Notes to the Company Balance Sheet

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:

LTIS: awards up to 2005 A Black-Scholes valuation augmented by a Monte Carlo simulation to predict the total shareholder return performance
LTIS: 2006 EPS awards Market value on the date of grant
LTIS: 2006 TSR awards A Monte Carlo simulation to predict the total shareholder return performance
Sharesave Black-Scholes
ESOS Black-Scholes using an adjusted option life assumption to reflect the possibility of early exercise
Share Award Scheme Market value on the date of grant

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

  Plant, equipment and vehicles
£m
Cost  
1 January 2006 129
Additions 22
Disposals (3)
31 December 2006 148
Depreciation and amortisation  
1 January 2006 49
Charge for the year 18
Disposals (3)
31 December 2006 64
Net book value  
31 December 2006 84
31 December 2005 80

iv. Investments in subsidiary undertakings

  Investments in subsidiaries' shares
£m
(i) Additions and disposals represent the net decrease in shares to be issued under employee share schemes in Group undertakings.
Cost  
1 January 2006 2,062
Additions and disposals(i) (5)
31 December 2006 2,057

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

  Amounts falling due within one year
2006
£m
2005
£m
(i) Derivative financial instruments comprise foreign currency derivatives held for trading of £28 million (2005: £9 million), interest rate derivatives held for trading of £31 million (2005: £44 million) and foreign exchange derivatives held for hedging of £11 million (2005: £nil). The fair value of these derivatives is equivalent to the carrying value.
Amounts owed by Group undertakings 5,058 3,467
Derivative financial instruments(i) 70 53
Other debtors 7 3
Prepayments and other accrued income 11 6
  5,146 3,529

vi. Current asset investments

  2006
£m
2005
£m
Money market investments 608 1,139

£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

Amounts falling due 2006   2005
Within one year
£m
After one year
£m
  Within one year
£m
After one year
£m
(i) Commercial paper has a face value of £102 million (2005: £382 million).
Bank loans and overdrafts 68 88   66
Bonds 1,181   422
Commercial paper(i) 100   377
  168 1,269   443 422

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

  Amounts falling due within one year
2006
£m
2005
£m
(i) Derivative financial instruments comprise foreign currency derivatives held for trading of £13 million (2005: £94 million), interest rate derivatives held for trading of £32 million (2005: £45 million) interest rate derivatives held for hedging of £12 million (2005: £1 million) and foreign currency derivatives held for hedging of £11 million (2005: £5 million). The fair value of these derivatives is equivalent to the carrying value.
Trade creditors 22 12
Amounts owed to Group undertakings 2,559 3,526
Derivative financial instruments(i) 68 145
Taxation and social security 3 3
Accruals and deferred income 58 87
  2,710 3,773

ix. Provisions for liabilities and charges

  1 January 2006
£m
Profit and loss charge
£m
Utilised in the year
£m
Unused and released
£m
31 December 2006
£m
Restructuring and other provisions 43 14 (20) (12) 25

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

  Share premium account
£m
Capital redemption reserve
£m
Cash flow hedging reserve
£m
Profit and loss account
£m
Total
£m
(i) As permitted by section 230(3) of the Companies Act 1985, no profit and loss account is presented. The Company’s profit for the financial year was £1,939 million (2005: £11 million) before dividends paid of £384 million (2005: £340 million). The Company’s profit includes dividends received from subsidiary undertakings of £1,967 million (2005: £nil).
(ii) Arising on revaluation of interest rate derivatives. Further details of the Company’s interest rate derivatives are included within the financial instrument disclosures in note 33 to the Group Financial Statements.
1 January 2006 595 15 (5) 1,305 1,910
Profit for the year(i) 1,939 1,939
Gains on revaluation of cash flow hedges(ii) 6 6
Dividends (384) (384)
Employee share option schemes:          
Value of services provided 23 23
Exercise of awards (29) (29)
Share issue 62 62
Repurchase of shares 1 (23) (22)
31 December 2006 657 16 1 2,831 3,505

The profit and loss account can be further analysed as follows:

  Share options reserve
£m
Other
£m
Profit and loss account
£m
(i) Includes a £2 million gain on re-measurement of interest rate derivatives and bonds designated as the hedged item and a £17 million gain on re-measurement of foreign exchange derivatives. Further details of the Company’s interest rate and foreign currency derivatives are included within the financial instrument disclosures in note 33 to the Group Financial Statements.
(ii) Details of the repurchase of shares can be found in note 24 to the Group Financial Statements.
1 January 2006 42 1,263 1,305
Profit for the year(i) 1,939 1,939
Dividends (384) (384)
Employee share option schemes:      
Value of services provided 23 23
Exercise of awards (27) (2) (29)
Repurchase of shares(ii) (23) (23)
31 December 2006 38 2,793 2,831

xi. Movements in shareholders' funds

  2006
£m
  2005
£m
1 January 2,134   2,815
Profit attributable to the Company(i) 1,939   11
Gains/(losses) on revaluation of cash flow hedges 6   (5)
Gains on revaluation of available for sale assets   2
Dividends paid to shareholders (384)   (340)
Employee share option schemes:      
Purchase of treasury shares   (3)
Value of services provided 23   21
Exercise of awards (29)  
Share issue 65   21
Repurchase of shares (note 24 to the Group Financial Statements) (23)   (388)
Net movement in shareholders' funds for the financial year 1,597   (681)
31 December 3,731   2,134

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).

(i) Profit attributable to the Company includes dividends received from subsidiary undertakings of £1,967 million (2005: £nil).

 

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).