i. Principal accounting policies of the Company
Accounting principles
The Company Balance Sheet has been prepared in accordance with applicable UK accounting standards and under the historical cost convention and the Companies Act 1985.
Basis of preparation
No profit and loss account is presented for the Company as permitted by Section 230(3) of the Companies Act 1985. The Company's profit after tax for the year ended 31 December 2006 was £1,939 million (2005: £11 million).
Employee share schemes
The Group has a number of employee share schemes, detailed in the Directors’ Report – Corporate Responsibility, the
Remuneration Report, and in note 25 to the Group Financial Statements, under which it makes equity-settled share-based
payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant (excluding the
effect of non-market-based vesting conditions). For share-based payments to employees of the Company, the fair value determined at
the grant date is expensed on a straight-line basis together with a corresponding increase in equity over the vesting period, based on the
Group’s estimate of the number of awards that will vest and adjusted for the effect of non market-based vesting conditions. Equity-settled
share-based payments which are made available to employees of the Company’s subsidiaries are treated as increases in equity over the
vesting period of the award, with a corresponding increase in the Company’s investments in subsidiaries, based on the Group’s estimate
of the number of awards that will vest, and adjusted for the effect of non market-based vesting conditions.
Fair value is measured using methods appropriate to each of the different schemes as follows:
Foreign currencies
Transactions in foreign currencies are translated at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into sterling at closing rates of exchange. Exchange differences on monetary assets and liabilities are taken to the profit and loss account.
Tangible fixed assets
Tangible fixed assets are included in the Balance Sheet at cost, less accumulated depreciation and any provisions for impairment. Tangible fixed assets are depreciated on a straight-line basis at rates sufficient to write off the cost, less estimated residual values, of individual assets over their estimated useful lives at periods ranging from five to 20 years.
Leases
Rentals under operating leases are charged to the profit and loss account on a straight-line basis.
Investments
Fixed asset investments are held in the Balance Sheet at cost, less any provision for impairment as necessary. Current asset investments are stated at the lower of cost and net realisable value.
Pensions and other retirement benefits
The Company’s employees participate in a number of the Group’s defined benefit pension schemes as described in note 30 to the Group
Financial Statements. The Company is unable to identify its share of the underlying assets and liabilities in the schemes on a consistent
and reasonable basis and therefore accounts for the schemes as if they were defined contribution schemes. The charge to the profit and
loss account is equal to the contributions payable to the schemes in the accounting period. Details of the defined benefit schemes of the
Group (accounted for in accordance with the Group’s accounting policies detailed in note 2 to the Group Financial Statements) can be
found in note 30 to the Group Financial Statements.
Taxation
Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date.
Deferred tax is recognised in respect of all timing differences that have originated, but not reversed, at the balance sheet date where
transactions or events that result in an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred at
the balance sheet date. Timing differences are differences between the Group’s taxable profits and its results as stated in the Financial
Statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are
recognised in the Financial Statements.
A deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits in the foreseeable future from which the reversal of the underlying timing differences can be deducted.
Deferred tax is not recognised when fixed assets are revalued unless, by the balance sheet date, there is a binding agreement to sell the revalued assets and the gain or loss expected to arise on sale has been recognised in the Financial Statements. Deferred tax is not recognised when fixed assets are sold and it is more likely than not that the taxable gain will be rolled over, being charged to tax only if and when the replacement assets are sold.
Deferred tax is recognised in respect of the retained earnings of overseas subsidiaries and associates only to the extent that, at the balance sheet date, dividends have been accrued as receivable or a binding agreement to distribute past earnings in the future has been entered into by the subsidiary or associate.
Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date.
Deferred tax is measured on a non-discounted basis.
Financial instruments
The Company’s accounting policies for financial instruments are consistent with those of the Group, and are disclosed in note 2 to the
Group Financial Statements. The Company’s financial risk management policies are consistent with those of the Group and are described
in the Directors’ Report – Principal Risks and Uncertainties and in note 33 to the Group Financial Statements.
The Company is exempted by FRS 25 from providing detailed disclosures in respect of its financial instruments because the Company
is included within the Group’s consolidated accounts and its financial instruments are incorporated into the disclosures in note 33 to the
Group Financial Statements.
ii. Directors and employees
Included within the Company’s loss charge for the year are wages and salaries costs of £91 million (2005: £90 million), social security costs of £9 million (2005: £6 million) and other pension and retirement benefit costs of £25 million (2005: £18 million).
The average number of employees of the Company during the year was 1,529 (2005: 1,580), all of whom were employed in the UK.
iii. Tangible fixed assets
During the year Centrica plc transferred 100% of its holding in the share capital of GB Gas Holdings Limited to a newly-formed subsidiary, Centrica Holdings Limited, for consideration of 100% of the share capital of Centrica Holdings Limited.
v. Debtors
£29 million (2005: £31 million) of money market investments were held by the Law Debenture Trust, on behalf of the Company, as security in respect of the Centrica Unapproved Pension Scheme (note 30 to the Group Financial Statements).
vii. Borrowings
The Company’s financial instruments and related disclosures are included within the consolidated accounts of the Group. In accordance
with the requirements of FRS 25, further detailed disclosure in respect of the Company is not included. Disclosures in respect of the
Group’s borrowings and other financial instruments are provided in notes 20 and 33 respectively to the Group Financial Statements.
viii. Other creditors
Potential unrecognised deferred corporation tax assets amounted to £16 million (2005: £26 million), primarily relating to unutilised tax losses. The Company does not expect to be able to utilise these losses within the foreseeable future.
Restructuring and other provisions principally represent estimated liabilities for redundancy costs associated with the restructuring announced in 2005 and 2006 and National Insurance in respect of Long Term Incentive Scheme liabilities. The National Insurance provision was based on a share price of 354.50 pence at 31 December 2006 (31 December 2005: 254.75 pence). The majority of the amounts are expected to be utilised between 2007 and 2009.
x. Reserves
The profit and loss account can be further analysed as follows:
The Directors propose a final dividend of 8.0 pence per share (totalling £293 million) for the year ended 31 December 2006. The dividend
will be submitted for formal approval at the Annual General Meeting to be held on 14 May 2007. These Financial Statements do not reflect
this dividend payable, which will be accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending
31 December 2007.
Details of the Company’s share capital are provided in notes notes 24 and 25 to the Group Financial Statements. The repurchase of shares
is stated net of transaction costs of £nil (2005: £1 million).
xii. Commitments and indemnities
(a) Capital expenditure
At 31 December 2006, the Company had placed contracts for capital expenditure amounting to £51 million (2005: £16 million).
(b) Lease commitments
At 31 December 2006, there were £1 million of land and buildings and £2 million of computer lease commitments in relation to non-cancellable operating leases for the Company (2005: £1 million and £5 million respectively). The Company has guaranteed operating commitments of a subsidiary undertaking at 31 December 2006 of £7 million (2005: £7 million) in respect of land and buildings.
(c) Guarantees and indemnities
Refer to note 31(e) to the Group Financial Statements for details of guarantees and indemnities. The maximum credit risk exposure was
represented by the carrying amount for all financial instruments with the exception of financial guarantees issued by the Company to third
parties, principally to support its subsidiaries’ gas and power procurement and banking activities. At 31 December 2006 the credit risk
exposure under financial guarantees issued by Centrica plc was £1,612 million (2005: £832 million).
