) 3 728 uld otherwise be required by uld otherwise be required by (657) (500) (52 based upon the Group’s cost (1, Fair value value Fair ) 2006 2006 – 3 5 2 (4) (4) £m contracts which are within the scope of I within the scope contracts which are 42) 15 16 11 (57) (40) (10) 3 728 (657) (500) (52 financial asset at fair value through profit at fair value asset financial r value through profit or loss due to the (1, erwise be required by the contract. the contract. by erwise be required lues are undiscounted and are derived fro are undiscounted and lues Carrying value e of the use of derivatives but does note of the of reflec use December Year ended 31 discount rates based ondiscount the rates Group’s cost of borrowing of 5%. y modify the cash flows that wo y modify the cash flows discounted using discount rates rates discount using discounted mated commitment to make payments underprocurement contracts, ial instruments, carrying value approximated fair value. value approximated fair value. carrying instruments, ial

(viii)

relation to proprietary relation trading. to proprietary relation trading. Centrica plc Annual Report and Accounts 2006 designated as a financial liability at fai liability as a financial designated (viii)

ntracts that have been designated as a designated ntracts that have been n techniques, of those and purchase sales loans is equivalent to carrying value due to the maturity. short-term The fair value tly modify the cash flows that would oth the cash tly modify is shown in the tables below. Principal va below. Principal tables in the is shown

instruments in the Group Balance Sheet. in the Group Balance instruments (xii)

ssets in the Group Balance Sheet. (xi)

instruments (2005: £26 million). (x)

(ix) incipal value provides an indication of the scop an indication provides incipal value continued nts in hedging relationships in nts embedded derivatives embedded

Fair value of bank overdrafts and current overdrafts and current of bank Fair value using discounted flows cash future is based on loans non-current loss dueexistence to the derivatives that of embedded significantl the contract. Includes £26 million of equity Includes £26 million of equity cash flows, future based on been determined have Fair values Fair value determined with reference to closing market prices. to determined with reference Fair value Balances which are outside the scope of IAS 32 have been excluded. scope of IAS 32 have been excluded. the are outside Balances which Relates to energy contracts that been have of embedded derivatives that significan Includes £3 million in relation to energy co of borrowing of 5%. financial derivative Included within in Includes £206 million (2005: £284 million) in Includes £198 million (2005: £272 million) Duenature to the and/or short maturity of these financ a financial other Included within

. Financial instruments

More than five years More than five (vii) (vi) Foreign exchange derivatives – liabilities Energy derivatives – liabilities Net total Foreign exchange – assets derivatives Foreign exchange derivatives – liabilities Net total Foreign exchange derivatives – assets Interest rate derivatives – liabilities Interest rate derivatives – assets

Energy derivatives – liabilities 33

One to five years Less than one year Less than one year Principal value of

Less than one year Less than one year One to five years (xii) (iv) (v) (i) (ii) Interest rate derivatives – assets Derivative financial instrume Derivative financial Energy derivatives – assets Interest rate derivatives – liabilities Embedded derivatives – liabilities Energy derivatives – assets Derivative financial instruments financial instruments Derivative for trading held instruments Derivative financial

More than five years More than five Embedded derivatives – assets The principal value of derivative contracts of derivative value The principal (x) (xi) (viii) (ix) (iii) Principal value of energy derivatives the Group is exposed to from entering into derivatives. The principal value differs in scope and in basis from the esti from basis and in in scope differs value The principal note 31 (g). The pr disclosed in aggregated volumes, using valuatio estimated

– – (7) £m £m £m £m £m £m £m 11 d 2005 2005 2005 2005 low. 300 873 553 690 488 690 753 530 363 1,873 1,053 1,188 1,718 (1,110) (1,664) losures ery e realised. nts table table nts y a part within the ing sumptions cation of S 39 are the price is the price 6) 3 2 3 £m £m £m £m 3 89) 42) 16 75 67 ll occur either 2006 2006 2006 2006 not be realised 3 3 728 21 3 664 482 (500) (250) (2 (225) ( 1,244 1,446 2,00 (1, (1,098) (1,098)

financial instrume in accordance with IA in accordance e balance sheet date, for deliv e balance sheet rities, which provides an indi rities, which continued of the contract or for which balances therefore represent onl therefore balances commodity prices, and may not b ves in the derivative rivatives, and a summary of the terms and , are set out in ‘Effect of changes in as of changes in out in ‘Effect , are set r valued in the Financial Statements. The disc Financial the in r valued derivative financial instruments which are are which instruments financial derivative iled specific terms but comprise the follow but terms iled specific eatment of contracts tatements tatements sult of the contracts being traded or may contracts sult of the S lding commodity contracts at th e described under ‘UK markets’ and ‘North American markets’ be markets’ and ‘North ‘UK under e described from owned gas fields and power stations, energy procurement power stations, energy and from owned gas fields an rchases), and its range of matu and its range of rchases), values of derivative financial instruments are as follows: instruments are as values of derivative financial ial Statements. These fair value value Statements. These fair ial ange resulting from changes in in from changes ange resulting ge 97. The cash flows arising in relation to these contracts wi the commodity which is the subject the commodity which asset) and consists of the following balances: balances: asset) and consists of the following s entered into which are within the scope of IAS 39. scope of the s entered into which are within oup’s strategy for entering into energy de Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 nsitivities to changes in commodity prices tives are subject to a wide range of deta a wide range tives are subject to activities. The criteria for determining tr The criteria for determining activities. December 2006 included within energy derivati December 2006 included within energy

fe of the individual contracts, or as a re contracts, the individual fe of procurement and sales contracts constitute sales and procurement s are outside the scope of IAS 39 and are not fai s are outside the scope of IAS energy derivatives (sales and pu hases of gas and electricity: hases of gas and continued s in hedging relationships: hedging relationships: in s n exchange derivatives rest rate derivatives rest rate derivatives ntracts, is outlined on pages 92 and 93. Certain other commodity contract Certain other commodity The fair values represent the unrealised gains and losses from ho and the unrealised gains represent The fair values The net fair value of the contracts at 31 . Financial instruments that follow relate only to the fair values of contract that follow relate only to the fair conditions of these co Long-term gas sales contracts North America North Energy derivatives – liabilities 98 depending on market price movements. The Gr The market price movements. depending on The aggregated principal value of value The aggregated principal thematurity table onthe profile, is contained in pa underlying takes place over the li as physical delivery UK and Europe Short-term forward market purc The contracts included within energy deriva within The contracts included Energy derivatives – assets Derivative financial instruments held for trading: held instruments Derivative financial Energy derivatives – assets outlined in note 3. energy sales contracts. Certain of these in the Financ value is recorded scope of IAS 39 and whose fair of theoverall energy Group’s procurement The major methods andassumptions used in estimating the fair Energy derivatives Commodity pricethrough mixture risk is managed of production a One to five years Principal value of foreig Less than one year One to five years Principal value of inte Principal one year Less than 33 Energy derivatives – liabilities More than five years More than five More than five years More than five Net total Other Long-term gas purchase contracts gas purchase contracts Long-term Net total Derivative financial instrument Derivative financial

general components: and sensitivities’ below. and sensitivities’ in future periods, that are not indexedmarket price of to the on page 97 is a £1,098 million liability (2005: £690 million on page 97 is a The methods and assumptions applied in determining fair values ar and se in assumptions, The effect of changes fixed in advance of delivery. These fair values are subject to ch of delivery. These fair values fixed in advance

ut ut ended -term;

bination h for h for rded in ld be to ldwide hould hould ity in rices timated rt by using rt by using to e broker an ion liability). riod of d on the s. These es. e forecast considered gas and inst forward inst forward ilities at ilities 005: £170 mill anied by an increase in gas by an increase anied market participants wou market participants d significantly increas d significantly tain long-term contract tain long-term ported coal and that the price ported coal and that the lumes to those contracted at the illion liability (2 e of 20p/th for gas and £15/MW s are valued using commodity p using commodity s are valued s of LNG may be directed to either Europe s of LNG may be directed e to the net fair value assets of an es to the net fair value e ts of an estimated £651 million). A com ts of an estimated gas and £11/MWh for electricity is gas and £11/MWh the economic value of the contract; and of the contract; value economic the e the long-run marginal price of electric long-run marginal e the individually or in combination, would be combination, would or in individually ead (the margin between gas and carbon inp gas and margin between ead (the x (PPI). Fair values are discounted base are x (PPI). Fair values ice quotations in active markets and in pa in markets and in active ice quotations and interpolated to arriveand interpolated at monthly rat ces both within and outside the active pe and outside ces both within continental European gas prices in the medium e the subject of the contracts (primarily subject e the to be active for upto be active to two years, with reliabl od of the market at 31 December 2006 by rket, financial instruments are valued aga are instruments rket, financial ive assumptions, woul ive assumptions, e periods would decrease net fair value liab net fair value e periods would decrease lculation formulae of cer lculation formulae of competition between gas producers; and and competition between gas producers; onably reflect all factors that onably reflect all £91 million). The net fair value of commodity contracts of commodity value reco fair £91 million). The net December is a £262 m 2006 that was recognised in the Income Statement during in that the year the was recognised ill be dominated by the cost of im dominated by the cost ill be eases in gas andeases in electricity prices inactive period would the rnative assumptions would be accomp rnative assumptions each commodity in equivalent vo each commodity in equivalent dium-term although liberalisation of the European gas market s gas market of the European liberalisation dium-term although million (2005: an average increas new infrastructure or lower worldwide demand for gas. or lower worldwide demand new infrastructure active period financial instrument active period financial n techniques used to value commodity contracts at 31 December 2006 commodity contracts at 31 December used to value n techniques average increase of 15p/th for increase of average value liabilities of an estimated £35 million). liabilities of an estimated £35 value (2005: increase to the net fair value asse fair value (2005: increase to the net mber of independent external market experts; external mber of independent ce due to insufficient new infrastructure being put in place, or due to higher wor ices will occur in certain periods as cargoe certain periods in will occur ices Centrica plc Annual Report and Accounts 2006 et will lower prices during this time; during this will lower prices et

turity dates as available in the market, the in turity dates as available market expectations and reas market expectations period. Inperiod. the of the active period ma l indices such as the Producer Price Inde such as indices l oil and gas prices in the medium-term; oil and , if this were to result in increased were to result in , if this assumed that counterparties act to maximise assumed that counterparties uld significantly decrease forecast gas pri decrease uld significantly ices, carbon prices and the clean spark spr the clean and carbon prices ices, valuation techniques at 31 valuation techniques fired power stations are assumed to determin timated by reference in part to published pr reference in part by timated reasonably possible alternative assumptions, possible alternative assumptions, reasonably

mmodity contracts outside the active peri linkage between oil and gas prices; and ectricity prices in the active and inactiv prices in the ectricity and gas prices in the long-term; gas prices in the long-term; and tions, or a combination of these alternat or a combination tions, ssible at 31 December 2005 leading to an increas 2005 leading ssible at 31 December d outside the active period of the market: of the market: the active period d outside ces are derived for the commodities which ar derived for the commodities which ces are ill strengthen the direct linkage between UK ill strengthen the direct linkage between UK and kage between oil and gas prices; consider the UK markets for gas and electricity gas and electricity for UK markets consider the s incorporated in the valuatio s incorporated in the whose indices are incorporated in the price ca in the are incorporated whose indices continued

of coal showsthe some linkage price of oil; to a discontinuationbetweenlinkage of the European gas market the liberalisation in a degree of oversupply to the UK gas market resulting from lower oil prices and continued lin and continued lower oil prices lower supply to the UK gas market, for instan lower supply to the UK gas market, higher oil prices and continued strong strong and continued prices oil higher it is assumed that markets would allow the sale or purchase of sale it is assumed that markets would allow the forecast market price. UK coal prices are based on the assumption that market prices w market prices assumption that based on the are UK coal prices for contracts with volume optionality it is oil prices are based on the views held by a nu held by a on the views oil prices are based European gas prices will retain significant oil linkage in the me the in linkage oil significant will retain prices European gas prices between oil linkage weaken the electricity prices are derived from gas pr a potential oversupply of gas to the UK mark gas pr European interaction between US and or US markets; new gas infrastructure capacity w Management consider it likely that the occurrence of these alte of these the occurrence it likely that Management consider competition for gas supplies. prices and electricity sales prices). Gas- prices and electricity future; the UK for the foreseeable The total change in fair valueThefair invaluation estimated using total change techniques . Financial instruments instruments . Financial

ssumptions made in determining fair values 33

X X X X X X Either of the following alternative assump Either of the following prices both within an gas and electricity Effect of changes in assumptions and sensitivities X X X X X X X X X A assumption The most significant derived using assumptions that are based on quotes and published prices available for this published prices quotes and Outside the sheet date. balance at the market prices available Fair values of commodity contracts are es contracts are of commodity Fair values Management techniques. valuation UK markets 31 December 2006 by an estimated £425 million alternative assumptions wo of the following In combination the increase in gas and el in the increase In combination £686 million). decrease the net fair value liabilities for co decrease the estimated £43 million (2005: increase to the net fair The of changing impact to either of these as follows: include oil and oil products, coal, and genera oil products, coal, and and oil include yields on zero-coupon ma bonds with differing electricity) and for commodities electricity) and for consider in setting a price. Forecast pri Forecast a price. consider in setting the market: electricity was considered reasonably po reasonably possible at 31 December 2006. The impact of such incr 2006 by £382 at 31 December value liabilities decrease net fair and electricity prices in the active period of the market. An active in the prices and electricity the Financial Statements determinedthe Financial Statements using 31 December 2006 amounted to a loss of £117 million (2005: loss of amounted to a loss of £117 million (2005: 31 December 2006

ure ure le le ending ion). ase net value city was ilities at at ilities 005: nably nably at would at would rket prices n).

e and five years and vary dep five years and vary e and tive period would be to incre tive period would be ectricity is considered reaso ectricity is a measure of the Group’s expos measure a a measure of the Group’s expos measure a ssets of an estimated £681 mill ssets of an estimated The fair value impacts only concern fair value The The fair value impacts only concern fair value The continued . . for gas and £15/MWh for electri for gas and £15/MWh creases in commodity prices would be creases in commodity prices would be to commodity creases in d an average decrease in electricity prices of decrease in electricity average d an dicative of the changes th fair value in dicative of the changesfair value th in net fair value assets by £704 million). value assets by net fair g commodity contracts to reasonably possib g commodity contracts to reasonably possib g commodity contracts mptions would be to increase the net fair net fair the increase be to would mptions and an average increase in electricity prices of electricity prices in increase average and an periods would increase net fair value liab net fair value periods would increase tatements tatements Statements is primarily based on quoted ma Statements is primarily based on quoted S the balance sheet date. the balance 31 December 2006 by approximately £82 million (2 approximately £82 million December 2006 by 31 and electricity prices in the ac and electricity prices the net fair value assets of an estimated £661 million). assets of an estimated fair value the net ricity to be active for between on decrease to the net fair value a fair value decrease to the net and should not be construed as and should not be construed as ternative assumptions would be accompanied by a decrease in gas in by a decrease accompanied would be assumptions ternative 0 million (2005: increase net fair value assets by £777 millio fair value net 0 million (2005: increase an average decrease of 20p/th an average of 13p/th for gas and £9/MWh for el of 13p/th for gas and 31 December 2006. The impact of such in ricity prices in the active and inactive and ricity prices in the active to closing interest rates at the balance sheet date. to closing exchangeat rates Notes to the Financial Financial to the Notes at 31 December 2006. The impact of such de at 31 December future, as contractual positions change over time positions change as contractual future, future, as contractual positions change over time as contractual positions change future, Centrica plc Annual Report and Accounts 2006 date. These impacts are not necessarily in date. These impacts date. These impacts are not necessarily in date. These impacts anging the assumptions used for fair valuin the assumptions anging anging the assumptions used for fair valuin the assumptions anging ssible combination of these alternative assu of these ssible combination

ial instruments recorded in the Financial Financial in the recorded instruments ial increase in gas prices of 13p/thin (2005:increase 16p/th) 9p/thdecrease in (2005: gas prices of 15p/th) an ecember 2006 by £363 million (2005: decrease ecember 2006 by £363 million (2005: decrease s outside the active period of the market at active period of s outside the continued changes in commodity prices. in changes changes in commodity prices. commodity prices. in changes merican markets A Management consider an average an average Management consider Management consider an average an average Management consider In combination the decrease in gas and elect gas and the decrease in In combination Management consider it likely that the occurrence of these al of these the occurrence it likely that consider Management . Financial instruments 100 Fair values have been determined with reference with reference been determined have Fair values Interest rate derivatives with reference been determined have Fair values those contracts entered into which are within scope of IAS 39 the Foreign exchange derivatives The impacts disclosed above result from ch The impacts disclosed sheet balance alternative assumptions at the in the actually take place events occur if these to decrease net fair value liabilities at 31 December 2006 by £63 at 31 December liabilities to decrease net fair value £7/MWh (2005: £9/MWh) reasonably possible at 31 D value liabilities net fair increase on delivery point. The fair value of financ on delivery point. The fair value in active markets. £13/MWh (2005: £10/MWh) reasonably possible at North for gas and elect American markets the North Management consider The impact of changing to a reasonably po a reasonably to of changing The impact 33 to cash flow risk resulting from prices in the active period of the market. An average decrease of the market. An average period prices in the active liabilities for commodity contract for commodity liabilities alternative assumptions at the balance sheet balance at the alternative assumptions in the take place actually events occur if these those contracts entered into which are within of IAS 39 scope the considered reasonably possible at 31 December 2005 leading to a 2005 leading possible at 31 December considered reasonably by an estimated £431 million31 December 2006 (2005: decrease to ch above result from The impacts disclosed possible at 31 December 2006. The impact of such decreases in gas in gas such decreases 2006. The impact of possible at 31 December 2006 by £349 million (2005: liabilities at 31 December fair value decrease to the net fair value liabilities of an estimated £20 million). estimated liabilities of an the net fair value decrease to to cash flow risk resulting from

, toilet siphon and radiator valve breakdown; radiator valve breakdown; siphon and , toilet ice contracts will be the costs of the engi contracts will be ice nce inspection is performed to ensure i is all inspection nce iance Check, Plumbing and Drains Care, Kitc Care, Drains and Plumbing Check, iance of the contracts entered into, however ge of the contracts entered into, ted future cash flows under the contracts under the flows ted future cash of these uncertain events by undertaking of these uncertain fe of the contract as a result of emerge of the contract fe in the maintenance element of the contract element maintenance the in ling Protection Plus and Plumbing and Drains and Plus and Plumbing ling Protection with home services customers in the UK in services customers with home recognised on a straight-line basis over over recognised on a straight-line basis eer workforce employed by Centrica within employed by Centrica eer workforce costs within fixed fee contracts. fee costs within fixed act future cash flows are as follows: are as act future cash flows central heating care. If, at the initial vi central heating care. If, the contract. These plans incorporate both incorporate plans These contract. the exposures relating to ive motor and breakdown; and flame sensor and equity by approximately and equity £7 million. The re £258 million (2005: £231 million) and were exactly matched by expenses related to fixe by expenses were exactly matched re £258 million (2005: £231 million) and box, light switch, wall socket, circ socket, wall box, light switch, purchasers of these contracts against the risk against the contracts purchasers of these for over a 12-month period with adjustments ma for over a 12-month period with adjustments immediately to the In r cylinder and pipe work breakdown; d and no further cover provided; no further d and ier, dishwasher, fridge, freezer, cooker, dishwasher, fridge, ier, the contracts is uncertain. the contracts is uncertain. place within the contract period: contract the within place ions under the terms of its home services fixed ions under the terms of its home services claims are settled immediately and in full. full. and in are settled immediately claims Fixed fee service contracts fee service Fixed

Weather conditions and the seasonality of maintenance can impact can of maintenance seasonality and the Weather conditions significant maintenance or breakdownand issues; repair work are incorporated and maintenance caps on certain cost to repair. of prevalence and terms higher risk in an initial service visit is performed for service an initial service contract will be cancelle and maintena safety bi-annual or an annual ventormotor, circuit board, direct dr evaporator and condensermotor breakdown. fan washing machine, tumble dr wiring system, fuse fixed electrical boiler, radiator, controls, hot wate and gas cooker breakdown; heater wall heater, gas fire, water hot and cold water pipe, overflow, cold tank Cost to the of sales relates directly engin no limit to the numberno the limit to of call outs to carry out work includedwithin the selected agreement; and repair and caps on certain maintenance Appliance Care and Gas Appliance Check in Check Appliance and Gas Appliance Care ever inspection in maintenance one safety and Care); and Drains and Plumbing Appliance Care provision of labour and parts for repairs, dependent provision of labour and inspection in ever maintenance one safety and Service requests are sensitive to the reliability of appliances of appliances the reliability Service requests are sensitive to The costs of claims under the fixed fee serv the fixed under The costs of claims Fixed fee service contracts protect service contracts Fixed fee The key terms and conditions that imp The key terms and conditions The risk and level of service required with of service required level The risk and

mounts relating to fixed fee service contracts

Deferred income

service contracts. All The claims notified during the year we notified The claims Expenses Total revenue contracts. Any deficiency is charged contracts. Any deficiency is charged The Group considers the adequacy of estima The Group considers the adequacy X X Centrica actively manages the risk exposure the manages Centrica actively X X X X X X X X over a 12-month period with adjustments refl made to receivable by the customer which span the li receivable by the customer which pointcontract within term. the Revenue from fixed fee service contracts is fee service Revenue from fixed X X X X X

Fixed fee service contracts are entered into service contracts Fixed fee 34. uncertain future events taking uncertain future the fault. Centrica’s obligat the fault. Centrica’s given year. No further claims costs are accrued. costs claims given year. No further services. These costs are accounted services. These in the UK, and Heating Protection Plus, Coo Protection Plus, Heating UK, and in the Controls Care, Gas Appliance Care, Gas Appl Gas Appliance Controls Care, A significant credit risk, nor are there any credit significant in service requests would impact profit in service requests vary in accordance with terms and conditions vary in accordance with and household appliances, resulting in the transfer of an elemen the transfer in resulting appliances, and household continue until cancelled by either party to future cash outflows related to future events, in particular the number of call outs, the cost number of call the particular in future events, items affected. items affected.

t reflect dividend dividend able p has Principal activity activity Principal ending transportation t available. 2

water heater rental business heater rental business water Energy supply and home services Norwegian Sea and Northern Sea and Northern Norwegian continued ing and installation of gas heating systems year ended 31 December 2006.year ended The ship in one block. In addition the Grou addition one block. In ship in cash. Management considers it impractic considers Management cash. opriation of retained earnings in the year the retained earnings in opriation of ings of the valuation exercise are not ye are of the valuation exercise ings tatements tatements S and net assets net assets and % Group holding % Group in ordinary shares in ordinary cent to Centrica’s Morecambe fields. fields. to Centrica’s Morecambe cent eater Income Fund acquired the eater Income Fund acquired oration licences located in the located in oration licences d 100 holding company energy Renewable d 100 trading Wholesale energy A 100 trading Wholesale energy da 100 and home services Energy supply gland 100 trading energy Wholesale e (totalling £293 million) for the million) for the (totalling £293 e Country of Country Norway 100 Upstream exploration ipation in four expl four ipation in incorporation/formation incorporation/formation Notes to the Financial Financial to the Notes Centrica plc Annual Report and Accounts 2006 interest in three licences, with non-operator with licences, in three interest ted for in shareholders’ equity as an appr equity as an for in shareholders’ ted of the net assets acquired since the find since of the net assets acquired consideration of C$41 million (£18 million) in consideration of C$41 located in the East Irish Sea, adja located in the East Irish d Nigeria 100exploration Upstream ted England 100company Holding d) England 100generation Power mited England 100generation Power c USAcompany 100 Holding

(i) Principal undertakings Principal undertakings Events after the balance sheet date sheet after the balance Events

On 8 February2007 the Group’s subsidiary The Consumers’ Waterh In January 2007 the Group awarded partic was ubsidiary undertakings Segebel SA Belgium 50 Holding company 102 Joint ventures Limited Barrow Offshore Wind Coots Limited England 50 England 55 farm construction Wind CO Hydrocarbon Resources Limited Oxxio BV Group Inc Residential Services England USA 100 Netherlands 100 100 Gas production company Holding Energy supply Energy America LLC GB Gas Holdings Limited Li Windfarm Foudland Glens of England USA 100 100 Holding company Energy supply Direct Energy Marketing Limited Direct Energy Marketing Limited Direct Energy Services LLC LimitedDyno Holdings Electricity Direct (UK) Limited Cana USA England England 100 100 100 Energy supply Home services Coastal Energy Limited DER Development No. 10 Limited Direct Energy Marketing Inc Canada England US 100 85 Gas production Clean coal generation (formerly Humber Power Limite Centrica Storage Limited Holdings In Centrica US England 100 storage Gas Centrica Resources (Norge) AS Centrica RPS Limited Limited Centrica SHB England 100 Power generation Centrica PB Limited Energy Limited Centrica Renewable Centrica Limited Resources Centrica Resources (Nigeria) Limite Englan England England 100 100 Gas and oil production Power generation Centrica KPS Limited CentricaLangage Limited Limi Centrica Overseas Holdings England England 100 100 generation Power generation Power CentricaLimited Gamma Holdings CentricaHoldings Limited Centrica Limited KL England England 100 England 100 100 Holding company Holding company Power generation Centrica Energía SL Centrica Energía GmbH Centrica Energie Centrica Energy Operations Limited England Germany Spain 100 100 100 Power generation trading energy Wholesale Energy supply Centrica America Limited Limited Centrica America CentricaLimited Barry CentricaLimited Brigg CentricaCanada Limited England England England Canada 100 100 100 100 Holding company and production gas company Holding generation Power Power generation Accord Energy (Trading) Limited British Gas Services Limited British Gas Trading Limited En England England 100 Servic 100 Energy supply 31 December 2006 S Accord Energy Limited Englan 36. The Directors propose a final dividend of 8.0 pence per shar of 8.0 pence propose a final dividend The Directors 35. will be submitted for formal approval at the Annual General Meeting to be held on 14 May 2007. These Financial Statements do no do Statements Financial These 2007. May 14 on be held to Meeting General Annual the at approval formal for will be submitted be accoun will which payable, this dividend 31 December 2007. 31 December 2007. of Toronto Hydro Energy Services Inc for to disclose information about the fair value to disclose information North Sea. The Group will have an operated Group will have North Sea. The exploration licences been awarded two

B of the red to idiary idiary s shown Statements ber 2002. On 27 April 2006, 2002. On 27 April 2006, ber ated basis within the Financial nts Limited disposed of its 19.9% interest Up until 23 June 2006, DEML Investments 2006, Up until 23 June Holdings Limited, which is a direct subs a direct is which Limited, Holdings of the Group. Thehas Group determined that the e Directors’ opinion principally affect the figure affect Directors’ opinion principally e and net assets net assets and activity Principal a Centrica Group company, exercises management of the management Group company, exercises Centrica a % Group holding % Group in ordinary shares in ordinary mmenced operating on 17 Decem mmenced operating Holding Limited Holding Partnership, a subsidiary of theClass Fund. and is included on a consolid on is included and Country of Country ffice is Millstream, Maidenhead Road, Windsor SL4 5GD. Road, Windsor Maidenhead Millstream, ffice is l% interest in the Fund (2005: 19.9%). in the l% interest incorporation/formation incorporation/formation Centrica plc Annual Report and Accounts 2006 ts of the Fund and attracted comparable voting rights to units of the Fund. Units

nts Limited. On 23 Junents Limited. On 2006, DEML Investme held by the Company, except for Centrica except for Centrica the Company, held by

Hydrocarbon Resources Limited, Hydrocarbon Resources e arrangements. The Fund co arrangements. e Fund (the Fund) is also consolidated as part as part consolidated is also Fund) (the Fund only given for those subsidiaries which in th only given for those subsidiaries England –production Gas (ii) continued

(i)

of the Group. It has no share capital. partner. Its registered o partnership as the general undertaking. The information is undertaking. The information is Statements. Financial in the

6. Principal undertakings undertakings 6. Principal

(ii) partnership’ is a ‘qualifying LP Production Gas Centrica The 3

(i) are indirectly undertakings All principal Fund are traded on the Toronto Stock Exchange. Exchange. Stock Toronto the on are traded Fund Limited of the held 100% class B exchangeable units in Waterheater uni into units were exchangeable exchangeable its wholly-owned subsidiary, DEML Investme held a ni Therefore, at 31 December 2006 Centrica is a subsidiary due to the substance of th the substance is a subsidiary due to was transfer plc, Centrica of subsidiary a wholly-owned Limited, Marketing Energy Direct by Fund the held in interest 19.9% the The Consumers’ Waterheater Income The Consumers’ The Centrica Gas Production LP Paris Generation LP USA 100 Power generation Direct Energy Resources Partnership Frontera Generation LP Canada 100 USA 100 Gas production Power generation Direct Energy Partnership Direct Energy Partnership Canada 100 supply Energy CPL LP Retail Energy Direct Energy LP USA USA 100 100 Energy supply Energy supply Partnerships Partnerships Bastrop Energy Partners LP USA 100 generation Power 31 December 2006 WTU Retail Energy LP USA 100 Energy supply

the part of the Remunerationthe part the part of the Remuneration tors’ Report is consistent ts by themade Directors in the atements and the part of the examination, on a test basis, basis, on a test examination, Kingdom Generally Accepted e of the Company’s affairs as as affairs e of the Company’s y Financial Statements, and of y Financial eland) issued by the Auditing by the Auditing eland) issued any Financial Statements and any Financial ich we considered necessary ich we considered give reasonable ent evidence to lied and adequately disclosed. disclosed. adequately lied and ether caused by fraud or other ether caused by includes an assessment of the of the assessment an includes e Members of Centrica plc plc of Centrica e Members

We planned our and performed audit so as to obtain all the Remuneration Report to be audited have been properly prepared Act 1985; the Companies with and in accordance in the Direc given the information Statements. Financial Company with the parent the parent Company Financial Statements give a true and fair fair Statements give a true and Financial the parent Company with United accordance view, in stat Accounting Practice, of the at 31 December 2006; St Financial Company parent the

X LLP PricewaterhouseCoopers Auditors Registered and Accountants Chartered London 2007 22 February Basis of audit opinion We conductedour audit in accordance with International Ir on Auditing (UK and Standards includes An audit Practices Board. parent in the disclosures and amounts to the relevant of evidence and Statements Financial Company also It audited. Report to be significantestimates and judgemen Compan preparation of the parent are appropriate to the Company’s policies whether the accounting consistently circumstances, app Opinion In our opinion: X X information and explanations wh explanations information and in order to provide us with suffici Comp assurance that the parent free Report to be audited are Remuneration the part of the wh from material misstatement, irregularity or error. In forming our opinionalso evaluated the we overall adequacy of the presentation of information in the parent Statements and Company Financial Report to be audited. uditors’ Report to th to Report uditors’ A nts or material material nts or Independent Independent Centrica plc Annual Report and Accounts 2006 uditors uditors A rds, if we have not received rds, if we have not received ial Statements and the part part Statements and the ial e related notes. Thesee related notes. parent we require for our audit, or or for our audit, we require s’ Report – Governance) e set out in the Statement e set out in the Statement erein. We have also audited also audited have erein. We our prior consent in writing. our prior consent in apparent misstateme apparent e opinion, has been prepared for prepared been has e opinion, have been prepared under under prepared have been applicable law and United and United law applicable mbers as a body in accordance ose or to any other person to Standards on Auditing (UK and the year ended 31 December 2006. 31 December the year ended levant legal and regulatory legal and levant the Companies Act 1985. We our opinion the information the information opinion our uditors’ report to the members of Centrica plc A Our responsibility is to audit the parent Company Financial We have reported separately on theFinancial Group We read other information contained in the Annual Report and and Report Annual the in contained information other We read In to addition we report you if, in our Company opinion, the We report to you our opinion as to whether the parent 104 save where expressly agreed by save where expressly with Section 235 of the Companies Act 1985 and for no other purpose. We do not,this in opinion, giving accept or assume responsibility for any other purp whom this report is shown or into whosehands it may come audited in accordance with re audited in accordance International requirements and th including Ireland). This report, Company’s me and only for the of Directors’ Responsibilities. of Directors’ Responsibilities. Statements and the part of the Remuneration Report to be the Remuneration Report and the parent Company Financial Financial Company parent and the Report Remuneration the with Statements in accordance Generally Kingdom (United Standards Accounting Kingdom ar Practice) Accepted Accounting Statements of Centrica plc for plc Statements of Centrica Respective responsibilities of Directors and Report, Annual the preparing for responsibilities Directors’ The the accounting policies set out th policies set out the accounting the informationin the Remuneration Report that is described audited. as having been of Centrica plc for the year ended 31 December 2006 which 2006 31 December plc for the year ended of Centrica th Sheet and Balance comprise the Statements Financial Company Independent Statements Financial Company parent the audited We have inconsistencies with the parent Company Financial Statements. Our Our Statements. Financial Company parent the with inconsistencies information. other any to extend do not responsibilities Chairman’s Statement, the Directors’ Report, the unaudited part of the of the part unaudited the Report, Directors’ the Statement, Chairman’s Record Year Five Reserves, Liquid and Gas the Report, Remuneration our for implications the consider We Information. and Shareholder report if we become aware of any consider whether it is consistent with the audited parent Company Company parent audited the with consistent is it whether consider the only comprises information other The Statements. Financial has not kept proper accounting reco and explanations information all the remuneration regarding Directors’ specified by law if information is not disclosed. and other transactions given in the Directors’ Report (comprisinggiven inDirectors’ Report – the Directors’ the Director and the Business Review Statements. Financial Company parent the with is consistent of the Remuneration Report to havebe audited been properly with prepared in accordance also report to you whether in Company Financial Statements give a true and fair view and fair view and Statements give a true and Company Financial Financ Company parent the whether

2 8 1 1 £m 3 16 84 3 3 (25) 2006 657 608 226 ,7 ,7 (168) 2,8 3 2,057 2,141 5,146 5,762 2,884 5,025 3 (2,878) (1,269) (2,710)

x x x iii vi xi ix vii vii viii 24 Notes Notes

authorised for issue of Directors on by the Board 22 February 20 atements, along with notes 24 and 25 to the Group Financial Statem Centrica plc Annual Report and Accounts 2006

Borrowings Other creditors Borrowings

hareholders’ funds am Laidlaw Laidlaw am Phil Bentley Capital redemption reserve Share premium account account Share premium Net assets Cash at bank and in hand hand in and bank Cash at

The notes on pages 106 to 110 form part of theseSt Financial S Executive Chief Director Finance Group The on Financial pages 105 to Statements 110 were approved and S Called up share capital up share capital Called Capital and reserves – equity interests

Creditors (amounts falling due after more thanCreditors (amounts falling due after more year) one Total assets less current liabilities Net current assets Creditors (amounts falling due within one year) Creditors (amounts Current asset investments Current asset investments Current assets year) within one due Debtors (amounts falling v

Tangible assets Tangible assets 31 December Fixed assets Company Balance Sheet Balance Company

Other reserves Provisions for liabilities and liabilities Provisions for charges Investments in subsidiary undertakings subsidiary undertakings Investments in iv and were signed on its behalf by: and were signed on its behalf

roup r the at are- fit and fit and ding the stimate an be t. ity-settled vestments mes of the ased on the consistent consistent s and n monetary n monetary al values, al values, 1985. The Company’s y provisions for impairmen ich it makes equity-settled sh ich it necessary. Current asset in Current asset necessary. schemes. The charge to the pro The charge schemes. -based vesting Equ conditions. heet heet are treated as increases in equity ove in are treated as increases S on to reflect the possibility of early exercise on to reflect the possibility at fair value at the date of grant (exclu date at fair value at the schemesnote as described in 30 to the G 2 to the Group Financial Statements) c 2 to the Group Financial of the Companies Act Act of the Companies s in subsidiaries, based on the Group’s e based on the Group’s s in subsidiaries, od. Details of the defined benefit sche benefit Details of the defined od. nte Carlo simulation to predict the total oyees of the Company, the fair value determined the fair oyees of the Company, assets and liabilities in the schemes on a the schemes in assets and liabilities the date of the transaction. Monetary transaction. asset the date of the rates of exchange. Exchange differences o differences Exchange rates of exchange. -based vesting conditions. e total shareholder return performance provision for impairment as provision for impairment unt on a straight-line basis. basis. a straight-line unt on applicable UK accounting standards and under the historical historical under the standards and UK accounting applicable accumulated depreciation and an accumulated p Financial Statements, under wh Statements, p Financial e Directors’ Report – Corporate Responsibility on page 26, the – Corporate Report on page Responsibility e Directors’ they were defined contribution defined contribution they were tes sufficient to write off the cost, less estimated residu tes sufficient a corresponding increase in equity over the vesting period, b justed for the effect of non market effect of non justed for the for the effect of non market effect of non for the ate to each of the different schemes as follows: schemes as follows: different ate to each of the ber of the Group’s defined benefit pension ber of the Group’s defined benefit e to employees of the Company’s subsidiaries e to employees of the ettled share-based payments are measured are measured ettled share-based payments Notes to the Company Balance Balance Company to the Notes Centrica plc Annual Report and Accounts 2006 lives at periods ranging five to 20 years. from to identify its share of the underlying underlying share of the to identify its yable to the schemes in the accounting peri yable to the schemes in the accounting e Group’s accounting policies detailed in note in policies detailed accounting e Group’s are translated into sterling at closing translated into are the Company as permitted by Sectionthe Company as permitted 230(3) onding increase in the Company’s investment in the Company’s onding increase lance Sheet at cost, less any a straight-line basis at ra shareholder return performance theMarket value date of grant on A Monte Carlo simulation to predict th Black-Scholes option life assumpti adjusted Black-Scholes using an theMarket value date of grant on A Black-Scholes valuation augmented by a Mo e Balance Sheet at cost, less e Balance December 2006 was £1,939 million (2005: £11 million). 2006 was December are translated at the rate of exchange ruling at exchange ruling at the rate of are translated g conditions). For share-based payments to empl g conditions). For share-based e charged to the profit and loss acco e charged to the profit and loss n to the profit and loss account. the profit and n to st and net realisable value. value. st and net realisable e Companies Act 1985.e Principal accounting policies of the Company of the Company policies accounting Principal Fair value is measured using methods appropri methods using is measured Fair value

ccounting principlesccounting 106 are stated at the lower of co Pensions and other retirement benefits num employees participate in a The Company’s Rentals under operating leases ar Rentals under operating leases Investments are held in the Ba Fixed asset investments Tangible fixed assets are included in th in are included Tangible fixed assets are depreciated on Tangible fixed assets of individual assets over their estimated useful Leases liabilities denominated in foreign currencies foreign currencies in denominated liabilities are take assets and liabilities Tangible fixed assets Share Award Scheme Foreign currencies currencies foreign Transactions in LTIS: 2006 TSR awards Sharesave ESOS LTIS: awards up to 2005 LTIS: 2006 EPS awards Employee shareschemes in th schemes, detailed share of employee a number The Group has RemunerationReport on pages 34 to 36, andnote in 25 to the Grou Basis of preparation for account is presented No profit and loss A with accordance in has been prepared Sheet Balance The Company th and cost convention i. Financial Statements. The Company is unable The Statements. Financial with th Group (accounted for in accordance effect of non-market-based vestineffect of non-market-based the grant date is expenseda straight-line on basis together with based payments to certain Equity-s employees. profit after tax for the year ended 31 year ended profit after tax for the found to the in Group note Financial 30 Statements. and reasonable basis and therefore accounts for the schemes as if for the schemes accounts basis and therefore and reasonable pa equal to the contributions loss account is share-based payments which are made availabl are which share-based payments vesting period of the award, with a corresp Group’s estimate of the number of awards that will vest and ad that will vest and of awards the number Group’s estimate of of the number of awards that will vest, and adjusted that will vest, and of awards of the number

and vehicles . to the can can at the has been has been x is not tax rates te where te n), re Financial Financial e 33 to the million). million).

o tax only if al of the ve occurred at ve om were employed inUK. the ates only to the extent that, past earnings in the future future the past earnings in ed by the balance sheet date. date. sheet ed by the balance versed, at the balance sheet da sheet the balance versed, at its financial instruments because the Compa because instruments its financial ofits and its results as stated in the ofits and its results the Group, and are disclosed in note 2 are the Group, and sheet date, there is a binding agreement t binding agreement date, there is a sheet periods in which the timing differences are differences timing the which periods in ected to be paid (or recovered) using paid (or recovered) ected to be the riods different from those in which they a they in which from those riods different e incorporated into the disclosures in not in e incorporated into the disclosures laries costs of £91 million (2005: £90 millio laries nt benefit costs of £25 million (2005: £18 nt benefit e gain will be rolled over, being charged t be rolled over, e gain will was 1,529 (2005: 1,580), all of wh nt policies are consistent with those of the Group and are des the Group and with those of are consistent nt policies

ognised only when, on the basis of all available evidence, it evidence, available basis of all on the ognised only when, overseas subsidiaries and associ and overseas subsidiaries a binding agreement to distribute a binding enacted or substantially enact or enacted that have originated, but not re that have originated, e balance sheet date. date. sheet e balance taxable profits in the foreseeable future from which the revers future from which the foreseeable profits in taxable continued oviding detailed disclosures in respect of oviding detailed disclosures in respect of instruments are consistent with those of are consistent instruments Centrica plc Annual Report and Accounts 2006 sets are revalued unless, by the balance balance by the unless, are revalued sets

x rates that are expected to apply in the to apply in the x rates that are expected e differences between the Group’s taxable pr differences between e d foreign tax, is provided at amounts exp tax, is provided d foreign it is more likely than notit thattaxabl the ntially enacted by th by ntially enacted pected to arise on sale has been recognised in the Financial Statements. Deferred ta Statements. Deferred Financial in the recognised on sale has been to arise pected gains and losses in tax assessments in pe tax assessments losses in and gains loss charge for the year are wages and sa year are wages charge for the loss ed accounts and its financial instruments ar instruments and its financial ed accounts £6 million) and other pension and retireme pension and other £6 million) and s and Uncertaintiespages 21 to 23 on andnote in 33 to the Group Financial Statements sult in an obligation more to pay tax in the future, or a right future, to pay less tax inha the idiary or associate.

Tangible fixed assets Directors and employees Directors and employees

Deferred tax is measured at the average ta measured Deferred tax is basis. non-discounted on a measured Deferred tax is The average number the of employees of Company during the year The Company is exempted by FRS 25 from pr The Company is Deferred tax is recognised in respect of theDeferred tax is recognised retained earningsof Deferred tax is not recognised when fixed as not recognised when fixed Deferred tax is A deferred tax asset is regarded as recoverable and therefore rec is regarded as recoverable and therefore A deferred tax asset Deferred tax is recognised in respect of all timing differences differences of all timing in respect is recognised Deferred tax

1 December 2006 1 December 2006 1 December 2006 expected to reverse, based on tax rates and laws that have been that tax rates and laws expected to reverse, based on balance sheet date, dividends have been accrued as receivable or as receivable accrued have been date, dividends sheet balance entered into by the subs the balance sheet date. Timing differences ar differences date. Timing the balance sheet of inclusion from the Statements that arise transactions or events that re transactions or events

Additions i. of the Company policies Principal accounting

Net book value 3 1 January 2006 Depreciation and amortisation 1 January 2006 Cost iii. social security costs of £9 million (2005: costs social security Included within the Company’s profit and Company’s the Included within ii. is included within the Group’s consolidat Statements. Financial Group Financial instruments for financial accounting policies The Company’s and when the replacement assets are sold. assets replacement the and when the revalued assets and the gain or loss ex the gain and the revalued assets assets are sold and recognised when fixed underlying timing differences can be deducted. be deducted. can differences underlying timing be regarded as more likely than not that there will be suitable not that there likely than be regarded as more recognised in the Financial Statements. Statements. Financial recognised in the Current tax, including UK corporation tax an corporation UK including Current tax, or substa have been enacted and laws that Taxation 31 December 2005 3 Charge for the year Charge for the Disposals 3 Disposals in the Directors’ Report – Principal Risk in the Group Financial Statements. The Company’s financial risk manageme risk financial Company’s The Statements. Financial Group

3 6 (5) £m £m £m £m £m £m 53 After 2005 2005 shares 3,467 3,529 2,062 2,057 1,139 one year ts. rdance subsidiaries’ subsidiaries’ subsidiary, n Investments in in Investments of the within one year rest rate

7 Amounts falling due due Amounts falling £m £m £m £m 70 11 2006 2006 608 Within 5,058 5,146 one year

377 – 2005 – 443 422 422

66 – – £m 88 After After 1,181 1,269 one year continued accounts of the Group. In acco 2006 2006 – heet heet £m included. Disclosures in respect in respect Disclosures included. 68 S 100 168 Within oyee share schemes in Group undertakings. Group in oyee share schemes one year spectively to the Group Financial Statemen spectively to the Group Financial

trading of £28 million (2005: £9 million), inte 30 to the Group Financial Statements). by the Law Debenture Trust, on behalf of the Company, Trust, on behalf of the Company, Law Debenture by the cluded within the consolidated within the cluded d foreign exchange derivatives held for hedging of £11 millio d foreign exchange the share capital of GB Gas Holdingsto a newly-formed Limited respect of the Company is not Company is not respect of the of the share capital of Centrica Holdings Limited.Centricaof the share capital of ecrease in shares to be issued under empl under be issued in shares to ecrease Notes to the Company Balance Balance Company to the Notes Centrica plc Annual Report and Accounts 2006 tives is equivalent to the carrying value. foreign currency derivatives held for foreign currency derivatives rumentsnotes are provided in 20 and 33 re rica Unapproved Pension Scheme (note

(i)

(i) Borrowings

(2005: £nil). The fair value of these deriva Commercial paper has a face value of £102 million (2005: £382 million). has a face Commercial paper derivatives held for trading of £31 million (2005: £44 million) an derivatives held for trading of £31 million Derivative financial instruments comprise Derivative financial instruments Additions andrepresent disposals the net d Current asset investments Current asset investments Debtors Investments undertakings in subsidiary

1 December 2006 Centrica Holdings Limited, for considerationHoldings Limited,Centrica of 100% for DuringCentrica the year plc transferred 100% of its holding in

Commercial paper Commercial paper Prepayments and other accrued income Prepayments and other accrued 108 Group’s borrowingsinst and other financial (i) disclosures are in related and instruments financial The Company’s with the requirements of FRS 25, further detailed disclosure in Bonds Amounts falling due due Amounts falling overdrafts and Bank loans vii. Money market investments market investments were held £29 million (2005: £31 million) of money of the Cent as security in respect vi. (i) Amounts owed by Group undertakings undertakings Group by owed Amounts instruments Derivative financial Other debtors v. (i) Cost 1 January 2006 Additions and disposals iv. 3

(29) (22) 109 2006 Total 2005 3 145 ( ,505 3 1,910 1,9 3,526 3,773 profit 31 December turing ivalent to within one year thin the erest rate : £1 million) lised tax 1 3 Amounts falling due due Amounts falling £m £m £m 3 22 68 58 £m £m 2006 Profit account 2,8 2,559 2,710 and loss released any’s profit for the Unused and

1 £m £m £m £m The National Insurance Utilised Utilised reserve reserve hedging hedging 75 pence). The majority Cash flow in the year in the £m £m £m £m 16 Profit presented. The Comp The presented. charge Capital ir value of these derivatives is equ ir value of these reserve and loss redemption redemption ancy costs associated with the restruc ancy costs £26 million), primarily relating to unuti million (2005: £340 million). The Company’s interest rate derivatives are included wi ve Scheme liabilities. liabilities. ve Scheme tives held for hedging of £12 tives held for hedging million (2005 trading of £13 million (2005: £94 million), int trading of £13 million £m £m £m £m 2006 657 Share account premium 1 January

December 2006 (31 December 2005: 254. utilise these losses within the foreseeable future. the foreseeable losses within utilise these million) before dividends paid of £384 million) before dividends paid of £384 undertakings of £1,967 million (2005: £nil). £1,967 million (2005: of undertakings anies Act 1985, no profit and loss account is Centrica plc Annual Report and Accounts 2006

lly represent estimated liabilities for redund represent estimated liabilities lly foreign currency derivatives held for held for foreign currency derivatives hedging of £11 million (2005: £5 million). The fa hedging of £11 million rivatives. FurtherCompany’s details of the n (2005: £45 million) interest rate deriva n (2005: £45 million) ––6 – ––6 n tax assets amounted to £16 million (2005: n tax assets amounted to £16 million (2005: (ii) ote 33 to the Group Statements. Financial onal Insurance in respect of Long Term Incenti of in respect Insurance onal

(i) – – – 1,939 – – – (i) Other creditors Other

the carrying value. derivatives held for trading of £32 millio derivatives held for trading held for derivatives and foreign currency financial instrument disclosures in n financial instrument disclosures in As permitted by section 230(3) of the Comp financial year was £1,939 million (2005: £11 Derivative financial instruments comprise Derivative financial instruments Reserves Provisions for liabilities and charges includes dividends received from subsidiary received from dividends includes Arising on revaluation of interest rate de

Restructuring and other provisions principa Restructuring and

1 December 2006 announced in 2005 and 2006 and Nati announced in 2005 pence at 31 price of 354.50 provision was based on a share Accruals and deferred income income Accruals and deferred Derivative financial instruments instruments Derivative financial Repurchase of shares Repurchase of – 1 – (23)

(ii) (i) provided Value of services – – – 23 1 January 2006 Profit for the year 595 15 (5) 1,305 of the amounts are expected to be utilised between 2007 and 2009. expected to be utilised are of the amounts x. Potential unrecognised deferred corporatio Potential unrecognised does not expect to be able to losses. The Company Restructuring and other provisions 43 14 (20) (12) ix. (i) Taxation and social security Taxation and social Amounts owed to Group undertakings Trade creditors viii. 3 Share issue 62 – – – Dividends – – – (384) flow hedges of cash Gains on revaluation Dividends– – – Employee share option schemes: Employee share option schemes: Exercise of awards – – – (29)

) – 3 9 1 3 2 (3) £m (5) £m £m 84) 3 3 2 05 11 21 21 (29) (2 2005 3 3 res (681) (340) (388) ( 1, 1,9 2,8 2,815 2,134 account t reflect ng ng n- re was dividend dividend dit risk ny to third Profit and loss Profit and ending

3 ) £m £m – – 4 1 9 6 3 3 £m 3 3 3 2 65 Other 84) (29) (2 2006 3 2,79 ,7 ( 1,597 3 2,1 1,9

– 1,939 – (23) – (384) 8

£m £m 42 1,263 23 – 3 (27) (2) reserve reserve continued Share options Share options heet heet to £51 million (2005: £16 million). S n) in respect of land and buildings. land and n) in respect of year ended 31 December 2006. The the Company’s interest rate and foreign the Company’s interest y). The Company has guaranteed operati guaranteed has y). The Company financial guarantees issued by the Compa financial opriation of retained earnings in the year opriation of retained earnings in the ing activities. At 31 December 2006 the cre

ry undertakings of £1,967 million (2005: £nil). undertakings ry and £2 million of computer lease commitments in relation to no in relation of computer lease commitments and £2 million derivatives and bonds designated as the hedged item and a a hedged item and designated as the derivatives and bonds of guarantees and indemnities. The maximum credit risk exposu The maximum and indemnities. of guarantees capital expenditure amounting capital expenditure e (totalling £293 million) for the for the (totalling £293 million) e exchange derivatives. Further details of Further exchange derivatives. und in note 24 to the Group Financial Statements. Notes to the Company Balance Balance Company to the Notes Centrica plc Annual Report and Accounts 2006 Centrica plc was £1,612 million (2005: £832 £1,612 million). plc was Centrica provided in24 and notes 25 to the Group Financial Statements. The repurchase of sha y (2005: £1 million and £5 million respectivel £5 million £1 million and y (2005: the financial instrument disclosures in note 33 to the Group Financial Statements. nancial instruments with the exception of with the exception instruments nancial ted for in shareholders’ equity as an appr equity as an for in shareholders’ ted at 31 December 2006 of £7 million (2005: £7 millio at 31 December 2006 of £7 million iaries’ gas and power procurement and bank iaries’ Group Financial Statements) Statements) Financial Group

further analysed as follows: analysed further any includes dividends received from subsidia includes dividends received any (i) to the

costs of £nil (2005: £1 million).

(ii)

(i) continued Commitments and indemnities

£17 million gain on re-measurement of foreign £17 million gain on re-measurement within are included currency derivatives Includes a £2 million gain on re-measurement of interest rate re-measurement on gain £2 million Includes a Movements in shareholders’ funds Details of the repurchase of shares can be fo can be of shares Details of the repurchase Profit attributable to the Comp

Guarantees and indemnities Capital expenditure Lease commitments Details of the Company’s share capital are Company’s share capital are Details of the

1 December 1 December 2006 Repurchase of shares Repurchase of 110 parties, principally to support its subsid parties, principally issued by guarantees financial exposure under (c) Refer to note 31(e) to the Group Statements for details Financial for all fi represented by the carrying amount (b) and buildings land At 31 December 2006, there were £1 million of Compan leases for the operating cancellable commitments of a subsidiary undertaking (a) for contracts had placed At 31 December 2006, the Company xii. 3 8.0 pence per shar The Directors propose a final dividend of Share issue Repurchaseshares (note of 24 year for the financial funds shareholders’ Net movement in Purchase of treasury shares provided Value of services Exercise of awards Gains on revaluation of available for sale assets for sale assets of available Gains on revaluation shareholders to Dividends paid Employee share option schemes: 1 January January 1 Profit attributable to the Company hedges cash flow Gains/(losses) on revaluation of xi. (ii) (i) Employee share option schemes: schemes: Employee share option provided Value of services 1 January 2006 Profit for the year Dividends The profit and loss account can be can account and loss The profit x. Reserves x. Reserves Exercise of awards 3 this dividend payable, which will be accoun will which this dividend payable, will be submitted for formal approval at the Annual General Meeting to be held on 14 May 2007. These Financial Statements do no do Statements Financial These 2007. May 14 on be held to Meeting General Annual the at approval formal for will be submitted 31 December 2007. (i) is stated net of transaction is stated net of

1,989 1,791 3 272 North North America America 4 – (4) – (5) – UK UK 53 2 28 3 15 – 42 (186) (29) 1,685 304 1,519 the Rough field associated with Centrica associated with Centrica field the Rough in the UK and North in the UK America. Estimatesmanageme are made by Centrica plc Annual Report and Accounts 2006 Gas and Liquid Reserves (Unaudited) (Unaudited) Reserves and Liquid Gas Galleon field (37 billion cubic feet reduction). cubic (37 billion field Galleon 9 – 9 (iv) h Morecambe, North Morecambe, Statfjord and North Morecambe, h Morecambe, tion in the Statfjord field. h America are Medicine Hat and Entice. Hat and Entice. are Medicine h America sate and natural gas liquids (NGL). natural gas sate and (38) (5) (38)

(i) rest inHewett the field.

(ii) (iii)

Reflects the disposal of inte Reflects the disposal field. development of the Davy East new Reflects the Includes revised reserves estimate for the Includes revised Includes the 4.84% equityacquisi

The principal fields in the UK are Sout are in the UK fields The principal

1 December 2006 1 December 2006

(iv) conden oil, reserves include Liquid (iii) (i) (ii) Revisions of previous estimates Estimated net proven and probable reserves of liquid (million barrels) 1 January 2006

Revisions of previous estimates Estimated net proven and probable reserves of gas (billion cubic feet) 1 January 2006 The Grouphas estimated proven and probablegas and liquid reserves Purchases of reserves in place 3 Production 3 Production Extensions, discoveries and other additions Disposals of reserves in place Disposals of reserves Purchases of reserves in place Purchases of reserves Storage. The principal fields in Nort in fields principal Storage. The

) ) ) – – – – 3 7 3 – 3 3 £m £m 95 87 14 £m 17 (11) 2006 2006 2006 102 686 228 22 (4. 850 (862) (155) 19.4 Pence (11 (720) (48 (112) ,918) 1,442 3 1,477 4,195 1,642 (1,527) (2,010) ( 16,450 £m £m £m £m £m £m 2005 2005 2005

5 (9) 3 12 £m £m 80 – £m £m £m £m 2004 2004 2004 2004 2004 2004 Restated to IFRS IFRS to Restated Restated to IFRS IFRS to Restated Restated to IFRS IFRS to Restated £m £m £m £m £m £m 2003 2003 2003 2,737 2,308 2,442 ge in accounting policy. £m £m £m £m £m £m 2002 2002 2002 As reported under UK GAAP As reported under UK As reported under UK GAAP As reported under UK As reported under UK GAAP UK As reported under

Pence Pence Pence Pence Pence Pence Pence Pence tion and exceptional charges under UK GAAP, under tion and exceptional charges were restated for the chan Five Year Record Year Record Five Centrica plc Annual Report and Accounts 2006 15.2 16.8 18.1 18.2 15.2 16.8 18.1 exceptional items under IFRS. items under exceptional (iv) ations 14,345 17,931 11,361 13,448 ations14,345 17,931 11,361 s, and certain re-measurements re-measurements s, and certain ng operations before goodwill ng operations before share 11.4 11.8 38.0 27.4 g goodwill 1,813 1,614 1,567 1,739 to the Group to the 478 500 1,591 1,012 ts 2,865 2,827 3,791 4,490 2,865ts 2,827 3,791 ventures and associates: and associates: ventures (40) (27) – – (40) (27) – (iii) 1 December 1 December 3 3 73 93 – – 73 93 –

(ii) (ii) 2 4 – – 2 4 – (i) (i) Discontinued in 2005. Discontinued in 2003. amortisa goodwill Adjusted earnings per share exclude and and certain re-measurements Discontinued in 2004. 1 December 3

t (i) (ii) Other operations Other 5 – 1 2 Onetel The Consumers’ Waterheater Income Fund (non-recourse) debt (196) (216) (217) (532) 112 Disposals and acquisitionsDisposals and Cash (outflow)/inflow before financing (918) (935) 652 292 1,766 615 Cash operating inflow before exceptional activities from paymentsExceptional payments Netflow from investing cash activities 733 992 1,294 1,192 (16) – 497 (25) (529) (48) Cash flows Year ended (iii) (iv) On implementation in 2004 of UITF 38, values for 2003 (1,155) (53) (725) (1,592) (1,155) (53) (725) Debt, net of cash and money market investments: and money Debt, net of cash Net (debt)/cash (excluding Goldfishnon-recourse Bank and debt) (529) 163 (508) (1,060) Other non-current asse Long-term liabilities and provisions (2,168) (1,945) (3,205) (4,453) Assets and liabilities A Intangible assets includin Earnings/(loss) per ordinary Adjusted earnings per ordinary share Profit/(loss) attributable Onetel AA The Operating profit/(loss) from discontinued operations: Operating profit/(loss) from discontinued European Energy European British Gas Residential British Gas Services Centrica Energy 218 26 136 519 70 242 561 72 90 773 111 903 Operating profit from continui Operating profit from amortisation, exceptional charge of joint share including Year ended Year ended oper continuing from revenue Group Results Results Net current (liabilities)/assets Net current (liabilities)/assets (108) 241 155 666 Goldfish Bank working capital facility working capital Goldfish Bank (430) – – – Net assets 2,402 Goodwill amortisation (net of tax credit) (123) (161) Exceptional items andre-measurements certain (net of tax) (35) (53) 833 340 932 1,058 1,362 1,513 Bank Goldfish 932 1,058 1,362 The AA The Centrica Storage Centrica North American Energy andRelated Services 63 130 1 132 40 185 69 154 British Gas Business 65 51 68 77

. +44 121 415 7061 lly within five working days lly within five r is issued at the end of each the end of at r is issued rars. It is a convenient way rars. It is a convenient way . on the payment date without d more quickly as the cash as the cash d more quickly e are many telephone and online online and telephone e are many provide shareholders in over provide shareholders in over . FlexiShare (details above) offers FlexiShare (details . lly into your bank or building lly into your bank or building ansferring in or out at any time. converted from sterling and converted from sterling and and wait for it to clear; and clear; and and wait for it to ed Centrica shares, you will shares, you will ed Centrica to receive Centrica dividends to receive Centrica dividends without the need for a share

FlexiShare you will benefit from: from: benefit will you FlexiShare annual confirmation statement. confirmation annual . r your self-assessment tax return. ies provided by a panel of provided by a panel ies ling, you will need to present your and cheque clearance costs. costs. clearance and cheque nee’, sponsored by Centrica and sponsored by Centrica and nee’, ease call the Centrica shareholder shareholder Centrica the call ease st dealing service to its participants. hare service S For further details about FlexiShare, please call the Centrica call please about FlexiShare, For further details there is no chance of the dividend cheque going missing going cheque dividend of the there is no chance post; in the is receive the dividend payment the account is paid directly into in the cheque the need to pay tax vouche a single consolidated fo time in tax year, in March, low-cost share dealing facilit low-cost share dealing independent brokers; quicker settlement periods; lose; and no certificates to used be can cash dividend your plan – reinvestment a dividend charge) which a small dealing shares (for to buy more Centrica to your FlexiShare account. are then credited

the London Stock Exchange. Ther services available. If you are sel at the time of sale share certificate a year-round, low-co Direct dividend payments be paid automatica Dividends can benefits: has a number of society account. This service X X X its improve also helps Centrica payment Direct dividend by reducing postage efficiency To register for this service, pl helpline on 0870 600 3985 to requestdividend payment a direct form, or download it from our website at www.centrica.com/shareholders Overseas dividend payments to established A service has been 30 countries with the opportunity shareholders can fee, fixed For a small local currency. in their automatically have their dividends norma account, paid into their bank contact please details, For further payment date. of the dividend on helpline overseas shareholder the Centrica Buying and selling shares in the UK If you wish to buy or sell certificat need to use a stockbroker or highwhich street bank trades on The Centrica Flexi shares into By transferring your X X X X nomi is a ‘corporate FlexiShare Lloyds TSB Regist administered by shares Centrica your manage to a separate on held details will be share account certificate. Your receive an register and you will general Participants will have the same rights to attend and vote at There is no charge for holding shareholders. other all as meetings sharesyour in FlexiShare, nor for tr shareholder helpline 600 on 0870 3985 or visit www.centrica.com/flexishare hareholder Information Information hareholder Centrica plc Annual Report and Accounts 2006 . S news and provides

); or role that the internetrole that plays cumentation in hard copy (to (to copy hard in cumentation er volumes of information that, subject to the necessary to the necessary subject that, ion by website communication ion by website communication n of the website contains n of the website olding, please contact Lloyds contact olding, please , plus information on the share ese changes, introduced by the introduced by ese changes, as dividend payment dates. It as dividend payment ive share price information ive share price eques and payment of dividends eques and olders including the Company’s of shares or any other query al shareholding quickly and quickly and al shareholding address (to do this, please go address (to do this, please for making dividend payments as past dividend payment dates as past dividend payment dates manner and helps Centrica Centrica helps manner and impact on the environment. impact on the environment. ken, subject to the necessary subject ken, pportunity to receive shareholder shareholder pportunity to receive eholder documentation from eholder documentation an 30 June 2007). If you do not 30 June 2007). an the day it is published; the day it is published;

www.centrica.com 950* 985* 3 3 www.centrica.com/shareholders www.centrica.com/ecomms 0870 600 0870 600 [email protected] The investor information sectio The investor information into a bank or building society account; and society account; and or building into a bank holder death of the registered relating to your Centrica shareh TSB Registrars: lost share certificate; lost share certificate; lost or out-of-date dividend ch transfer of shares; changename or address; of cast their AGM vote electronically; and their individu of access details securely online. view the Annual Report on view the Annual great significantly have access to about Centrica; authority beinghaveat the AGM, to agreed to receive passed the website. via documentation shareholder do this, please complete and return the personalised prepaid prepaid the personalised complete and return do this, please proxy card so enclosed AGM to the form of election attached that it is received no later th will be ta you return the form by providing us withemail an online to do shareholder continue to receive receive shareholder documentat receive shareholder

Calls charged at national rate. * 114 telephone: text phone: X X X If you have a query on the following: on the following: If you have a query X X Centrica shareholder helpline Lloyds TSB by maintained register is Centrica’s shareholder Registrars, which is responsible and updating the register. also holds historical details such a comprehens and amounts, and section. Visit price and links to our business sites. up-to-date information for shareh latest results and key dates such The Centrica website at website The Centrica details of the Company’s activities This new legislation provides shareholders with the opportunity a timely to access information in to reduce both its costs and its X X Centrica electronically can in future: future: in can Centrica electronically X X Shareholders who receive shar X in timely communications. in timely communications. You may now choose either to: X authority being at the passed forthcoming AGM,now Centrica is o the able to offer shareholders Th via its website. documentation the increasing Government, recognise Electronic communications mean in legislation Recent changes write to: Lloyds TSB Registrars,The Causeway, Worthing, West Sussex BN99 6DA email:

5 9 / 5 Centrica plc Annual Report and Accounts 2006

5 are capital was consolidated consolidated are capital was 86) is an independent charity 86) is an independent charity eal-time buying or selling price, or selling eal-time buying ares were acquired in Centrica in Centrica ares were acquired capital gains tax implications (i.e. capital gains nd of 25 pence per share on per nd of 25 pence prices that are updated regularly updated regularly prices that are r information can be obtained r information can be obtained Centrica shareholder helpline helpline Centrica shareholder to charity and it is also possible shareholderswishing to dispose share for every British Gas share British Gas share for every traded onLondon the Stock slation) of 64.25 pence each. slation) of 64.25 pence each. ares which would cost more to sell share price, shareholders can shareholders can share price, national newspapers. Ceefax and and newspapers. Ceefax national tween the post-demerger Centrica the post-demerger Centrica tween ch Street Station pence for every ten ordinary shares of ordinary shares of for every ten pence

81 / 14 6 Shares in Centrica plc acquired on demerger are treated on demerger are acquired plc Centrica Shares in held on 22 October 2004.held The on consolidationwas linked 22 October to special divide a the payment of 17 November 2004. every ten ordinary shares7 May 1999.held of 5 pence on of a special was linked to the payment The consolidation dividend of 12 pence per share on June 23 1999. On 25 October 2004, was the ordinary share capital shares new ordinary of nine consolidated on the basis of On 10 May 1999, the ordinary sh onnine the new basis of ordinary shares of

merican Depositary Receipts hareGift hare capital consolidations hare price informationhare price

from outside the US. www.adrbny.com from outside the US. www.adrbny.com Telephone: BNY ADRs inUS or 1 212 815 1 888 the 3700 email: [email protected] email: [email protected] or via www.stockbny.com PO Box 11258, Chur New York NY 10286-1258 The Bank of New York TheNew Bank of Investor Relations For enquiries, please contact: contact: please For enquiries, ADR Depositary ordinary Centrica shares, trade under the symbol CPYYY. CPYYY. symbol shares, trade under the Centrica ordinary Centrica has a Level 1 American Depositary Receipt (ADR) Level 1 American has a Centrica ten to equivalent is which of programme. The ADRs, each A at www.sharegift.org or from the on 0870 600 3985. no gain or loss) on gifts of shares no gain or loss) to obtain income tax relief. Furthe charitably of small parcels of sh parcels charitably of small no There are than they are worth. which provides a free service for free service for a which provides S ShareGift (registered charity 10526 X two occasions: X S on consolidated has been plc of Centrica The share capital as having a base cost for capital gains tax purposes (calculated (calculated gains for purposes tax capital cost base a having as taxation legi with in accordance and British Gas 72.947%. held at demerger. The split be The held at demerger. and British Gas shares proportion was in Centrica the 27.053% plc on the basis of one Centrica Exchange for the first time on 17 FebruaryExchange for the first time on 1997, 17 the date of Sh Gas plc. demerger from British Demerger Centrica plc were The shares of Useful historicalinformation throughout the trading day. For a r stockbroker. you should contact a find share prices listed in most find share prices share Teletext pages also display As well as usingAs well as the to viewwebsite Centrica details of the Centrica historical current and S Index

Accounting policies 20, 48-55, 106-107 Financial Statements Acquisitions and disposals 33, 85 Group 44-103 Auditors Income Statement 44 Balance Sheet 45 ietr’Rpr uiesRve 0 Drcos eot–Gvrac 2 Financial Statements p43 Directors’p27 Report – Governance Directors’ Report – Business Review p05 re-appointment 33 remuneration 59 Statement of recognized income and expense 46 reports to the shareholders of Centrica plc 42, 104 Cash flow statement 47, 86-87 Bank overdrafts and loans 73 Company 105-110 Board of Directors 3-4, 28-32 Balance Sheet 105 British Gas Business 6-8, 13 Fixed fee service contracts 101 British Gas Residential 3, 6-8, 12 Five-year record 112 British Gas Services 6-8, 14 Gas production 15 Carbon footprint 11 Gas and liquids reserves 111 Cash and cash equivalents 53, 72 Goodwill and other intangible assets 65-66 Centrica Energy 6-8, 15 Group earnings 19 Centrica North America 6, 9, 17 Group Financial Review 19-20 Centrica Storage 6, 9, 16 Health and safety 21, 24-26 Chairman’s Statement 3-4 Interest 20, 62 Charitable and political donations 26 Interests in joint ventures and associates 70-72 Chief Executive’s Review 6-7 Internal control 32 Climate change 7, 22, 24-25 International Financial Reporting Standards 2 Commitments and contingencies 90-91 Inventories 72 Committees 31-32 Minority interests 84 Communities 24, 26 Operating profit 2, 9, 19, 57 Corporate Governance 3, 30-33 Operating Review 12-18 Corporate Responsibility 24-26, 32 Pensions 87-89 Cost of sales 49 Principal activities Inside Front Cover 8-9 Costs of continuing operations 59 Principal Risks and Uncertainties 21-23 Creditor payment policy 33 Principal undertakings 102-103 Deferred corporation tax liabilities and assets 75 Property, plant and equipment 68-70 Directors Provisions 76 biographies 29 Related party transactions 33, 91-92 directors’ indemnities 33 Remuneration Report 34-41 emoluments 34, 37 Renewables 16 pensions 41 Reserves 82-84 re-election 30 Revenue 56 remuneration policy 34-37 Risk Management 32 service contracts 36-37 Segmental analysis 56-58 share interests 38-39 Shares Directors’ Report – Business Review 5-26 analysis of shareholders 115 Directors’ Report – Governance 27-33 called up share capital 77 Directors’ Responsibilities Statement 32-33 material shareholdings 33 Disclosure of information to auditors 33 prices 19, 40

Shareholder Information p113 Dividend 2-3, 10, 19, 63, 115 Shareholder information 114-115 Earnings 19 Share schemes Earnings per share 2, 10, 19, 64 all-employee 26, 40, 80-81 Electricity generation 15-16 Deferred and Matching Share Scheme 35 Electronic communications 114 Executive 35, 40, 78 Long Term Incentive Scheme 35-36, 38-39, 79 Employees Share based payments 78-81 average number during the year 61 Taxation 19, 62-63 costs 61 Trade payables 74 policies 24, 26 Trade receivables 72 Europe 7, 9, 18 Vulnerable customers 24-25 Events after the Balance Sheet date 102 Exceptional items and certain re-measurements 20, 60 Financial calendar 115 Financial instruments 92-100 Financial Review 19-20

116 Centrica plc Annual Report and Accounts 2006 Accessibility

If you would like this Annual Report in a different format, such as large print, Braille, audio or digital (text CD or ﬂoppy disk), you can request these in the following ways: Telephone 0191 438 6063 Text phone 0191 438 1122 Please note that these numbers should be used to order copies of alternative formats only. For general shareholder enquiries please use the shareholder helpline, details on page 114. Visit us at www.centrica.com The Centrica website provides news and details of the Company’s activities, plus links to our business sites. The shareholder section at www.centrica.com/shareholders contains up-to-date information including the Company’s latest results and dividend payment details. It holds current and historical share price information. Here you may view a fully accessible online version of this Annual Report which can be customised to suit your own viewing preferences. Other services available include: Shareholder centre sign up to receive Centrica shareholder communications electronically. Current share price daily and historical market data. Online presentations and reports the latest Annual and Interim Reports and presentations to analysts. Centrica news sign up to receive email alerts whenever a news release is published. Investor tools up-to-date Company and industry data.

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Centrica plc Company registered in England and Wales no. 3033654 Registered office:

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