Notes to the Financial Statements (11 – 20)

11. Taxation

  2009 2008
(restated) (i)
(a) Analysis of tax charge for the year Business performance
£m
Exceptional items and certain re-measurements
£m
Results for the year
£m
Business performance
£m
Exceptional items and certain re-measurements
£m
Results for the year
£m
  1. Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation as explained in note 38.
  2. The Finance Act 2008 changed the rules concerning loss relief on decommissioning costs and, as a result of this change, the prior year deferred tax charge is stated net of a £55 million credit in respect of previously unrecognised deferred tax assets.
  3. The effect of the decrease of 2% to the standard rate of UK corporation tax from 1 April 2008 on the relevant temporary differences at 31 December 2008 was a credit of £1 million.
  4. Total tax on profit from continuing operations excludes taxation on the Group’s share of profits in joint ventures and associates.
The tax charge comprises:            
Current tax            
UK corporation tax 333 (62) 271 397 5 402
UK petroleum revenue tax 112 112 517 517
Foreign tax 30 (4) 26 25 2 27
Adjustments in respect of prior years (135) (4) (139) (21) (21)
Total current tax 340 (70) 270 918 7 925
Deferred tax            
Current year (ii) 147 (113) 34 165 (236) (71)
Adjustments in respect of prior years 80 7 87 (8) (8)
Change in tax rates (iii) (1) (1)
UK petroleum revenue tax (25) (25) (52) (52)
Foreign deferred tax (11) (9) (20) 4 (184) (180)
Total deferred tax 191 (115) 76 108 (420) (312)
Total tax on profit from continuing operations (iv) 531 (185) 346 1,026 (413) 613

Tax on items taken directly to equity is disclosed in notes 31 and 32.

The Group earns its profits primarily in the UK, therefore the tax rate used for tax on profit from ordinary activities is the standard rate for UK corporation tax, which was 28% for 2009 (2008: 28.5%), with the exception of upstream profits, which were taxed at a UK corporation tax rate of 30% (2008: 30%) plus a supplementary charge at 20% (2008: 20%). Certain upstream assets also bear petroleum revenue tax at 50% (2008: 50%). Taxation for other jurisdictions is calculated at the rates prevailing in those respective jurisdictions.

(b) Factors affecting the tax charge for the year

The differences between the total tax shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax is as follows:

  2009 2008
(restated) (i)
  Business performance
£m
Exceptional items and certain re-measurements
£m
Results for the year
£m
Business performance
£m
Exceptional items and certain re-measurements
£m
Results for the year
£m
  1. Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation as explained in note 38.
  2. The movement in unrecognised deferred tax assets includes the recognition in 2008 of £55 million of deferred tax assets relating to certain decommissioning provisions, following changes to UK tax law, and non-recognition of losses in certain overseas subsidiaries.
Profit from continuing operations before tax 1,635 (639) 996 1,990 (1,331) 659
Less: share of profits in joint ventures and associates, net of interest and taxation (10) 9 (1) (9) (9)
Group profit from continuing operations before tax 1,625 (630) 995 1,981 (1,331) 650
Tax on profit from continuing operations at standard UK corporation tax rate of 28% (2008: 28.5%) 455 (176) 279 564 (379) 185
Effects of:            
Net expenses not deductible for tax purposes 32 (9) 23 44 2 46
Adjustments in respect of prior years (55) 3 (52) (29) (29)
Movement in unrecognised deferred tax assets (ii) 3 3 (43) (43)
UK petroleum revenue tax rates 60 60 335 335
Overseas tax rates (1) 8 7 (10) (50) (60)
Additional charges applicable to upstream profits 37 (11) 26 166 10 176
Changes to tax rates (1) 4 3
Taxation on profit from continuing operations 531 (185) 346 1,026 (413) 613

(c) Factors that may affect future tax charges

Production of gas and oil within the UK continental shelf is subject to several taxes: corporation tax at 30% (2008: 30%) on profits of gas and oil production; supplementary charge at 20% (2008: 20%) on profits of gas and oil production (adjusted for financing costs); petroleum revenue tax (PRT) at 50% (2008: 50%) on income generated from certain gas and oil production (net of certain costs).

PRT is a deductible expense for the purposes of corporation tax and the supplementary charge. The effective rate of tax suffered on profits of UK gas production therefore falls between 50% and 75%. To the extent that the Group’s profits are earned from UK oil and gas production, its effective tax rate will remain above the current UK statutory rate of 28% (2008: 28%).

Income earned in North America and other territories outside the UK is generally subject to higher effective rates of tax than the current UK statutory rate. In the medium term, the Group’s effective tax rate is expected to remain above the UK statutory rate.

12. Dividends

  2009
£m
2008
£m
Prior year final dividend of 8.73 pence (2008: 8.59 pence) per ordinary share 447 356
Interim dividend of 3.66 pence (2008: 3.47 pence) per ordinary share 188 144
  635 500

The prior year final dividend was paid on 10 June 2009 (2008: 11 June). The interim dividend was paid on 11 November 2009 (2008: 12 November).

The Directors propose a final dividend of 9.14 pence per ordinary share (totalling £470 million) for the year ended 31 December 2009. The dividend will be submitted for formal approval at the Annual General Meeting to be held on 10 May 2010 and, subject to approval, will be paid on 16 June 2010 to those shareholders registered on 30 April 2010.

13. Auditors’ remuneration

  2009
£m
2008
£m
  1. Audit fees have increased in 2009 primarily as a result of work performed on Strategic Investments and the acquisition and subsequent disposal of Segebel S.A. The 2009 audit fees include a non-recurring element attributable largely to fair value assessments and audit work undertaken in support of disposals.
  2. Includes fees in respect of review performed on the Interim Financial Statements.
Fees payable to the Company’s auditors for the audit of the Company’s annual accounts and Group consolidation 2.7 2.2
The auditing of other accounts within the Group pursuant to legislation (including that of countries and territories outside the UK) 3.4 1.3
Total fees related to audit of parent and subsidiary entities (i) 6.1 3.5
Fees payable to the Company’s auditors and its associates for other services:    
Other services pursuant to legislation (ii) 0.7 0.9
Services related to taxation 0.1
Services related to information technology 0.1 0.2
Services related to corporate finance transactions entered into or proposed to be entered into by or on behalf of the Company or any of its associates 0.3 0.4
All other services 1.5 0.8
  8.8 5.8
Fees in respect of pension schemes:    
Audit 0.1 0.1

It is the Group’s policy to seek competitive tenders for all major consultancy and advisory projects. Appointments are made taking into account factors including expertise, experience and cost. In addition, the Board has approved a detailed policy defining the types of work for which the auditors can tender and the approvals required. In the past, the auditors have been engaged on assignments in addition to their statutory audit duties where their expertise and experience with the Group are particularly important, including tax advice, due diligence reporting and reporting accountant services on acquisitions.

14. Earnings per ordinary share

Basic earnings per ordinary share has been calculated by dividing the earnings attributable to equity holders of the Company for the year of £844 million (2008: loss of £137 million) by the weighted average number of ordinary shares in issue during the year of 5,121 million (2008: 4,198 million). The Directors believe that the presentation of adjusted basic earnings per ordinary share, being the basic earnings per ordinary share adjusted for certain re-measurements, exceptional items and the impact of Strategic Investments, assists with understanding the underlying performance of the Group, as explained in note 2. The reconciliation of basic to adjusted basic earnings per ordinary share is as follows:

Year ended 31 December 2009 2008 (restated) (i)
(a) Continuing and discontinued operations £m Pence per ordinary
share
£m Pence per ordinary
share
  1. Restated to capitalise borrowing costs on adoption of IAS 23 (Amendment) and to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2.
  2. Excludes minority interests of £38 million (2008: £nil). Refer to note 33.
Earnings/(loss) – basic 844 16.5 (137) (3.3)
Net exceptional items after taxation (notes 2 and 8) 109 2.1 67 1.6
Certain re-measurement losses after taxation (notes 2 and 8) (ii) 141 2.8 981 23.4
Depreciation of fair value uplifts to property, plant and equipment fromStrategic Investments, after taxation 17 0.3
Earnings – adjusted basic 1,111 21.7 911 21.7
         
Earnings/(loss) – diluted 844 16.4 (137) (3.3)
         
Earnings – adjusted diluted 1,111 21.6 911 21.5

Venture

The Group obtained a controlling interest in the Venture Group on 27 August 2009. The fair values attributable to the acquired assets, liabilities and contingent liabilities arising on acquisition are set out in note 37. Fair value adjustments amounting to £651 million have been made to interests acquired in oil and gas fields to report these at their acquisition-date fair values amounting to £1,748 million (included within property, plant and equipment). The fair value adjustments are provisional as the Directors have not yet reached final determination on all aspects of the fair value exercise. The Directors will finalise the fair values within 12 months of the acquisition date. The acquired oil and gas field interests are depreciated over their remaining useful economic lives on a unit of production basis in accordance with the Group’s accounting policies as set out in note 2. As explained in note 2, the depreciation relating to fair value uplifts relating to the acquired property, plant and equipment and related taxation is excluded in arriving at adjusted earnings for the year, which amounted to £20 million depreciation and a taxation credit of £10 million in the period.

British Energy

The Group acquired a 20% interest in British Energy on 26 November 2009 and accounts for its interest as an investment in associate as set out in note 19. As explained in note 3, the Group has undertaken a provisional notional fair value exercise at the date of acquisition to allocate the cost of the investment to the individual assets, liabilities and contingent liabilities at their acquisition-date fair values. The fair values attributed are provisional as the Directors have not yet reached final determination on all aspects of the fair value exercise. The Directors will finalise the fair values within 12 months of the acquisition date. The Group’s share of provisional fair value adjustments made to the existing nuclear power stations amounts to £1,275 million resulting in an acquisition-date fair value attributable to these stations of £1,549 million. The nuclear power stations are depreciated over their useful economic lives in accordance with the Group’s accounting policies as set out in note 2. As explained in note 2, the impact of depreciation arising on fair value uplifts attributed to the nuclear power stations and related taxation included within the Group’s share of the post-taxation results of the associate is excluded in arriving at adjusted earnings for the period, which amounted to £7 million net of taxation.

Year ended 31 December 2009 2008 (restated) (i)
(b) Continuing operations £m Pence per ordinary
share
£m Pence per ordinary
share
  1. Restated to capitalise borrowing costs on adoption of IAS 23 (Amendment) and to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2. Also restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation, as explained in note 38.
Earnings – basic 648 12.7 45 1.1
Net exceptional items after taxation (notes 2 and 8) 382 7.5
Certain re-measurement losses after taxation (notes 2 and 8) 72 1.4 918 21.8
Depreciation of fair value uplifts to property, plant and equipment fromStrategic Investments, after taxation 17 0.3
Earnings – adjusted basic 1,119 21.9 963 22.9
         
Earnings – diluted 648 12.6 45 1.1
         
Earnings – adjusted diluted 1,119 21.8 963 22.8
  2009 2008 (restated) (i)
(c) Discontinued operations £m Pence per
ordinary
share
£m Pence per ordinary
share
  1. Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation, as explained in note 38.
Earnings/(loss) – basic 196 3.8 (182) (4.3)
Earnings/(loss) – diluted 196 3.8 (182) (4.3)

Certain re-measurements (notes 2 and 8) included within operating profit and discontinued operations comprise re-measurements arising on energy procurement activities and re-measurements of proprietary trades in relation to cross-border transportation or capacity contracts. All other re-measurements are included within results before exceptional items and certain re-measurements.

In addition to basic and adjusted basic earnings per ordinary share, information is presented for diluted and adjusted diluted earnings per ordinary share. Under this presentation, no adjustments are made to the reported earnings for either 2009 or 2008, however the weighted average number of shares used as the denominator is adjusted for potentially dilutive ordinary shares. In 2008, no outstanding awards or options were considered to be potentially dilutive for diluted earnings per ordinary share, because doing so would have decreased the loss per ordinary share. However, potentially dilutive ordinary shares were taken into account when calculating adjusted diluted earnings per ordinary share.

(d) Weighted average number of shares 2009 Million shares 2008 Million shares
Weighted average number of shares used in the calculation of basic earnings per ordinary share 5,121 4,198
Dilutive impact of share-based payment schemes 24 35
Weighted average number of shares used in the calculation of diluted earnings per ordinary share 5,145 4,233

15. Goodwill

  2009
£m
2008
£m
  1. During 2009 European operations (excluding Germany) have been treated as discontinued operations, and Segebel S.A. has subsequently been sold (note 38) and hence goodwill arising on acquisition is no longer included within Group goodwill at 31 December 2009.
Cost and net book value    
1 January 1,510 1,074
Acquisitions (note 37) 916 269
Adjustments to provisional fair values of acquisitions completed in previous year 2
Impairments (note 17) (5) (45)
Disposals (3)
Transfer to assets held for sale (i) (324)
Exchange adjustments (6) 210
31 December 2,088 1,510
Analysis of goodwill at 31 December by acquisition 2009
£m
2008
£m
  1. During 2009 European operations (excluding Germany) have been treated as discontinued operations, and Segebel S.A. has subsequently been sold (note 38) and hence goodwill arising on acquisition is no longer included within Group goodwill at 31 December 2009.
Direct Energy 389 369
Energy America 28 31
Enron Direct/Electricity Direct 133 133
Enbridge Services 91 87
CPL/WTU 228 253
ATCO 54 51
Dyno-Rod 17 17
Residential Services Group 81 92
Oxxio (i) 69
Newfield 57 57
Strategic Energy 94 104
Caythorpe 33 33
Heimdal 165 151
Venture 654
Other 64 63
  2,088 1,510

16. Other intangible assets

  Application software(v)
£m
Emissions allowances and renewable obligation certificates
£m
Brands(i)
£m
Customer relationships
£m
Consents
£m
Exploration and evaluation expenditure
£m
Other
£m
Total
£m
Cost                
1 January 2009 521 193 59 108 29 97 46 1,053
Additions – acquired from a third party 111 278 5 46 2 442
Additions – internally generated 29 1 1 31
Acquisitions (note 37) 15 8 15 202 100 263 603
Disposal of subsidiaries (17) (17)
Transfer to assets held for sale(iv) (43) (5) (15) (218) (260) (541)
Surrenders (286) (286)
Write-downs recognised in income(ii) (55) (55)
Exchange adjustments (1) (17) 4 (14) (28)
31 December 2009 633 188 59 80 12 193 37 1,202
Aggregate amortisation and impairment                
1 January 2009 278 31 37 2 34 382
Amortisation 70 10 10 90
Impairments recognised in income (iii) 21 35 20 76
Disposal of subsidiaries (2) (2)
Surrenders (29) (29)
Transfer to assets held for sale (iv) (18) (18) (10) (46)
Exchange adjustments 1 (4) (3)
31 December 2009 352 37 45 34 468
Net book value at 31 December 2009 281 151 59 35 12 193 3 734
  Application software(v)
£m
Emissions allowances and renewable obligation certificates
£m
Brands(i)
£m
Customer relationships
£m
Consents
£m
Exploration and evaluation expenditure
£m
Other
£m
Total
£m
  1. Brands include £57 million (2008: £57 million) associated with the Dyno-Rod brand, acquired on the acquisition of the Dyno group of companies during 2004. In accordance with IAS 38 paragraph 88, management has ascribed the brand an indefinite useful life because there is no foreseeable limit to the period over which the Dyno brand is expected to generate net cash inflows. In reaching this determination, management has reviewed potential threats from competition, the risks of technological obsolescence and the expected usage of the brand by management.
  2. A £55 million (2008: £22 million) write-down of exploration and evaluation expenditure was recognised through operating costs, £36 million (2008: £nil) as an exceptional item due to declining commodity prices making the assets uneconomic, £19 million (2008: £22 million) relating to unsuccessful drilling activity.
  3. A £35 million (2008: £31 million) impairment of emissions allowances was recognised within cost of sales, to reflect a reduction in fair value (less costs to sell) as a result of a decrease in market prices, that was offset by a reduction in the obligation related to emissions allowances of £35 million (2008: £31 million). A £21 million (2008: £nil) impairment of application software was recognised as an exceptional item due to restructuring activity in the Downstream UK business, as described in note 8. A £19 million (2008: £nil) impairment of customer relationship intangibles was recognised as an exceptional item due to increased customer churn in the Texas market of North America – Residential energy supply.
  4. During 2009 European operations (excluding Germany) have been treated as discontinued operations and Segebel S.A. was subsequently sold (note 38) and hence other intangible assets associated with these operations are no longer included within Group other intangible assets at year end.
  5. Application software includes assets under construction with a cost of £40 million (2008: £nil).
Cost
1 January 2008 447 53 57 72 29 41 44 743
Additions – acquired from a third party 57 249 14 16 1 337
Additions – internally generated 2 2
Acquisitions (note 37) 2 20 54 76
Disposals (9) (18) (27)
Surrenders (100) (100)
Write-downs recognised in income (ii) (22) (22)
Exchange adjustments 15 20 8 1 44
31 December 2008 521 193 59 108 29 97 46 1,053
Aggregate amortisation and impairment                
1 January 2008 214 32 32 278
Amortisation 58 14 2 2 76
Impairments recognised in income (iii) 31 31
Disposals (18) (18)
Exchange adjustments 6 9 15
31 December 2008 278 31 37 2 34 382
Net book value at 31 December 2008 243 162 59 71 27 97 12 671

17. Impairment testing of goodwill and intangibles with indefinite useful lives

(a) Carrying amount of goodwill and intangible assets with indefinite useful lives allocated to cash-generating units

Goodwill acquired through business combinations and indefinite-lived intangible assets have been allocated for impairment testing purposes to individual cash-generating units each representing the lowest level within the Group at which the goodwill or indefinite-lived intangible asset is monitored for internal management purposes as follows:

    2009 2008
Cash-generating unit Principal acquisitions to which goodwill and intangibles with indefinite useful lives relates Carrying amount of goodwill
£m
Carrying amount of indefinite-lived intangible asset
£m
Total
£m
Carrying amount of goodwill
£m
Carrying amount of indefinite-lived intangible asset
£m
Total
£m
  1. Increase due primarily to goodwill arising from the acquisition of Venture Production plc during 2009 (note 37).
  2. Carrying amount of goodwill also contains goodwill from other Direct Energy acquisitions which are not significant compared with the aggregate carrying value of goodwill reported within the cash-generating unit.
  3. Oxxio has been classified as a discontinued operation in 2009 (note 38).
  4. Goodwill balances allocated across multiple cash-generating units. The amount of goodwill allocated to each cash-generating unit is not significant compared with the aggregate carrying value of goodwill reported within the Group. Included in this amount is £2 million impairment of goodwill attributable to Semplice Energy Ltd. £2 million of goodwill attributable to the Group’s interest in GLID Wind Farms TopCo Limited was disposed of in 2009, as described in note 38.
Downstream UK – Business energy supply and services Enron Direct/Electricity Direct 133 133 133 133
Downstream UK – Residential services – Dyno-Rod Dyno-Rod 17 57 74 17 57 74
Upstream UK – Upstream gas and oil Newfield/Heimdal/Venture(i) 876 876 208 208
North America – Residential energy supply Direct Energy/ATCO/CPL/WTU (ii) 602 602 612 612
North America – Business energy supply Direct Energy/ATCO/Strategic Energy 191 191 196 196
North America – Residential and business services Enbridge Services/Residential Services Group (ii) 192 192 200 200
European Energy – Oxxio Oxxio (iii) 69 69
Other Various (iv) 77 77 75 75
    2,088 57 2,145 1,510 57 1,567

(b) Basis on which recoverable amount has been determined

Value in use calculations have been used to determine recoverable amounts for all of the goodwill and indefinite-lived intangible asset balances noted above, with the exception of the impairment test for the Upstream UK – Gas production and development cash-generating unit, where fair value less costs to sell has been used as the basis for determining recoverable amount.

(i) Value in use

The value in use calculations use pre-tax cash flow projections based on the Group’s internal Board-approved three-year business plans. The Group’s business plans are based on past experience, and adjusted to reflect market trends, economic conditions, key risks, the implementation of strategic objectives and changes in commodity prices, as appropriate. Commodity prices used in the planning process are based in part on observable market data and in part on internal estimates. The extent to which the commodity prices used in the business plans are based on observable market data is determined by the extent to which the market for the underlying commodity is judged to be active. Note 29 provides additional detail on the active period of each of the commodity markets in which the Group operates.

Cash flows beyond the three-year plan period have been extrapolated using growth rates in line with historic long-term growth rates in the market where the cash-generating unit operates.

Cash flows are discounted using a discount rate specific to each cash-generating unit to determine the cash-generating unit’s value in use, which is then deemed to be its recoverable amount. The recoverable amount is compared to the carrying value of each cash-generating unit’s net assets to determine whether the carrying values of any of the Group’s goodwill or indefinite-lived intangible asset balances are greater than their corresponding recoverable amounts.

(ii) Fair value less costs to sell

Fair value less costs to sell is used as the basis for determining the recoverable amount of goodwill allocated to Upstream UK – Upstream gas and oil. This methodology is deemed to be more appropriate as it is based on the post-tax cash flows arising from each field within Upstream UK – Upstream gas and oil. This is consistent with the approach taken by management to evaluate the economic value of the underlying assets.

Fair value less costs to sell is determined by discounting the post-tax cash flows expected to be generated by the gas production and development assets within Upstream UK – Upstream gas and oil, net of associated selling costs, taking into account those assumptions that market participants would use in estimating fair value. Post-tax cash flows are derived from projected production profiles of each field within Upstream UK – Upstream gas and oil, taking into account forward prices for gas and liquids over the relevant period.

Where forward market prices are not available, prices are determined based on internal model inputs. Note 29 provides additional detail on the active period of each of the commodity markets in which the Group operates.

The date of cessation of production depends on the interaction of a number of variables, such as the recoverable quantities of hydrocarbons, production costs, the contractual duration of the licence area and the selling price of the gas and liquids produced. As each field has specific reservoir characteristics and economic circumstances, the post-tax cash flows for each field are computed using individual economic models and key assumptions as determined by management. Post-tax cash flows used in the fair value less costs to sell calculation for the first three years are based on the Group’s internal Board-approved three-year business plans and, thereafter, are based on long-term production and cash flow forecasts. Where necessary, the business plan and long-term forecasts are updated in the economic models to reflect the latest view of each field as at the balance sheet date. The future post-tax cash flows are discounted using a post-tax nominal discount rate of 7% to determine the fair value less costs to sell of Upstream UK – Upstream gas and oil. Fair value less costs to sell is compared to the carrying value of the Upstream UK – Upstream gas and oil cash-generating unit to determine whether goodwill is impaired. The discount rate used in the fair value less costs to sell calculation is determined in the same manner as the discount rates used in the value in use calculations described below, with the exception of the adjustment required to determine an equivalent pre-tax discount rate that is not required for the fair value less costs to sell calculation.

(c) Key rates used in value in use calculations

(i) Growth rate to perpetuity

Long-term growth rates are determined using a blend of publicly available historical data and long-term growth rate forecasts published by external analysts.

(ii) Discount rates

Discount rates reflect the current market assessments of the time value of money and are derived from the Group’s weighted average cost of capital. Risks specific to cash-generating units are reflected within cash flow forecasts. Each cash-generating unit’s weighted average cost of capital is then adjusted to reflect the impact of tax in order to calculate an equivalent pre-tax discount rate.

Long-term growth rates used in the value in use calculations for each of the Group’s cash-generating units are provided in the table below together with pre-tax discount rates.

  Downstream UK – Business energy supply and services Downstream UK – Residential services North America – Residential energy supply North America – Business energy supply North America – Residential and business services
Growth rate to perpetuity 1.7% 1.7% 1.5% 2.0% 1.9%
Pre-tax discount rate 7.6% 7.6% 7.5% 7.5% 7.5%

(iii) Inflation rates

Inflation rates used in the three-year business plan were based on a blend of a number of publicly available inflation forecasts available in the UK, Canada and the US. Inflation rates used for the value in use calculations were as follows: UK – 1.7% in 2010–2012, Canada – 1.8% in 2010–2012 and the US – 2.0% in 2010–2012.

(d) Key assumptions used and summary of results

(i) Downstream UK – Business energy supply and services

Key assumptions
  • Gross margin percentage: based on the contractual terms for customers on existing contracts and gross margin percentages achieved in the period leading up to approval of the business plan for new and renewal customers, adjusted to reflect current market conditions and higher expected transportation costs.
  • Revenues: based on the average market share achieved immediately prior to the approval of the business plan, adjusted for growth forecasts based on sales and marketing activity and recent customer acquisitions, with prices based on forward market curves for both gas and electricity.
  • Operating costs: based on a projection of headcount in line with expected activity and salary increases based on inflation expectations, with a slight increase in the provision for credit losses experienced historically to reflect the current economic environment in the UK.
Summary of results

The recoverable amount of the Downstream UK – Business energy supply and services cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount.

(ii) Downstream UK – Residential services – Dyno-Rod

Key assumptions
  • Gross margin percentage: based on gross margins achieved in the period leading up to the approval of the business plan.
  • Revenues: based on revenue levels achieved in the period leading up to the approval of the business plan adjusted for the impact of increased marketing spend and the targeting of key accounts with individual sales staff, with a slight reduction in growth rates to reflect the current economic environment in the UK.
  • Operating costs: based on a projection of headcount in line with expected activity and salary increases based on inflation expectations.
Summary of results

The recoverable amount of the Downstream UK – Residential services – Dyno-Rod cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill or indefinite-lived intangible asset to be equal to or less than their carrying amounts.

(iii) Upstream UK – Upstream gas and oil

Key assumptions
  • Cash inflows: based on forward market prices for gas and oil for the active period of the market and internal model inputs thereafter, with reserve volumes and production profiles based on internal management or operator estimates.
  • Cash outflows: based on forecast capital and operating expenditure and the estimated future costs of abandonment.
  • Taxation: based on tax rates expected to be in effect at the point of the forecast cash flow.
Summary of results

The recoverable amount of the Upstream UK – Gas production and development cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount.

(iv) North America – Residential energy supply

Key assumptions
  • Gross margin percentage: based on contractual terms for customers on existing contracts and gross margin percentages achieved in the period leading up to the approval of the business plan for new and renewal customers, adjusted to reflect competitor data, where available. Where applicable, regulated gross margin percentages are based on the gross margin percentages included in regulatory applications submitted to the Alberta Utilities Commission in Canada.
  • Revenues: based on average market share by individual market sector achieved in the period immediately prior to the approval of the business plan, adjusted for expectations of growth or decline based on individual jurisdictions to reflect regulatory or competitive differences, including customer propensity to switch, and contractual prices, with non-contractual prices based on forward market gas and power curves in Canada and the US.
  • Operating costs: based on a projection of headcount in line with expected activity and salary increases based on inflation expectations, with a slight decrease in costs to reflect planned business process efficiencies.
Summary of results

The recoverable amount of the North America – Residential energy supply cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount.

(v) North America – Business energy supply

Key assumptions
  • Gross margin percentage: based on contractual terms for gross margin under contract and historical experience for planned renewals and new sales. Unit margins were planned to achieve an acceptable return on risk adjusted capital.
  • Revenues: based on historical growth trends and planned sales activities by individual market sector. Prices are based on forward market curves for gas and electricity in Canada and the US.
  • Operating costs: based on historical trends adjusted to reflect expected cost optimisations, as well as improved bad debt performance as a result of assumed economic and credit market recovery.
Summary of results

The recoverable amount of the North America – Business energy supply cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount.

(vi) North America – Residential and business services

Key assumptions
  • Gross margin percentage: based on gross margin percentages achieved in the period leading up to the approval of the business plan, adjusted to reflect the current economic conditions and housing decline in North America.
  • Revenues: based on historical growth trends by individual market sector, adjusted for new product offerings and continued penetration into new markets.
  • Operating costs: based on projected headcount and inflationary increases.
Summary of results

An amount of £3 million of goodwill attributable to the North America – Residential and business services cash-generating unit was written off as a result of the Appliances division being classified as held for sale (in accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, the assets should be written down to the lower of their cost and recoverable amount). The recoverable amount of the North America – Residential and business services cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount.

18. Property, plant and equipment

  Land and buildings(i)
£m
Plant,equipment and vehicles (ii),(iii)
£m
Power generation (ii),(iii)
£m
Gas storage and production (ii),(iii),(iv)
£m
Total
£m
Cost          
1 January 2009 (restated) (vii) 22 424 2,483 6,234 9,163
Additions 60 5 316 469 850
Capitalised borrowing costs (note 10) 34 34
Acquisitions (note 37) 13 14 903 1,796 2,726
Fair value unwind capitalisation (vi) (18) (18)
Disposals (5) (9) (4) (18)
Reclassification as joint venture (370) (370)
Transfer to assets held for sale(v) (71) (47) (1,094) (1,212)
Revisions and additions to decommissioning liability (note 28) (6) 74 68
Exchange adjustments (1) (2) (79) 64 (18)
31 December 2009 23 389 2,144 8,649 11,205
Aggregate depreciation and impairment          
1 January 2009 10 167 434 3,863 4,474
Charge for the year 2 43 144 455 644
Disposals (5) (9) (4) (18)
Reclassification as joint venture (27) (27)
Impairments 2 35 52 89
Transfer to assets held for sale(v) (1) (7) (24) (32)
Exchange adjustments 3 (8) 21 16
31 December 2009 11 203 545 4,387 5,146
Net book value at 31 December 2009 12 186 1,599 4,262 6,059
  Land and buildings(i)
£m
Plant,equipment and vehicles (ii),(iii)
£m
Power generation (ii),(iii)
£m
Gas storage and production (ii),(iii),(iv)
£m
Total
£m
Cost
1 January 2008 39 288 2,076 5,433 7,836
Additions 115 312 204 631
Capitalised borrowing costs (note 10) (vii) 9 9
Acquisitions (note 37) 4 342 346
Disposals (18) (8) (8) (34)
Revisions and additions to decommissioning liability (note 28) 16 165 181
Exchange adjustments 1 25 87 81 194
31 December 2008 (restated) (vii) 22 424 2,483 6,234 9,163
Aggregate depreciation and impairment          
1 January 2008 17 121 305 3,483 3,926
Charge for the year 1 46 117 351 515
Disposals (8) (8) (7) (23)
Exchange adjustments 8 19 29 56
31 December 2008 10 167 434 3,863 4,474
Net book value at 31 December 2008 (restated) (vii) 12 257 2,049 2,371 4,689

During 2009, declining commodity prices have given rise to impairment charges within Upstream UK – Power generation (£35 million), Upstream UK – Upstream gas and oil (£22 million) and North America – Upstream and wholesale energy (£30 million). The impairment charges arise as a result of the assets being written down to the higher of their value in use (Upstream UK – Power generation) or fair value less costs to sell (Upstream UK – Upstream gas and oil, and North America – Upstream and wholesale energy). Note 17 provides more detail on the general approach to impairment calculations and provides the assumptions used to assess Upstream UK – Upstream gas and oil for impairment. For North America – Upstream and wholesale energy, fair value less cost to sell is determined based on evidence from recent acquisition transactions for similar assets in the local oil and gas market, net of estimated selling costs.

For Upstream UK – Power generation assets, the future cash flows were discounted using a pre-tax discount rate of 7.6%. The key assumptions are:

  • Cash inflows: based on forward market prices for power for the active period of the market and internal models thereafter, with production profiles based on best economic running decision;
  • Cash outflows: based on planned operating and capital expenditure; and
  • Taxation: based on tax rates expected to be in effect at the point of the forecast cash flow.
(i) The net book value of land and buildings comprises the following: 2009
£m
2008
£m
Freeholds 6 5
Long leaseholds 1 1
Short leaseholds 5 6
  12 12
(ii) Assets in the course of construction are included within the following categories of property, plant and equipment: 2009
£m
2008
£m
Plant, equipment and vehicles 20 33
Power generation 355 697
Gas storage and production 757 186
  1,132 916
(iii) Assets held under finance leases included in totals above: 2009   2008
  Plant, equipment
and vehicles
£m
Power generation
£m
Gas storage and production
£m
Total
£m
  Power generation
£m
Gas storage and production
£m
Total
£m
Cost at 1 January 469 415 884   469 415 884
Additions 2 2  
Cost at 31 December 2 469 415 886   469 415 884
Aggregate depreciation at 1 January 118 360 478   90 352 442
Charge for the year 1 28 5 34   28 8 36
Aggregate depreciation at 31 December 1 146 365 512   118 360 478
Net book value at 31 December 1 323 50 374   351 55 406
  • iv The net book value of decommissioning costs included within power generation and gas storage and production assets was £565 million (2008: £413 million).
  • v During 2009 European operations (excluding Germany) have been treated as discontinued operations and Segebel S.A. was subsequently sold (note 38) and hence property, plant and equipment associated with these operations are no longer included within Group property, plant and equipment at 31 December 2009.
  • vi Relates to the consumption of a rig contract which was out-of-the-money on acquisition. As the contract is utilised, the fair value is added to the cost of the associated fixed assets.
  • vii Restated to capitalise borrowing costs on adoption of IAS 23 (Amendment), as explained in note 2.

The net book value of assets to which title was restricted at 31 December 2009 was £374 million (2008: £351 million), of which £324 million (2008: £351 million) relates to the Spalding power station finance lease asset. The net book value of assets pledged as security for liabilities as at 31 December 2009 was £157 million (2008: £nil).

19. Interests in joint ventures and associates

(a) Interest in joint ventures and associates Investments in joint ventures and associates
£m
Shareholder loans
£m
Total
£m
  1. On 26 November 2009, the Group acquired a 20% interest in Lake Acquisitions Limited (British Energy) for £2,255 million, which is the holding company of the British Energy Group and a 20% interest in NNB Holding Company Limited for £32 million, which is the investment vehicle for new nuclear build activity.
  2. Other additions relate to the reclassification of interests in GLID Wind Farms TopCo Limited (note 38) and the acquisitions of North Sea Infrastructure Partners Limited, Bacton Storage Company Limited, Secure Electrans Limited, Ten Degrees North Energy Limited and Sevan Production General Partnership.
  3. On 20 January 2009 the Group gained control of Segebel S.A. and from this date until the date of subsequent disposal the investment was consolidated as a subsidiary (notes 37 and 38).
1 January 2009 286 44 330
Additions(i),(ii) 2,303 39 2,342
Reclassification as a subsidiary(iii) (216) (216)
Decrease in shareholder loans (17) (17)
Disposals of investments (1) (1)
Share of profits for the year 1 1
Exchange adjustments (17) (17)
31 December 2009 2,356 66 2,422
  Investments in joint ventures and associates
£m
Shareholder loans
£m
Total
£m
  1. Share of profits for 2008 includes £3 million in respect of Segebel S.A., which was classified as discontinued in 2009.
1 January 2008 222 63 285
Decrease in shareholder loans (19) (19)
Share of profits for the year (i) 12 12
Exchange adjustments 52 52
31 December 2008 286 44 330

(b) Share of joint ventures’ and associates’ assets and liabilities

The Group’s share of joint ventures’ and associates’ gross assets and gross liabilities at 31 December 2009 principally comprises its interests in Braes of Doune Wind Farm (Scotland) Limited, Barrow Offshore Wind Limited, GLID Wind Farms TopCo Limited, Lake Acquisitions Limited (British Energy) and NNB Holding Company Limited.

The Group’s share of the investments in and results of Braes of Doune Wind Farm (Scotland) Limited, Barrow Offshore Wind Limited, GLID Wind Farms TopCo Limited, Lake Acquisitions Limited (British Energy) and NNB Holding Company Limited are included within the Upstream UK – Power generation segment. The Group’s share of the investments in and results of Secure Electrans Limited are included within the Downstream UK – Residential energy supply segment. The Group’s share of the investments in and results of Bacton Storage Company Limited are included within the Storage UK segment. The Group’s share of the investments in and results of North Sea Infrastructure Partners Limited, Ten Degrees North Energy Limited and Sevan Production General Partnership are included within the Upstream UK – Upstream gas and oil segment.

  2009 2008
  Joint ventures   Associates    
  Braes of DouneWind Farm (Scotland) Limited
£m
Barrow Offshore Wind Limited
£m
GLID Wind Farms TopCo Limited(i)
£m
  Lake Acquisitions Limited (British Energy)
£m
NNB Holding Company Limited
£m
Other (ii)
£m
Total
£m
Total
£m
  1. As part of a finance arrangement entered into by GLID Wind Farms TopCo Limited, the Group’s shares in GLID Wind Farms TopCo Limited are pledged to a third party. The pledge will only come into force should GLID Wind Farms TopCo Limited default on any of its obligations under the finance arrangement.
  2. Other includes joint ventures of North Sea Infrastructure Partners Limited, Bacton Storage Company Limited and Secure Electrans Limited and associates of Ten Degrees North Energy Limited and Sevan Production General Partnership.
Share of non-current assets 33 59 146   3,773 31 36 4,078 412
Share of current assets 10 14 32   628 5 13 702 204
  43 73 178   4,401 36 49 4,780 616
Share of current liabilities (7) (1) (41)   (188) (4) (2) (243) (173)
Share of non-current liabilities (23) (23) (152)   (1,981) (2) (2,181) (157)
  (30) (24) (193)   (2,169) (4) (4) (2,424) (330)
Share of net assets of joint ventures and associates 13 49 (15)   2,232 32 45 2,356 286
Shareholder loans 22 5 22   15 2 66 44
Interests in joint ventures and associates 35 54 7   2,247 32 47 2,422 330
                   
Net cash/(debt) included in share of net assets 24 11 181   20 3 (2) 237 (11)
(c) Share of profits/(losses) in joint ventures and associates 2009 2008 (restated) (i)
  Joint ventures   Associates  
  Braes of Doune Wind Farm (Scotland) Limited
£m
Barrow OffshoreWind Limited
£m
GLID Wind Farms TopCo Limited
£m
  Lake Acquisitions Limited (British Energy)
£m
Total
£m
Total
£m
  1. Restated to present Segebel S.A. as a discontinued operation, as explained in note 38.
  2. Includes £10 million (2008: £nil) relating to depreciation of fair value uplifts to property, plant and equipment on acquiring the British Energy investments. The associated tax impact is £3 million credit (2008: £nil).
  3. No profits or losses arose in NNB Holding Company Limited or in Other.
Income 8 13 3   52 76 21
Expenses excluding certain re-measurements (ii) (3) (5) (1)   (49) (58) (9)
Certain re-measurements   (12) (12)
  5 8 2   (9) 6 12
Interest (1) (1)   (2) (4)
Taxation excluding certain re-measurements (ii) (2) (2)   (4) (3)
Taxation on certain re-measurements   3 3
Share of post-taxation results of joint ventures and associates (iii) 3 5 1   (8) 1 9

British Energy

The Group acquired a 20% interest in British Energy for £2,255 million and NNB Holding Company Limited for £32 million on 26 November 2009, including transaction costs of £15 million which were unpaid at 31 December 2009. As explained in note 2, the Group has undertaken a provisional notional fair value exercise at the date of acquisition to allocate the cost of the investment to the individual assets, liabilities and contingent liabilities at their acquisition-date fair values. The fair values attributed at acquisition date are provisional as the Directors have not yet reached final determination on all aspects of the fair value exercise. The Directors will finalise the fair values within 12 months of the acquisition date. The Group’s share of loss arising from its investment in British Energy for the period 26 November 2009 to 31 December 2009 as set out in the table above includes the effect of unwinding the fair value adjustments. As explained in note 2 the depreciation, net of taxation, arising on fair value uplifts attributed to the nuclear power stations is reversed in arriving at adjusted profit for the period as shown in the reconciliation table below and as set out in notes 6 and 14.

(d) Reconciliation of share of profits/(losses) in joint ventures and associates to share
of adjusted profits/(losses) in joint ventures and associates
2009 2008 (restated) (i)
  Joint ventures   Associates  
  Braes of DouneWind Farm (Scotland) Limited
£m
Barrow Offshore Wind Limited
£m
GLID Wind Farms TopCo Limited
£m
  Lake Acquisitions Limited (British Energy)
£m
Total
£m
Total
£m
  1. Restated to present Segebel S.A. as a discontinued operation, as explained in note 38.
  2. Relates to depreciation of fair value uplifts to property, plant and equipment on acquiring the British Energy investments.
Share of post-taxation results of joint ventures and associates 3 5 1   (8) 1 9
Certain re-measurements (net of taxation)   9 9
Depreciation – British Energy (net of taxation) (ii)   7 7
Interest 1 1   2 4
Taxation (excluding certain re-measurements and British Energy depreciation) 2 2   3 7 3
Share of adjusted results of joint ventures and associates 5 8 2   13 28 12

20. Inventories

  2009
£m
2008
£m
Gas in storage and transportation 140 223
Other raw materials and consumables 108 93
Finished goods and goods for resale 134 96
  382 412

The Group consumed £786 million of inventories (2008: £515 million) during the year. Write-downs of inventory of £3 million (2008: £23 million) were recognised in gross profit during the year to reflect the impact of a reduction in the forward market price of gas on the net realisable value of gas in storage and transportation, with £1 million recognised in Direct Energy and £2 million recognised in Centrica Energy.