Centrica PLC — Audit Report / Information 2008

Dec 31, 2008

Independent Auditors' Report to the members of Centrica plc

Independent Auditors' report to the members of Centrica plc

We have audited the Group Financial Statements of Centrica plc for the year ended 31 December 2008 which comprise the Group Income Statement, the Group Balance Sheet, the Group Cash Flow Statement, the Group Statement of Recognised Income and Expense and the related notes. These Group Financial Statements have been prepared under the accounting policies set out therein.

We have reported separately on the parent Company Financial Statements of Centrica plc for the year ended 31 December 2008 and on the information in the Directors' Remuneration Report that is described as having been audited.

Respective responsibilities of Directors and Auditors

The Directors' responsibilities for preparing the Annual Report and the Group Financial Statements in accordance with applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union are set out in the Statement of Directors' Responsibilities.

Our responsibility is to audit the Group Financial Statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company's members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or in to whose hands it may come save where expressly agreed by our prior consent in writing.

We report to you our opinion as to whether the Group Financial Statements give a true and fair view and whether the Group Financial Statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether, in our opinion the information given in the Directors' Report (comprising the Directors' Report – Business Review and the Directors' Report – Governance) is consistent with the Group Financial Statements.

In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors' remuneration and other transactions is not disclosed.

We review whether the Corporate Governance Statement reflects the Company's compliance with the nine provisions of the Combined Code (2006) specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group's corporate governance procedures or its risk and control procedures.

We read other information contained in the Annual Report and consider whether it is consistent with the audited Group Financial Statements. The other information comprises only – At a Glance, Financial Highlights, the Chairman's Statement, the Directors' Report, the unaudited part of the Directors' Remuneration Report, the Gas and Liquids Reserves, Five Year Record and Shareholder Information. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group Financial Statements. Our responsibilities do not extend to any other information.

Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group Financial Statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the Group Financial Statements, and of whether the accounting policies are appropriate to the Group's circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group Financial Statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group Financial Statements.

Opinion

In our opinion:

• x the Group Financial Statements give a true and fair view, in accordance with IFRS as adopted by the European Union, of the state of the Group's affairs as at 31 December 2008 and of its result and cash flows for the year then ended;
• x the Group Financial Statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and
• x the information given in the Directors' Report is consistent with the Group Financial Statements.

PricewaterhouseCoopers LLP

Chartered Accountants and Registered Auditors London 26 February 2009

57 Financial Statements 58 Group Financial Statements 62 Notes to the Financial Statements 111 Reserves

• 62 General information 62 Summary of significant accounting policies
• 71 Critical accounting judgements and key sources of estimation
• uncertainty 74 Financial risk management
• 79 Capital management
• 80 Segmental analysis 84 Costs of continuing
• operations 85 Exceptional items and
• certain re-measurements

• 85 Directors and employees

• 86 Net interest

• 87 Taxation
• 88 Dividends
• 88 Earnings per ordinary share
• 89 Goodwill
• 90 Other intangible assets
• 91 Impairment testing of goodwill and intangibles
• with indefinite useful lives 95 Property, plant and

• 98 Trade and other

• 99 Derivative financial

• instruments 102 Hedge accounting
• 103 Cash and cash
• equivalents 104 Trade and other
• payables
• and other borrowings
• 114 Minority interests 115 Notes to the Group Cash
• Flow Statement 117 Share-based payments
• 123 Pensions
• 126 Business combinations 129 Commitments and
• contingencies
• 130 Related party transactions
• 131 Fixed-fee service contracts
• 132 Events after the balance sheet date
• 134 Principal undertakings
• 135 Independent Auditors' Report to the Members of Centrica plc 136 Company Balance Sheet 137 Notes to the Company Balance Sheet 143 Gas and Liquids Reserves

• 144 Five Year Record

• Shareholder Information

• 96 Interests in joint ventures and associates 98 Inventories receivables instruments

• equipment
• 106 Deferred and current and assets
• corporation tax liabilities 107 Provisions for other liabilities and charges
• 108 Fair value of financial
• 104 Bank overdrafts, loans
• 110 Called up share capital

Financial Statements

Group Income Statement

			2008			2007 (restated) (ii), (iii)
		Results for the year before exceptional items and certain re-measurements (i)	Exceptional items and certain re-measurements (i)	Results for the year	Results for the year before exceptional items and certain re-measurements (i)	Exceptional items and certain re-measurements (i)	Results for the year
Year ended 31 December	Notes	£m	£m	£m	£m	£m	£m
Continuing operations
Group revenue (ii)	6	21,345	–	21,345	16,272	–	16,272
Cost of sales (ii)	7	(17,139)	–	(17,139)	(12,147)	–	(12,147)
Re-measurement of energy contracts (i)	6,8	–	(1,411)	(1,411)	–	244	244
Gross profit		4,206	(1,411)	2,795	4,125	244	4,369
Operating costs before exceptional items	7	(2,280)	–	(2,280)	(2,190)	–	(2,190)
Impairment of Oxxio goodwill and other assets	8	–	(67)	(67)	–	–	–
Operating costs		(2,280)	(67)	(2,347)	(2,190)	–	(2,190)
Share of profits in joint ventures and associates,
net of interest and taxation (i)	6,8,18	16	(4)	12	14	(9)	5
Group operating profit	6	1,942	(1,482)	460	1,949	235	2,184
Interest income	10	658	–	658	258	–	258
Interest expense	10	(669)	–	(669)	(331)	–	(331)
Net interest expense	10	(11)	–	(11)	(73)	–	(73)
Profit from continuing operations
before taxation		1,931	(1,482)	449	1,876	235	2,111
Taxation on profit from continuing operations	11	(1,027)	434	(593)	(753)	(60)	(813)
Profit/(loss) from continuing operations
after taxation		904	(1,048)	(144)	1,123	175	1,298
Profit/(loss) from discontinued operations (i)		–	–	–	1	(19)	(18)
Gain on disposal of discontinued operations	8	–	–	–	–	227	227
Discontinued operations		–	–	–	1	208	209
Profit/(loss) for the year		904	(1,048)	(144)	1,124	383	1,507
Attributable to:
Equity holders of the parent		903	(1,048)	(145)	1,122	383	1,505
Minority interests	31	1	–	1	2	–	2
		904	(1,048)	(144)	1,124	383	1,507
		Pence		Pence	Pence		Pence
Earnings/(loss) per ordinary share (iii)
From continuing and discontinued operations:
Basic	13			(3.5)			36.5
Adjusted basic	13	21.5			27.2
Diluted	13			(3.5)			35.9
From continuing operations:
Basic	13			(3.5)			31.4
Adjusted basic	13	21.5			27.2
Diluted	13			(3.5)			30.9
Interim dividend paid per ordinary share (iii)	12			3.47			2.98
Final dividend proposed per ordinary share (iii)	12			8.73			8.59

(i) Certain re-measurements (notes 2 and 8) included within operating profit comprise re-measurement arising on energy procurement activities and re-measurement of proprietary trades in relation to cross-border transportation or capacity contracts. Certain re-measurements included within profit from discontinued operations in 2007 comprise re-measurement of the publicly traded units of The Consumers' Waterheater Income Fund. All other re-measurement is included within results before exceptional items and certain re-measurements.

(ii) Group revenue and cost of sales have been restated to report gas sales revenue of Centrica Storage net of cost of sales to better reflect the nature of the transactions as explained in note 2.

(iii) Earnings per ordinary share and dividend per ordinary share figures have been restated to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

Group Balance Sheet

31 December	Notes	2008 £m	Di 2007 rec £m
Non-current assets			tor
Goodwill	14	1,510	s' R 1,074
Other intangible assets	15	671	465 ep
Property, plant and equipment	17	4,680	or 3,910
Interests in joint ventures and associates	18	330	t – 285
Deferred tax assets	26	311	Bu 27
Trade and other receivables	20	34	sin 33
Derivative financial instruments	21	195	ess 72
Available-for-sale financial assets	28	35	R 39
Retirement benefit assets	34	73	ev 152
		7,839	iew 6,057
Current assets
Inventories	19	412	241
Current tax assets	26	39	Di 40
Trade and other receivables	20	5,335	rec 3,423
Derivative financial instruments	21	1,720	tor 914
Available-for-sale financial assets	28	63	s' R 50
Cash and cash equivalents	23	2,939	ep 1,130
		10,508	or 5,798
Total assets		18,347	t – 11,855
Current liabilities			G ov
Trade and other payables	24	(4,364)	ern (3,371)
Current tax liabilities		(365)	(281) an
Bank overdrafts, loans and other borrowings	25	(330)	(221) ce
Derivative financial instruments	21	(3,932)	(1,404)
Provisions for other liabilities and charges	27	(29)	(140)
		(9,020)	(5,417)
Net current assets		1,488	381
Non-current liabilities			Fin
Trade and other payables	24	(67)	an (20)
Bank loans and other borrowings	25	(3,218)	cia (1,793)
Derivative financial instruments	21	(157)	l S (11)
Deferred tax liabilities	26	(448)	tat (596)
Retirement benefit obligations	34	(186)	em (55) en
Provisions for other liabilities and charges	27	(865)	(581) ts
		(4,941)	(3,056)
Net assets		4,386	3,382
Equity
Called up share capital	29,30	315	227
Share premium account	30	729	685
Merger reserve	30	467	467
Capital redemption reserve	30	16	16
Other reserves	30	2,799	1,928
Shareholders' equity	30	4,326	3,323
Minority interests in equity	31	60	59
Total minority interests and shareholders' equity		4,386	3,382

The Financial Statements on pages 58 to 134 were approved and authorised for issue by the Board of Directors on 26 February 2009 and were signed below on its behalf by:

Sam Laidlaw Nick Luff

Chief Executive Group Finance Director

Financial Statements continued

Group Statement of Recognised Income and Expense

Year ended 31 December	Notes	2008 £m	2007 £m
(Loss)/profit for the year		(144)	1,507
(Losses)/gains on revaluation of available-for-sale financial assets	30	(19)	1
(Losses)/gains on cash flow hedges	30	(318)	169
Exchange differences on translation of foreign operations	30	(29)	15
Actuarial (losses)/gains on defined benefit pension schemes	34	(399)	284
Tax on items taken directly to equity	30	203	(120)
Net (expense)/income recognised directly in equity		(562)	349
Transferred to income and expense on cash flow hedges	30	(30)	382
Transferred to assets and liabilities on cash flow hedges	30	1	–
Exchange differences transferred to income and expense on disposal of subsidiaries	30	–	(4)
Tax on items transferred from equity	30	5	(128)
Transfers		(24)	250
Total recognised income and expense for the year		(730)	2,106
Total income and expense recognised in the year is attributable to:
Equity holders of the parent		(731)	2,104
Minority interests		1	2
		(730)	2,106

Group Cash Flow Statement

Year ended 31 December	Notes	2008 £m	2007 £m
Operating cash flows before movements in working capital		2,397	2,494
(Increase)/decrease in inventories		(143)	38
(Increase)/decrease in trade and other receivables		(1,377)	181
Increase in trade and other payables		425	44
Cash generated from continuing operations		1,302	2,757
Income taxes paid		(374)	(341)
Net petroleum revenue tax paid		(533)	(60)
Interest received		23	27
Interest paid		(47)	(3)
Payments relating to exceptional charges		(74)	(90)
Net cash flow from continuing operating activities	32	297	2,290
Net cash flow from discontinued operating activities	32	–	67
Net cash flow from operating activities		297	2,357
Purchase of interests in subsidiary undertakings and businesses net of cash and
cash equivalents acquired	35	(395)	(262)
Purchase of intangible assets	6	(184)	(185)
Disposal of intangible assets		12	14
Purchase of property, plant and equipment	6	(626)	(563)
Disposal of property, plant and equipment		11	76
Investments in joint ventures and associates		–	(45)
Repayments of loans to joint ventures and associates		19	–
Interest received		63	63
Net purchase of available-for-sale financial assets		(22)	(2)
Net cash flow from continuing investing activities		(1,122)	(904)
Net cash flow from discontinued investing activities		–	(60)
Net cash flow from investing activities		(1,122)	(964)
Issue of ordinary share capital (i)		2,202	22
Purchase of treasury shares		(3)	(2)
Interest paid in respect of finance leases		(23)	(110)
Other net interest paid		(274)	(114)
Net interest paid		(297)	(224)
Cash inflow from additional debt		1,513	256
Cash outflow from payment of capital element of finance leases		(20)	(383)
Cash outflow from repayment of other debt		(175)	(107)
Net cash flow from increase/(decrease) in debt		1,318	(234)
Realised net foreign exchange loss on cash settlement of derivative contracts		(117)	(8)
Equity dividends paid		(500)	(417)
Net cash flow from continuing financing activities		2,603	(863)
Net cash flow from discontinued financing activities		–	(25)
Net cash flow from financing activities		2,603	(888)
Net increase in cash and cash equivalents		1,778	505
Cash and cash equivalents at 1 January (ii)		1,100	592
Effect of foreign exchange rate changes		26	3
Cash and cash equivalents at 31 December (ii)	23	2,904	1,100
(i) On 15 December 2008 the Group raised £2,164 million of proceeds, net of £65 million of issue costs through a Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30. (ii) Cash and cash equivalents are stated net of overdrafts of £35 million (2007: £30 million).
The notes on pages 62 to 134 form part of these Financial Statements.

Notes to the Financial Statements

1. GENERAL INFORMATION

Centrica plc is a Company domiciled and incorporated in the United Kingdom under the Companies Act 1985. The address of the registered office is given on page 43. The nature of the Group's operations and its principal activities are set out in note 6 and in the Directors' Report – Business Review on pages 8 to 34.

The consolidated Financial Statements of Centrica plc are presented in pounds sterling. Operations and transactions conducted in currencies other than pounds sterling are included in the consolidated Financial Statements in accordance with the foreign currencies accounting policy set out in note 2.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these consolidated Financial Statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Basis of preparation

The consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and therefore comply with Article 4 of the EU IAS Regulation.

The consolidated Financial Statements have been prepared on the historical cost basis, except for derivative financial instruments and available-for-sale financial assets, and the assets and liabilities of the Group pension schemes that have been measured at fair value. The carrying values of recognised assets and liabilities that are hedged items in fair value hedges, and are otherwise carried at cost, are adjusted to record changes in the fair values attributable to the risks that are being hedged. The principal accounting policies adopted are set out below.

The preparation of Financial Statements in conformity with IFRS requires the use of certain critical accounting estimates. It requires management to exercise its judgement in the processes of applying the Group's accounting policies. The areas involving a higher degree of judgement, complexity or areas where assumptions and estimates are significant to the consolidated Financial Statements are described in note 3.

(a) Standards, amendments and interpretations effective in 2008

In 2008 an amendment to IAS 39, Financial Instruments: Recognition and Measurement and IFRS 7, Financial Instruments: Disclosures was issued. The amendment was endorsed by the EU on 15 October 2008. The amendment permits entities to reclassify certain financial assets held for trading to either the held to maturity, loans and receivables or available-for-sale categories. The amendment also allows transfers of certain financial assets from available-for-sale to loans and receivables. The adoption of the amendment has had no impact on the Financial Statements of the Group.

Three interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period. These are IFRIC 11, IFRS 2 – Group and Treasury Share Transactions, IFRIC 12 Service Concession Arrangements and IFRIC 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. The adoption of these interpretations has not led to any changes in the Group's accounting policies and has had no impact on the Financial Statements of the Group.

(b) Standards, amendments and interpretations that are not yet effective and that have not been early adopted by the Group

At the date of authorisation of these Financial Statements, the following standards, amendments to existing standards and interpretations which have not been applied in these Financial Statements were in issue but not yet effective:

• x IAS 23 (Amendment), Borrowing Costs, effective from 1 January 2009. The amendment requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing such borrowing costs will be removed. The Group will adopt IAS 23 (Amended) from 1 January 2009, which will require a change to the Group's existing accounting policy, where such costs are immediately expensed. The Group will adopt IAS 23 (Amended) retrospectively and apply a commencement date of 1 January 2008 for qualifying projects subject to borrowing cost capitalisation. Based on current investment plans, the estimated impact of adopting IAS 23 (Amended) in 2009 would be to capitalise approximately £30 million of borrowing costs directly attributable to the acquisition, construction and production of qualifying assets, resulting in an increase to the net book value of property, plant and equipment by approximately £30 million and a reduction to interest expense by approximately £30 million for the year ended 31 December 2009. The impact on comparatives would be an increase in the net book value of property, plant and equipment for borrowing costs capitalised and a reduction to interest expense of approximately £10 million;
• x IFRS 8, Operating Segments, effective from 1 January 2009. This standard replaces IAS 14, Segment Reporting and requires segmental information reported to be based on that which Directors use internally for evaluating the performance of operating segments. The Group will adopt IFRS 8 with effect from 1 January 2009. The impact of adopting IFRS 8 on the Group is under assessment;
• x 'Improvements to IFRSs' contains amendments to various existing standards. The amendments are effective, in most cases, from 1 January 2009, or otherwise for annual periods beginning on or after 1 July 2009. The impact of adopting 'Improvements to IFRSs' will result in the Group reclassifying certain derivative financial assets and certain derivative financial liabilities from current to non-current in the Group's Balance Sheet with effect from 1 January 2009;
• x IFRS 3 (Revised), Business Combinations, effective for annual periods beginning on or after 1 July 2009 subject to EU endorsement. The revised standard continues to apply the acquisition method to business combinations with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at acquisition date, with contingent payments classified as debt subsequently remeasured through the income statement. All acquisition-related costs should be expensed. There is a choice on an acquisitionby-acquisition basis to measure the non-controlling interest in

the acquiree at either fair value or at the non-controlling interest's proportionate share of the acquiree's net assets. The Group will adopt IFRS 3 (Revised) prospectively to all business combinations from 1 January 2010, subject to EU endorsement;

• x IAS 27 (Revised), Consolidated and Separate Financial Statements, effective for annual periods beginning on or after 1 July 2009, subject to EU endorsement. The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The revised standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. The Group will apply IAS 27 (Revised) prospectively from 1 January 2010, subject to EU endorsement; and
• x IFRIC 18, Transfers of Assets from Customers, issued on 29 January 2009, subject to EU endorsement. This interpretation clarifies the accounting for agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services, such as a supply of electricity or gas. It also applies to agreements in which an entity receives cash from a customer which must be used to acquire or construct the item of property, plant and equipment in order to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services. IFRIC 18 requires entities to apply the interpretation prospectively to transfers of assets from customers received on or after 1 July 2009. The impact to the Group of adopting IFRIC 18 is under assessment.

The Directors anticipate that the adoption of the following amendments to standards and interpretations in future periods, which were also in issue but not effective at the date of authorisation of these Financial Statements, will have no material impact on the Financial Statements of the Group:

• x IAS 1 (Revised), Presentation of Financial Statements, effective from 1 January 2009;
• x IAS 32 (Amendment), Financial Instruments: Presentation and IAS 1 (Amendment), Presentation of Financial Statements – Puttable financial instruments and obligations arising on liquidation, effective from 1 January 2009, subject to EU endorsement;
• x IFRS 2 (Amendment), Share Based Payment Vesting Conditions and Cancellations, effective from 1 January 2009;
• x IFRIC 13, Customer Loyalty Programmes, effective for annual periods beginning on or after 1 July 2008;
• x IFRIC 15, Agreements for the Construction of Real Estate, effective from 1 January 2009, subject to EU endorsement;
• x IFRIC 16, Hedges of a Net Investment in a Foreign Operation, effective for annual periods beginning on or after 1 October 2008, subject to EU endorsement;
• x IFRIC 17, Distributions of Non-cash Assets to Owners, effective for annual periods beginning on or after 1 July 2009, subject to EU endorsement;
• x IFRS 1 (Amendment), First-time Adoption of IFRS, effective from 1 January 2009, subject to EU endorsement; and

x IAS 39 (Amendment), Financial Instruments: Recognition and Measurement – Eligible Hedged Items, effective for annual periods beginning on or after 1 July 2009, subject to EU endorsement.

(c) Changes of accounting presentation

The Group has adopted the following change of accounting presentation in the year:

x Centrica Storage enters into gas sales and gas purchases as part of its normal trading activity to optimise the performance of the storage facility. Sales and purchases relating to this optimisation activity are presented net within revenue. Previously the Group presented such activity gross within revenue and cost of sales with sales reported as revenue and purchases reported as cost of sales. The Directors consider the change of presentation better reflects the nature of this activity. The impact of the change of accounting presentation is to reduce Group revenue and cost of sales by £263 million in 2008. The impact on comparatives is to reduce Group revenue and cost of sales by £70 million.

(d) Income statement presentation

The Group's Income Statement and segmental note separately identify the effects of re-measurement of certain financial instruments, and items which are exceptional, in order to provide readers with a clear and consistent presentation of the Group's underlying performance, as described below.

Certain re-measurements

As part of its energy procurement activities the Group enters into a range of commodity contracts designed to achieve security of energy supply. These contracts comprise both purchases and sales and cover a wide range of volumes, prices and timescales. The majority of the underlying supply comes from high volume long-term contracts which are complemented by short-term arrangements. These short-term contracts are entered into for the purpose of balancing energy supplies and customer demand and to optimise the price paid by the Group. Short-term demand can vary significantly as a result of factors such as weather, power generation profiles and short-term movements in market prices.

Many of the energy procurement contracts are held for the purpose of receipt or delivery of commodities in accordance with the Group's purchase, sale or usage requirements and are therefore out of scope of IAS 39. However, a number of contracts are considered to be derivative financial instruments and are required to be fair valued under IAS 39, primarily because their terms include the ability to trade elements of the contracted volumes on a net-settled basis.

The Group has shown the fair value adjustments arising on these contracts separately in the certain re-measurements column. This is because the intention of management is, subject to shortterm demand balancing, to use these energy supplies to meet customer demand. Accordingly, management believes the ultimate net charge to cost of sales will be consistent with the price of energy agreed in these contracts and that the fair value adjustments will reverse as the energy is supplied over the life of the contract. This makes the fair value re-measurements very different in nature from costs arising from the physical delivery of energy in the period.

At the balance sheet date the fair value represents the difference between the prices agreed in the respective contracts and the actual or anticipated market price of acquiring the same amount of energy on the open market. The movement in the fair value taken to certain re-measurements in the Income Statement represents the unwind of the contracted volume delivered or consumed during the period, combined with the change in fair value of future contracted energy as a result of movements in forward energy prices during the year.

These adjustments represent the significant majority of the items included in certain re-measurements. In addition to these, however, the Group has identified a number of comparable contractual arrangements where the difference between the price which the Group expects to pay or receive under a contract and the market price is required to be fair valued by IAS 39. These additional items relate to cross-border transportation or transmission capacity, storage capacity and contracts relating to the sale of energy by-products, on which economic value has been created which is not wholly recognised under the requirements of IAS 39. For these arrangements the related fair value adjustments are also included under certain re-measurements.

These arrangements are managed separately from proprietary energy trading activities where trades are entered into speculatively for the purpose of making profits in their own right. These proprietary trades are included in the results before certain re-measurements.

Exceptional items

As permitted by IAS 1, Presentation of Financial Statements, certain items are presented separately. The items that the Group separately presents as exceptional are items which are of a nonrecurring nature and, in the judgement of the Directors, need to be disclosed separately by virtue of their nature, size or incidence in order to obtain a clear and consistent presentation of the Group's underlying business performance. Items which may be considered exceptional in nature include disposals of businesses, business restructurings, the renegotiation of significant contracts and asset write-downs.

Basis of consolidation

The Group Financial Statements consolidate the Financial Statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year, and incorporate the results of its share of jointly controlled entities and associates using the equity method of accounting.

Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

The results of subsidiaries acquired or disposed of during the year are consolidated from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary adjustments are made to the financial statements of subsidiaries, associates and jointly controlled entities to bring the accounting policies used into line with those used by the Group.

All intra-Group transactions, balances, income and expenses are eliminated on consolidation.

Interests in joint ventures

A jointly controlled entity is a joint venture which involves the establishment of an entity to engage in economic activity, which the Group jointly controls with its fellow venturers. Under the equity method, investments in jointly controlled entities are carried at cost plus post-acquisition changes in the Group's share of net assets of the jointly controlled entity, less any impairment in value in individual investments. The Income Statement reflects the Group's share of the results of operations after tax of the jointly controlled entity.

Certain of the Group's exploration and production activity is conducted through joint ventures where the venturers have a direct interest in and jointly control the assets of the venture. The results, assets, liabilities and cash flows of these jointly controlled assets are included in the consolidated Financial Statements in proportion to the Group's interest.

Interests in associates

An associate is an entity in which the Group has an equity interest and over which it has the ability to exercise significant influence. Under the equity method, investments in associates are carried at cost plus post-acquisition changes in the Group's share of the net assets of the associate, less any impairment in value in individual investments. The Income Statement reflects the Group's share of the results of operations after tax of the associate.

Revenue

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue includes amounts receivable for goods and services provided in the normal course of business, net of discounts, rebates, VAT and other sales-related taxes.

Energy supply: Revenue is recognised on the basis of energy supplied during the period. Revenue for energy supply activities includes an assessment of energy supplied to customers between the date of the last meter reading and the year end (unread). Unread gas and electricity is estimated using historical consumption patterns, taking into account the industry reconciliation process for total gas and total electricity usage by supplier, and is included in accrued energy income within trade and other receivables.

Proprietary energy trading: Revenue comprises both realised (settled) and unrealised (fair value changes) net gains and losses from trading in physical and financial energy contracts.

Storage services: Storage capacity revenues are recognised evenly over the contract period, whilst commodity revenues for the injection and withdrawal of gas are recognised at the point of gas flowing into or out of the storage facilities. Gas purchases and gas sales entered into to optimise the performance of the gas storage facilities are presented net within revenue.

Home services and fixed-fee service contracts: Where the Group has an ongoing obligation to provide services, revenues are apportioned on a time basis and amounts billed in advance are treated as deferred income and excluded from current revenue. For one-off services, such as installations, revenue is recognised at the date of service provision. Revenue from fixed-fee service contracts is recognised on a straight-line basis over the life of the contract, reflecting the benefits receivable by the customer, which span the life of the contract as a result of emergency maintenance being available throughout the contract term.

Gas production: Revenue associated with exploration and production sales (of natural gas, crude oil and condensates) is recognised when title passes to the customer. Revenue from the production of natural gas, oil and condensates in which the Group has an interest with other producers is recognised based on the Group's working interest and the terms of the relevant production sharing arrangements (the entitlement method). Differences between production sold and the Group's share of production are not significant. Gas purchases and gas sales entered into to optimise the performance of gas production facilities are presented net within revenue.

Power generation: Revenue is recognised on the basis of power supplied during the period. Power and gas purchases and power and gas sales entered into to optimise the performance of power generation facilities are presented net within revenue.

Interest income: Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying value.

Cost of sales

Energy supply includes the cost of gas and electricity produced and purchased during the period taking into account the industry reconciliation process for total gas and total electricity usage by supplier, and related transportation, distribution, royalty costs and bought in materials and services.

Home services' and fixed-fee service contracts cost of sales includes direct labour and related overheads on installation work, repairs and service contracts in the period.

Carbon Emissions Reduction Target programme (CERT)

UK licensed energy suppliers are set a carbon emission reduction target by the Government which is proportional to the size of their customer base. The current CERT programme runs from April 2008 to March 2011. The target is subject to an annual adjustment throughout the programme period to take account of changes to a UK licensed energy supplier's customer base. Energy suppliers can meet the target through expenditure on qualifying projects which give rise to carbon savings. The carbon savings can be transferred between energy suppliers. The Group charges the costs of the programme to cost of sales and capitalises costs incurred in deriving carbon savings in excess of the annual target as inventory which is valued at the lower of cost or net realisable value and which may be used to meet the carbon emissions reduction target in subsequent periods or be transferred to third parties. The inventory is carried on a first-in, first-out basis. The carbon emission reduction target for the programme period is allocated to reporting periods on a straight-line basis as adjusted by the annual determination process.

Employee share schemes

The Group operates a number of employee share schemes, detailed in note 33, under which it makes equity-settled sharebased 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). 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.

Fair value is measured using methods appropriate to each of the different schemes as follows:

LTIS: awards up	A Black-Scholes valuation augmented by a
to 2005	Monte Carlo simulation to predict the total
	shareholder return performance
LTIS: EPS awards	Market value on the date of grant
after 2005
LTIS: TSR awards	A Monte Carlo simulation to predict the total
after 2005	shareholder return performance
Sharesave	Black-Scholes
ESOS	Black-Scholes using an adjusted option
	life assumption to reflect the possibility of
	early exercise
SAS, SIP, DMSS,	Market value on the date of grant
RSS and ESPP

Foreign currencies

The consolidated Financial Statements are presented in pounds sterling, which is the functional currency of the Company and the Group's presentational currency. Each entity in the Group determines its own functional currency and items included in the Financial Statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rate of exchange ruling at the balance sheet date. All differences are included in the Income Statement for the period with the exception of exchange differences on foreign currency borrowings that provide a hedge against a net investment in a foreign entity. These are taken directly to equity until the disposal or partial disposal of the net investment, at which time they are recognised in the Income Statement. Non-monetary items that are measured in terms of historical cost in a currency other than the functional currency of the entity concerned are translated using the exchange rates as at the dates of the initial transactions.

For the purpose of presenting consolidated Financial Statements, the assets and liabilities of the Group's foreign subsidiary undertakings, jointly controlled entities and associates are translated into pounds sterling at exchange rates prevailing on the balance sheet date. The results of foreign subsidiary undertakings, jointly controlled entities and associates are translated into pounds sterling at average rates of exchange for the relevant period. Exchange differences arising from the translation of the opening net assets and the results are transferred to the Group's foreign currency translation reserve, a separate component of equity, and are reported in the Statement of Recognised Income and Expense. In the event of the disposal of an undertaking with assets and liabilities denominated in a foreign currency, the cumulative translation difference arising in the foreign currency translation reserve is charged or credited to the Income Statement on disposal.

Exchange differences on foreign currency borrowings, foreign currency swaps and forward exchange contracts used to hedge foreign currency net investments in foreign subsidiary undertakings, jointly controlled entities and associates are taken directly to reserves and are reported in the Statement of Recognised Income and Expense. All other exchange movements are recognised in the Income Statement for the period.

Business combinations and goodwill

The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured as the cash paid and the aggregate of the fair values, at the date of exchange, of other assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3, Business Combinations are recognised at their fair value at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for resale in accordance with IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell.

Goodwill arising on a business combination represents the excess of the cost of acquisition over the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary, jointly controlled entity or associate at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. If, after reassessment, the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in the Income Statement.

The interest of minority shareholders in the acquiree is initially measured at the minority's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

Goodwill which is recognised as an asset is reviewed for impairment, annually, or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired. Any impairment is recognised immediately in the Income Statement and is not subsequently reversed.

For the purpose of impairment testing, goodwill is allocated to each of the Group's cash-generating units or groups of cashgenerating units that expect to benefit from the business combination in which the goodwill arose. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cashgenerating unit or groups of cash-generating units is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit.

On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

Other intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. Intangible assets include emissions trading schemes, renewable obligation certificates and certain exploration and evaluation expenditures, the accounting policies for which are dealt with separately below. For purchased application software, for example investments in customer relationship management and billing systems, cost includes contractors' charges, materials, directly attributable labour and directly attributable overheads.

Capitalisation begins when expenditure for the asset is being incurred and activities necessary to prepare the asset for use are in progress. Capitalisation ceases when substantially all the activities that are necessary to prepare the asset for use are complete. Amortisation commences at the point of commercial deployment. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for on a prospective basis by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates.

Intangible assets are derecognised on disposal, or when no future economic benefits are expected from their use.

Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite useful life is reviewed annually to determine whether the indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis.

The amortisation period for the principal categories of intangible assets are as follows:

Application software	up to 10 years
Licences	up to 20 years
Consents	up to 25 years
Contractual customer relationships	up to 20 years
Identifiable acquired brand	Indefinite

EU Emissions Trading Scheme and renewable obligations certificates

Granted CO2 emissions allowances received in a period are initially recognised at nominal value (nil value). Purchased CO2 emissions allowances are initially recognised at cost (purchase price) within intangible assets. A liability is recognised when the level of emissions exceed the level of allowances granted. The liability is measured at the cost of purchased allowances up to the level of purchased allowances held, and then at the market price of allowances ruling at the balance sheet date, with movements in the liability recognised in operating profit. Forward contracts for the purchase or sale of CO2 emissions allowances are measured at fair value with gains and losses arising from changes in fair value recognised in the Income Statement. The intangible asset is surrendered at the end of the compliance period reflecting the consumption of economic benefit. As a result no amortisation is recorded during the period.

Purchased renewable obligation certificates are initially recognised at cost within intangible assets. A liability for the renewables obligation is recognised based on the level of electricity supplied to customers, and is calculated in accordance with percentages set by the UK Government and the renewable obligation certificate buyout price for that period. The intangible asset is surrendered at the end of the compliance period reflecting the consumption of economic benefit. As a result no amortisation is recorded during the period.

Property, plant and equipment

Property, plant and equipment is included in the Balance Sheet at cost, less accumulated depreciation and any provisions for impairment.

The initial cost of an asset comprises its purchase price or construction cost and any costs directly attributable to bringing the asset into operation. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.

Freehold land is not depreciated. Other property, plant and equipment, except upstream production 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. The depreciation periods for the principal categories of assets are as follows:

Freehold and leasehold buildings	up to 50 years
Plant	5 to 20 years
Power stations and wind farms	up to 30 years
Equipment and vehicles	3 to 10 years
Storage	up to 40 years

Assets held under finance leases are depreciated over their expected useful economic lives on the same basis as for owned assets, or where shorter, the lease term.

The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

Residual values and useful lives are reassessed annually and, if necessary, changes are accounted for prospectively.

Exploration, evaluation and production assets

Centrica uses the successful efforts method of accounting for exploration and evaluation expenditure. Exploration and evaluation expenditure associated with an exploration well, including acquisition costs related to exploration and evaluation activities, are initially capitalised as intangible assets. Certain expenditures such as geological and geophysical exploration costs are expensed. If the prospects are subsequently determined to be successful on completion of evaluation, the relevant expenditure including licence acquisition costs is transferred to property, plant and equipment and depreciated on a unit of production basis. If the prospects are subsequently determined to be unsuccessful on completion of evaluation, the associated costs are expensed in the period in which that determination is made.

All field development costs are capitalised as property, plant and equipment. Such costs relate to the acquisition and installation of production facilities and include development drilling costs, project-related engineering and other technical services costs. Property, plant and equipment, including rights and concessions related to production activities, are depreciated from the commencement of production in the fields concerned, using the unit of production method, based on all of the proven and probable reserves of those fields. Changes in these estimates are dealt with prospectively.

The net carrying value of fields in production and development is compared on a field-by-field basis with the likely discounted future net revenues to be derived from the remaining commercial reserves. An impairment loss is recognised where it is considered that recorded amounts are unlikely to be fully recovered from the net present value of future net revenues. Exploration and production assets are reviewed annually for indicators of impairment.

Decommissioning costs

Provision is made for the net present value of the estimated cost of decommissioning gas production facilities at the end of the producing lives of fields, and storage facilities and power stations at the end of the useful life of the facilities, based on price levels and technology at the balance sheet date.

When this provision gives access to future economic benefits, a decommissioning asset is recognised and included within property, plant and equipment. Changes in these estimates and changes to the discount rates are dealt with prospectively and reflected as an adjustment to the provision and corresponding decommissioning asset included within property, plant and equipment. For gas production facilities and offshore storage facilities the decommissioning asset is amortised using the unit of production method, based on proven and probable reserves. For power stations the decommissioning asset is amortised on a straight-line basis over the useful life of the facility. The unwinding of the discount on the provision is included in the Income Statement within interest expense.

Leases

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are capitalised and included in property, plant and equipment at their fair value, or if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The obligations relating to finance leases, net of finance charges in respect of future periods, are included within bank loans and other borrowings, with the amount payable within 12 months included in bank overdrafts and loans within current liabilities. Lease payments are apportioned between finance charges and reduction of the finance lease obligation so as

to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income.

Payments under operating leases are charged to the Income Statement on a straight-line basis over the term of the relevant lease.

Impairment of property, plant and equipment and intangible assets excluding goodwill

At each balance sheet date, the Group reviews the carrying amounts of its intangible assets and property, plant and equipment to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of any impairment loss. Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cashgenerating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset concerned.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately as an expense.

An impairment loss is reversed only if there has been a change in the estimate used to determine the asset's recoverable amount since the last impairment loss was recognised. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. After such a reversal the depreciation or amortisation charge, where relevant, is adjusted in future periods to allocate the asset's revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

Non-current assets held for sale

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. No depreciation is charged in respect of noncurrent assets classified as held for sale.

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

Inventories

Inventories, excluding inventories of gas and oil, are valued on a first-in, first-out basis, at the lower of cost and estimated net realisable value after allowance for redundant and slow-moving items. Inventories of gas and oil are valued on a weighted average basis, at the lower of cost and estimated net realisable value.

Take-or-pay contracts

Where payments are made to external suppliers under take-or-pay obligations for gas not taken, they are treated as prepayments and included within other receivables, as they generate future economic benefits.

Pensions and other post-retirement benefits

The Group operates a number of defined benefit pension schemes. The cost of providing benefits under the defined benefit schemes is determined separately for each scheme using the projected unit credit actuarial valuation method. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside the Income Statement and presented in the Statement of Recognised Income and Expense.

The cost of providing retirement pensions and other benefits is charged to the Income Statement over the periods benefiting from employees' service. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the benefits become vested. The difference between the expected return on scheme assets and the change in present value of scheme obligations resulting from the passage of time is recognised in the Income Statement within interest income or interest expense.

The retirement benefit obligation/asset recognised in the Balance Sheet represents the present value of the defined benefit obligation of the schemes as adjusted for unrecognised past service cost, and the fair value of the schemes' assets. The present value of the defined benefit obligation/asset is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits are paid, and that have terms of maturity approximating to the terms of the related pension liability.

Payments to defined contribution retirement benefit schemes are charged as an operating expense as they fall due.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, that can be reliably measured, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the Directors' best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material. Where discounting is used, the increase in the provision due to the passage of time is recognised in the Income Statement included within interest expense.

Taxation

Current tax, including UK corporation tax, UK petroleum revenue 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 substantively enacted by the balance sheet date.

Deferred tax is recognised in respect of all temporary differences identified at the balance sheet date, except to the extent that the deferred tax arises from the initial recognition of goodwill (if amortisation of goodwill is not deductible for tax purposes) or the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting profit nor taxable profit and loss. Temporary differences are differences between the carrying amount of the Group's assets and liabilities and their tax base.

Deferred tax liabilities may be offset against deferred tax assets within the same taxable entity or qualifying local tax group. Any remaining deferred tax asset is recognised only when, on the basis of all available evidence, it can be regarded as probable that there will be suitable taxable profits, within the same jurisdiction, in the foreseeable future, against which the deductible temporary difference can be utilised.

Deferred tax is provided on temporary differences arising on subsidiaries, jointly controlled entities and associates, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the asset is realised or liability settled, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Measurement of deferred tax liabilities and assets reflects the tax consequences expected to arise from the manner in which the asset or liability is recovered or settled.

Financial instruments

Financial assets and financial liabilities are recognised in the Group Balance Sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets are de-recognised when the Group no longer has the rights to cash flows, the risks and rewards of ownership or control of the asset. Financial liabilities are de-recognised when the obligation under the liability is discharged, cancelled or expires.

(a) Trade receivables

Trade receivables are recognised and carried at original invoice amount less an allowance for any uncollectible amounts. Provision is made when there is objective evidence that the Group may not be able to collect the trade receivable. Balances are written off when recoverability is assessed as being remote.

(b) Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds received. Own equity instruments that are reacquired (treasury shares) are deducted from equity. No gain or loss is recognised in the Income Statement on the purchase, sale, issue or cancellation of the Group's own equity instruments.

(c) Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and current balances with banks and similar institutions, which are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value and have an original maturity of three months or less.

For the purpose of the consolidated Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

(d) Interest-bearing loans and other borrowings

All interest-bearing loans and other borrowings are initially recognised at fair value net of directly attributable transaction costs.

After initial recognition, interest-bearing loans and other borrowings are subsequently measured at amortised cost using the effective interest method, except when they are the hedged item in an effective fair value hedge relationship where the carrying value is also adjusted to reflect the fair value movements associated with the hedged risks. Such fair value movements are recognised in the Income Statement. Amortised cost is calculated by taking into account any issue costs, and any discount or premium.

(e) Units issued by The Consumers' Waterheater Income Fund

Prior to deconsolidation as explained in note 3, units issued by The Consumers' Waterheater Income Fund which contain redemption rights providing unit holders with the right to redeem units back to the Fund for cash or another financial asset were treated as a financial liability and recorded at the present value of the redemption amount. Gains and losses related to changes in the carrying value of the financial liability up to the date of deconsolidation are included in the Income Statement within discontinued operations.

(f) Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale, which are initially recognised at fair value within the Balance Sheet. Available-forsale financial assets are subsequently recognised at fair value with gains and losses arising from changes in fair value recognised directly in equity and presented in the Statement of Recognised Income and Expense, until the asset is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the Income Statement for the period. Accrued interest or dividends arising on available-for-sale financial assets are recognised in the Income Statement.

At each balance sheet date the Group assesses whether there is objective evidence that available-for-sale financial assets are impaired. If any such evidence exists cumulative losses recognised in equity are removed from equity and recognised in profit and loss. The cumulative loss removed from equity represents the difference between the acquisition cost and current fair value, less any impairment loss on that financial asset previously recognised in profit or loss.

Impairment losses recognised in the Income Statement for equity investments classified as available-for-sale are not subsequently reversed through the Income Statement. Impairment losses recognised in the Income Statement for debt instruments classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss.

(g) Derivative financial instruments

The Group routinely enters into sale and purchase transactions for physical delivery of gas, power and oil. A portion of these transactions take the form of contracts that were entered into and continue to be held for the purpose of receipt or delivery of the physical commodity in accordance with the Group's expected sale, purchase or usage requirements, and are not within the scope of IAS 39.

Certain purchase and sales contracts for the physical delivery of gas, power and oil are within the scope of IAS 39 because they net settle or contain written options. Such contracts are accounted for as derivatives under IAS 39 and are recognised in the Balance Sheet at fair value. Gains and losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to the Income Statement for the year.

The Group uses a range of derivatives for both trading and to hedge exposures to financial risks, such as interest rate, foreign exchange and energy price risks, arising in the normal course of business. The use of derivative financial instruments is governed by the Group's policies approved by the Board of Directors. Further detail on the Group's risk management policies is included within the Directors' Report – Governance on pages 41 to 42 and in note 4 to the Financial Statements.

The accounting treatment for derivatives is dependent on whether they are entered into for trading or hedging purposes. A derivative instrument is considered to be used for hedging purposes when it alters the risk profile of an underlying exposure of the Group in line with the Group's risk management policies and is in accordance with established guidelines, which require that the hedging relationship is documented at its inception, ensure that the derivative is highly effective in achieving its objective, and require that its effectiveness can be reliably measured. The Group also holds derivatives which are not designated as hedges and are held for trading.

All derivatives are recognised at fair value on the date on which the derivative is entered into and are re-measured to fair value at each reporting date. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Derivative assets and derivative liabilities are offset and presented on a net basis only when both a legal right of set-off exists and the intention to net settle the derivative contracts is present.

The Group enters into certain energy derivative contracts covering periods for which observable market data does not exist. The fair value of such derivatives is estimated by reference in part to published price quotations from active markets, to the extent that such observable market data exists, and in part by using valuation techniques, whose inputs include data, which is not based on or derived from observable markets. Where the fair value at initial recognition for such contracts differs from the transaction price, a fair value gain or fair value loss will arise. This is referred to as a day-one gain or day-one loss. Such gains and losses are deferred and amortised to the Income Statement based on volumes purchased or delivered over the contractual period until such time observable market data becomes available. When observable market data becomes available, any remaining deferred day-one gains or losses are recognised within the Income Statement. Recognition of the gain or loss that results from changes in fair

value depends on the purpose for issuing or holding the derivative. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the Income Statement and are included within gross profit or interest income and interest expense. Gains and losses arising on derivatives entered into for speculative energy trading purposes are presented on a net basis within revenue.

Embedded derivatives: Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value, with gains or losses reported in the Income Statement. The closely related nature of embedded derivatives is reassessed when there is a change in the terms of the contract which significantly modifies the future cash flows under the contract. Where a contract contains one or more embedded derivatives and providing that the embedded derivative significantly modifies the cash flows under the contract, the option to fair value the entire contract may be taken and the contract will be recognised at fair value with changes in fair value recognised in the Income Statement.

(h) Hedge accounting

For the purposes of hedge accounting, hedges are classified either as fair value hedges, cash flow hedges or hedges of net investments in foreign operations.

Fair value hedges: A derivative is classified as a fair value hedge when it hedges the exposure to changes in the fair value of a recognised asset or liability. Any gain or loss from re-measuring the hedging instrument at fair value is recognised immediately in the Income Statement. Any gain or loss on the hedged item attributable to the hedged risk is adjusted against the carrying amount of the hedged item and recognised in the Income Statement. The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer qualifies for hedge accounting or the Group revokes the designation. Any adjustment to the carrying amount of a hedged financial instrument for which the effective interest method is used is amortised to the Income Statement. Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged.

Cash flow hedges: A derivative is classified as a cash flow hedge when it hedges exposure to variability in cash flows that is attributable to a particular risk either associated with a recognised asset, liability or a highly probable forecast transaction. The portion of the gain or loss on the hedging instrument which is effective is recognised directly in equity while any ineffectiveness is recognised in the Income Statement. The gains or losses that are recognised directly in equity are transferred to the Income Statement in the same period in which the highly probable forecast transaction affects income, for example when the future sale of physical gas or physical power actually occurs. Where the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability on its recognition. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, no longer

qualifies for hedge accounting or the Group revokes the designation.

At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity remains in equity until the highly probable forecast transaction occurs. If the transaction is no longer expected to occur, the cumulative gain or loss recognised in equity is recognised in the Income Statement.

Net investment hedges: Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the effective portion of the hedge is recognised in equity, any gain or loss on the ineffective portion of the hedge is recognised in the Income Statement. On disposal of the foreign operation, the cumulative value of any gains or losses recognised directly in equity is transferred to the Income Statement.

3. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

(a) Critical judgements in applying the Group's accounting policies

In the process of applying the Group's accounting policies as described in note 2, management has made the following judgements that have the most significant effect on the amounts recognised in the Financial Statements (apart from those involving estimations which are dealt with below).

Finance lease – Third-party power station tolling arrangement

The Group has entered into a long-term tolling arrangement with the Spalding power station. The contract provides Centrica with the right to nominate 100% of the plant output until 2021 in return for a mix of capacity payments and operating payments. The capacity payments comprise both fixed-price and market-priced elements and are dependent on plant availability. Centrica holds an option to extend the tolling arrangement for a further 8 years, notice of which must be provided to the power station operator by 30 September 2020. If the extension option is exercised, Centrica is granted an option to purchase the station at the end of the extended tolling period. The option to purchase must be exercised by serving notice to the generator between 30 September 2027 and 30 September 2028. Should Centrica exercise the purchase option the generator can exercise an option to retain the station. Should both options be exercised the valuation of the options, and hence ownership of the asset, will be determined by an expert panel, appointed by both parties. Market-based compensation will be payable to Centrica if ownership is retained by the generator. The Directors have judged that the arrangement should be accounted for as a finance lease as the lease term is judged to be a major part of the economic life of the power station and the present value of the minimum lease payments at inception date of the arrangement amounted to a large part of the fair value of the power station at that time. Details of the finance lease asset, finance lease creditor and interest charges are included in notes 17, 25 and 10 respectively.

EU Emissions Trading Scheme

The Group has been subject to the European Union Emissions Trading Scheme (EU ETS) since 1 January 2005. IFRIC 3, Emission Rights was withdrawn by the IASB in June 2005, and has not yet been replaced by definitive guidance. The Group has adopted an accounting policy, which recognises CO2 emissions liabilities when the level of emissions exceeds the level of allowances granted by the Government in the period. The liability is measured at the cost of purchased allowances up to the level of purchased allowances held, and then at market price of allowances ruling at the balance sheet date. Movements in the liability are reflected within operating profit. Forward contracts for sales and purchases of allowances are measured at fair value.

Petroleum revenue tax (PRT)

The definitions of an income tax in IAS 12, Income Taxes, have led management to judge that PRT should be treated consistently with other income taxes. The charge for the year is presented within taxation on profit from continuing operations in the Income Statement. Deferred amounts are included within deferred tax assets and liabilities in the Balance Sheet.

The Consumers' Waterheater Income Fund

The Group deconsolidated The Consumers' Waterheater Income Fund (the 'Fund') with effect from 1 December 2007, the date of an Internalisation Agreement entered into between Centrica and the Fund.

Centrica created the Fund in 2002 to refinance the water heater assets acquired with the Enbridge Services acquisition. The Group consolidated the Fund in accordance with the requirements of SIC-12, Consolidation – Special Purpose Entities, as the substance of the agreements put in place by Centrica indicated that the Fund was created for and on behalf of the Group. These agreements both predetermined the Fund's activities and provided Centrica with operational control, via responsibilities for servicing the Fund's asset portfolio and administering the Fund's activities.

In 2006 the Trustees of the Fund appointed an independent Chief Executive Officer. The activities undertaken by the Fund started to change following this appointment. In 2007 the Trustees of the Fund sought further changes in the conduct of the Fund. On 1 December 2007, the existing Administration Agreement was replaced, at the instigation of the Fund, by a new Internalisation Agreement, which provides the Fund with access rights to key operational data and provides a basis for employees and business infrastructure to transfer to the Fund, such that it is capable of independent operation from Centrica. Subsequent to this agreement the Fund has independently refinanced its activities. The Directors believe that the Internalisation Agreement represented a change to the original contractual arrangements with the Fund, and demonstrates that the Fund has both the desire and the ability to manage its own affairs. Accordingly, in 2007 the Directors judged that the Fund's activities were no longer predetermined such that its activities were being conducted on behalf of Centrica, and thus the Fund ceased to represent a subsidiary of the Centrica Group.

The Group deconsolidated the Fund with effect from 1 December 2007, the date the Internalisation Agreement became effective and the date of the resultant loss of control, recognising an exceptional profit on disposal amounting to £227 million. The Fund's activities represented a separate major line of business of the Direct Energy segment, and contributed materially to Group borrowings. In order to provide a clear presentation of the impact of deconsolidating the Fund, the results in the prior year have been presented as a

discontinued operation distinct from continuing operations within the Group Income Statement.

(b) Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

Revenue recognition – unread gas and electricity meters

Revenue for energy supply activities includes an assessment of energy supplied to customers between the date of the last meter reading and the year end (unread). Unread gas and electricity comprises both billed and unbilled revenue. It is estimated through the billing systems, using historical consumption patterns, on a customer by customer basis, taking into account weather patterns and the differences between actual meter reads being returned and system estimates. Actual meter reads continue to be compared to system estimates between the balance sheet date and the finalisation of the accounts. An assessment is also made of any factors that are likely to materially affect the ultimate economic benefits which will flow to the Group, including bill cancellation and re-bill rates. To the extent that the economic benefits are not expected to flow to the Group, the value of that revenue is not recognised. The judgements applied, and the assumptions underpinning these judgements, are considered to be appropriate. However, a change in these assumptions would have an impact on the amount of revenue recognised.

Industry reconciliation process – cost of sales

The industry reconciliation process is required as differences arise between the estimated quantity of gas and electricity the Group deems to have supplied and billed customers, and the estimated quantity the industry system operator deems the individual suppliers, including the Group, to have supplied to customers. This difference in deemed supply is referred to as imbalance. The reconciliation process can result in either a higher or lower value of industry deemed supply than has been estimated as being supplied to customers by the Group, but in practice tends to result in a higher value of deemed supply. The Group then reviews the difference to ascertain whether there is evidence that its estimate of amounts supplied to customers is inaccurate or whether the difference arises from other causes. The Group's share of the resulting imbalance is included within commodity costs charged to cost of sales. Management estimates the level of recovery of imbalance which will be achieved either through subsequent customer billing or through the developing industry settlement process.

Determination of fair values – energy derivatives

Derivative contracts are carried in the Balance Sheet at fair value, with changes in fair value recorded in either the Income Statement or equity. Fair values of energy derivatives are estimated by reference in part to published price quotations in active markets and in part by using valuation techniques. More detail on the assumptions used in determining fair valuations is provided in note 28.

Gas and liquids reserves

The volume of proven and probable gas and liquids reserves is an estimate that affects the unit of production depreciation of

producing gas and liquids property, plant and equipment as well as being a significant estimate affecting decommissioning estimates and impairment calculations. The factors impacting gas and liquids estimates, and the process for estimating reserve quantities, are described on page 143.

The impact of a change in estimated proven and probable reserves is dealt with prospectively by depreciating the remaining book value of producing assets over the expected future production. If proven and probable reserves estimates are revised downwards, earnings could be affected by higher depreciation expense or an immediate write-down (impairment) of the asset's book value.

Decommissioning costs

The estimated cost of decommissioning at the end of the producing lives of fields is reviewed periodically and is based on proven and probable reserves, price levels and technology at the balance sheet date. Provision is made for the estimated cost of decommissioning at the balance sheet date. The payment dates of total expected future decommissioning costs are uncertain and dependent on the lives of the facilities, but are currently anticipated to be between 2010 and 2062, with the substantial majority of the costs expected to be paid between 2019 and 2030.

Impairment of goodwill and indefinite lived intangible assets

The Group determines whether goodwill and indefinite lived intangible assets are impaired at least on an annual basis in accordance with the Group's accounting policy described in note 2. This requires the determination of the recoverable amount of the cash-generating units to which goodwill and indefinite lived intangibles are allocated. The recoverable amounts are determined by either estimating the value in use of those cash-generating units or in the case of the Centrica Energy – Gas production and development cash-generating unit determining the fair value less costs to sell of the cash-generating unit. Value in use calculations requires the Group to make an estimate of the expected future cash flows to be derived from the cash-generating units and to choose a suitable discount rate in order to calculate the present value of those cash flows. The fair value less costs to sell methodology is deemed more appropriate for the Centrica Energy – Gas production and development cash-generating unit as it is based on post-tax cash flows arising from each field within the cash-generating unit, which is consistent with the approach taken by management in determining 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 the Centrica Energy – Gas production and development cash-generating unit, net of associated selling costs, and takes into account assumptions market participants would use in estimating fair value. Further detail on the assumptions used in determining the value in use and fair value less costs to sell calculations is provided in note 16.

An impairment charge of £45 million arose on the European Energy – Oxxio cash-generating unit during the course of 2008 resulting in the carrying amount of goodwill being written down to its recoverable amount. Further detail on the impairment is provided in note 16.

Impairment of power generation and upstream gas assets

Power generation and upstream gas assets are assessed for indicators of impairment at each reporting date in accordance with the Group's accounting policies as described in note 2. If an indicator of impairment exists an assessment of the recoverable amount of the asset is required to be made. Indicators of impairment for these assets may include, but are not limited to, the following:

• x Reductions in reserve estimates or profiles of production;
• x Declines in long-term commodity prices;
• x Increases in capital expenditure or acceleration of known capital expenditure;
• x Significant unplanned outages or problems with operational performance; and
• x Changes in regulatory or tax environments.

The recoverable amount of power generation and upstream gas assets is usually assessed with reference to each individual asset's value in use. The value in use is based on the pre-tax cash flows expected to be generated by the asset and is dependent on views of forecast generation/production, forecast commodity prices (using market prices where available and internal estimates for the remainder of the period) and the timing and extent of capital expenditure.

For gas fired power stations, which have a high degree of production flexibility, the value in use calculation also includes a scenario based statistical assessment of the additional value which can be generated from optimising production to take advantage of volatile forward prices. Pre-tax cash flows for the first three years are based on the Group's internal Board-approved three-year business plans and thereafter are estimated on a consistent basis to reflect cash flows up to the date of cessation of operation of the asset. Pre-tax cash flows are discounted using an appropriate pretax discount rate which is derived from the Group's weighted average cost of capital. The carrying values of the Group's power generation and upstream gas assets are included within note 17.

Pensions and other post-retirement benefits

The Group operates a number of defined benefit pension schemes. The cost of providing benefits under the defined benefit schemes is determined separately for each scheme under the projected unit credit actuarial valuation method. Actuarial gains and losses are recognised in full in the period in which they occur. The key assumptions used for the actuarial valuation are based on the Group's best estimate of the variables that will determine the ultimate cost of providing post-employment benefits, on which further detail is provided in note 34.

4. FINANCIAL RISK MANAGEMENT

The Group's normal operating, investing and financing activities expose it to a variety of financial risks: market risk (including commodity price risk, currency risk, interest rate risk and equity price risk), credit risk and liquidity risk. The Group's overall risk management process is designed to identify, manage and mitigate business risk, which includes, among others, financial risk. Further detail on the Group's overall risk management process is included within the Directors' Report – Governance on pages 41 to 42.

During 2008, there was significant volatility in commodity prices and a continuing shortage of available credit in the market. In addition, many of the markets in which the Group operates are experiencing a slowing of growth or, in some cases, economic contraction. As a result of these external market factors, the Group is encountering an increase in commodity price risk, credit risk and liquidity risk compared with that experienced at the end of 2007. The Group continues to manage these risks in accordance with its financial risk management processes and did not incur any additional significant cash costs as a result of the increased commodity, credit or liquidity risk experienced in 2008.

Financial risk management is overseen by the Group Financial Risk Management Committee (FRMC) according to objectives, targets and policies set by the Board. Commodity price risk management is carried out in accordance with individual business unit financial risk management policies, as approved by the FRMC and the Board. Treasury risk management, including management of currency risk, interest rate risk, equity price risk and liquidity risk is carried out by a central Group Treasury function in accordance with the Group's financing and treasury policy, as approved by the Board. The credit risks associated with commodity trading and treasury positions are managed in accordance with the Group's counterparty credit policy. Downstream credit risk management is carried out in accordance with individual business unit credit policies.

(a) Market risk management

Market risk is the risk of loss that results from changes in market prices (commodity prices, foreign exchange rates, interest rates and equity prices). The level of market risk to which the Group is exposed at a point in time varies depending on market conditions, expectations of future price or market rate movements and the composition of the Group's physical asset and contract portfolios.

(i) Commodity price risk management

The Group is exposed to commodity price risk in its energy procurement, downstream and proprietary energy trading activities.

Energy procurement and downstream activities

The Group's energy procurement and downstream activities consist of downstream positions, equity gas and liquids production, equity power generation, strategic procurement and sales contracts, market-traded purchase and sales contracts and derivative positions taken on with the intent of securing gas and power for the Group's downstream customers in the UK, Europe and North America from a variety of sources at an optimal cost. The Group actively manages commodity price risk by optimising its asset and contract portfolios making use of volume flexibility.

The Group is exposed to commodity price risk in its energy procurement and downstream activities because the cost of procuring gas and electricity to serve its downstream customers varies with wholesale commodity prices. The risk is primarily that market prices for commodities will fluctuate between the time that sales prices are fixed or tariffs are set and the time at which the corresponding procurement cost is fixed, thereby potentially reducing expected margins or making sales unprofitable.

The Group uses specific volumetric limits to manage the exposure to market prices associated with the Group's energy procurement and downstream activities to an acceptable level. Volumetric limits are supported by a Profit at Risk (PaR) methodology in the UK and a Value at Risk (VaR) methodology in North America and Europe to measure the Group's exposure to commodity price risk. PaR measures the estimated potential loss in a position or portfolio of positions associated with the movement of a commodity price for a given confidence level, over the remaining term of the position or contract portfolio. VaR measures the estimated potential loss for a given confidence level, over a predetermined holding period. The standard confidence level used is 95%.

The Group measures and manages the commodity price risk associated with the Group's entire energy procurement and downstream portfolio. Only certain of the Group's energy procurement and downstream contracts constitute financial instruments under IAS 39 (note 2). As a result, while the Group manages the commodity price risk associated with both financial and non-financial energy procurement and downstream contracts, it is the notional value of energy contracts being carried at fair value that represents the exposure of the Group's energy procurement and downstream activities to commodity price risk according to IFRS 7, Financial Instruments: Disclosures. This is because energy contracts that are financial instruments under IAS 39 are accounted for on a fair value basis and changes in fair value immediately impact profit or equity. Conversely, energy contracts that are not financial instruments under IAS 39 are accounted for as executory contracts and changes in fair value do not immediately impact profit or equity, and as such, are not exposed to commodity price risk as defined by IFRS 7. So while the PaR or the VaR associated with energy procurement and downstream contracts outside the scope of IAS 39 is monitored for internal risk management purposes, only those energy contracts within the scope of IAS 39 are within the scope of the IFRS 7 disclosure requirements.

4. FINANCIAL RISK MANAGEMENT CONTINUED

The increase in commodity prices in the six months ended 30 June 2008 resulted in significant mark-to-market gains on certain energy procurement contracts where the purchase price had been locked in by contract. Commodity prices have since fallen from their levels at 30 June 2008, resulting in significant mark-to-market losses for the year on contracts locked-in during the year at the higher prices. The net loss of £1,415 million (2007: gain of £235 million) on the re-measurement of energy contracts largely represents unrealised mark-to-market loss created by gas and power purchase contracts which are priced above the current wholesale market value of energy. This loss is calculated with reference to forward energy prices and therefore the extent of the economic loss arising over the life of these contracts is uncertain and is entirely dependent upon the level of future wholesale energy prices. Generally, subject to shortterm balancing, the ultimate net charge to cost of sales will be consistent with the price of energy agreed in these contracts and the fair value adjustments will reverse as the energy is supplied over the life of the contract.

The carrying value of energy contracts used in energy procurement and downstream activities at 31 December 2008 is disclosed in note 21. A sensitivity analysis that is intended to illustrate the sensitivity of the Group's financial position and performance to changes in the fair value or future cash flows of financial instruments associated with the Group's energy procurement and downstream activities as a result of changes in commodity prices is provided below in section (v).

Proprietary energy trading

The Group's proprietary energy trading activities consist of physical and financial commodity purchases and sales contracts taken on with the intent of benefiting in the short-term from changes in market prices or differences between buying and selling prices. The Group conducts its trading activities over the counter and through exchanges in the UK, North America and parts of the rest of Europe. The Group is exposed to commodity price risk as a result of its proprietary energy trading activities because the value of its trading assets and liabilities will fluctuate with changes in market prices for commodities.

The Group sets volumetric and VaR limits to manage the commodity price risk exposure associated with the Group's proprietary energy trading activities. The VaR used measures the estimated potential loss for a 95% confidence level over a one-day holding period. The holding period used is based on market liquidity and the number of days the Group would expect it to take to close off a trading position.

As with any modelled risk measure, there are certain limitations that arise from the assumptions used in the VaR analysis. VaR assumes that the future will behave like the past and that the Group's trading positions can be unwound or hedged within the predetermined holding period. Furthermore the use of a 95% confidence level, by definition, does not take into account changes in value that might occur beyond this confidence level.

The VaR, before taxation, associated with the Group's proprietary energy trading activities at 31 December 2008 was £1 million (2007: £9 million). The carrying value of energy contracts used in proprietary energy trading activities at 31 December 2008 is disclosed in note 21.

(ii) Currency risk management

The Group is exposed to currency risk on foreign currency denominated forecast transactions, firm commitments, monetary assets and liabilities (transactional exposure) and on its net investments in foreign operations (translational exposure).

Transactional currency risk

The Group is exposed to transactional currency risk on transactions denominated in currencies other than the underlying functional currency of the commercial operation transacting. The Group's primary functional currencies are pounds sterling in the UK, Canadian dollars in Canada, US dollars in the US and euros in Europe. The risk is that the functional currency value of cash flows will vary as a result of movements in exchange rates. Transactional exposure arises from the Group's energy procurement activities in the UK and in Canada, where a proportion of transactions are denominated in euros or US dollars and on certain capital commitments denominated in foreign currencies. In addition, in order to optimise the cost of funding, the Group has, in certain cases, issued foreign currency denominated debt, primarily in US dollars, New Zealand dollars, euros or Japanese yen.

It is the Group's policy to hedge all material transactional exposures using forward contracts to fix the functional currency value of non-functional currency cash flows. At 31 December 2008, there were no material unhedged non-functional currency monetary assets or liabilities, firm commitments or probable forecast transactions (2007: £nil), other than foreign currency borrowings used to hedge translational exposures.

4. FINANCIAL RISK MANAGEMENT CONTINUED

Translational currency risk

The Group is exposed to translational currency risk as a result of its net investments in North America and Europe. The risk is that the pounds sterling value of the net assets of foreign operations will decrease with changes in foreign exchange rates. The Group's policy is to protect the pounds sterling book value of its net investments in foreign operations, subject to certain targets monitored by the FRMC, by holding foreign currency debt, entering into foreign currency derivatives or a mixture of both.

The Group measures and manages the currency risk associated with all transactional and translational exposures. In contrast, IFRS 7 requires disclosure of currency risk arising on financial instruments denominated in a currency other than the functional currency of the commercial operation transacting only. As a result, for the purposes of IFRS 7, currency risk excludes the Group's net investments in North America and Europe as well as foreign currency denominated forecast transactions and firm commitments. A sensitivity analysis that is intended to illustrate the sensitivity of the Group's financial position and performance to changes in the fair value or future cash flows of foreign currency denominated financial instruments as a result of changes in foreign exchange rates is provided below in section (v).

(iii) Interest rate risk management

In the normal course of business the Group borrows to finance its operations. The Group is exposed to interest rate risk because the fair value of fixed rate borrowings and the cash flows associated with floating rate borrowings will fluctuate with changes in interest rates. The Group's policy is to manage the interest rate risk on long-term borrowings by ensuring that the exposure to floating interest rates remains within a 30% to 70% range, including the impact of interest rate derivatives. Note 25 details the interest rates on the Group's bank overdrafts, loans and other borrowings by the earlier of contractual re-pricing and maturity date and a sensitivity analysis that is intended to illustrate the sensitivity of the Group's financial position and performance to changes in interest rates is provided below in section (v).

(iv) Equity price risk management

The Group is exposed to equity price risk because certain available-for-sale financial assets, held by the Law Debenture Trust on behalf of the Company as security in respect of the Centrica Unapproved Pension Scheme, are linked to equity indices (note 34). Investments in equity indices are inherently exposed to less risk than individual equity investments because they represent a naturally diverse portfolio. Note 34 details the Group's other retirement benefit assets and liabilities.

(v) Sensitivity analysis

A financial instrument is defined in IAS 32 as any contract that gives rise to a financial asset of one entity (effectively the contractual right to receive cash or another financial asset from another entity) and a financial liability (effectively the contractual obligation to deliver cash or another financial asset to another entity) or equity instrument (effectively a residual interest in the assets of an entity) of another. IFRS 7 requires disclosure of a sensitivity analysis that is intended to illustrate the sensitivity of the Group's financial position and performance to changes in market variables (commodity prices, foreign exchange rates and interest rates) as a result of changes in the fair value or cash flows associated with the Group's financial instruments. The sensitivity analysis provided discloses the effect on profit or loss and equity at 31 December 2008 assuming that a reasonably possible change in the relevant risk variable had occurred at 31 December 2008 and been applied to the risk exposures in existence at that date to show the effects of reasonably possible changes in price on profit or loss and equity to the next annual reporting date. Reasonably possible changes in market variables used in the sensitivity analysis are based on implied volatilities, where available, or historical data for energy prices and foreign exchange rates. Reasonably possible changes in interest rates are based on management judgement and historical experience.

The sensitivity analysis has been prepared based on 31 December 2008 balances and on the basis that the balances, the ratio of fixed to floating rates of debt and derivatives, the proportion of energy contracts that are financial instruments, the proportion of financial instruments in foreign currencies and the hedge designations in place at 31 December 2008 are all constant. Excluded from this analysis are all non-financial assets and liabilities and energy contracts that are not financial instruments under IAS 39. The sensitivity to foreign exchange rates relates only to monetary assets and liabilities denominated in a currency other than the functional currency of the commercial operation transacting, and excludes the translation of the net assets of foreign operations to pounds sterling, but includes the corresponding impact of net investment hedges.

The sensitivity analysis provided is hypothetical only and should be used with caution as the impacts provided are not necessarily indicative of the actual impacts that would be experienced because the Group's actual exposure to market rates is constantly changing as the Group's portfolio of commodity, debt and foreign currency contracts changes. Changes in fair values or cash flows based on a variation in a market variable cannot be extrapolated because the relationship between the change in market variable and the change in fair value or cash flows may not be linear. In addition, the effect of a change in a particular market variable on fair values or cash flows is calculated without considering interrelationships between the various market rates or mitigating actions that would be taken by the Group. The sensitivity analysis provided below excludes the impact of proprietary energy trading assets and liabilities because the VaR associated with the Group's proprietary energy trading activities has already been provided above in section (i).

4. FINANCIAL RISK MANAGEMENT CONTINUED

The impacts of reasonably possible changes in commodity prices on profit and equity, both after taxation, based on the assumptions provided above are as follows:

		2008		2007
Energy prices	Base price (i)	Reasonably possible change in variable	Base price (i)	Reasonably possible change in variable
UK gas (p/therm)	56	+/-14	51	+/-12
UK power (£/MWh)	53	+/-9	52	+/-11
UK coal (US\$/tonne)	93	+/-24	101	+/-15
UK emissions (€/tonne)	16	+/-4	24	+/-5
UK oil (US\$/bbl)	58	+/-15	88	+/-14
North American gas (p/therm)	48	+/-11	38	+/-4
North American power (£/MWh)	41	+/-6	28	+/-5
European power (£/MWh)	61	+/-9	–	–

(i) The base price represents the average forward market price over the duration of the active market curve used in the sensitivity analysis provided.

		2008		2007
Incremental profit/(loss)	Impact on profit £m	Impact on equity £m	Impact on profit £m	Impact on equity £m
UK energy prices (combined) – increase/decrease	326/(322)	90/(90)	34/(34)	56/(56)
North American energy prices (combined) – increase/decrease	25/(25)	27/(27)	103/(103)	54/(54)
European energy prices (combined) – increase/decrease	44/(44)	–/–	–/–	–/–

The impacts of reasonably possible changes in interest rates on profit and equity, both after taxation, based on the assumptions provided above are as follows:

			2008			2007
Interest rates and incremental profit/(loss)	Reasonably possible change in variable %	Impact on profit £m	Impact on equity £m	Reasonably possible change in variable %	Impact on profit £m	Impact on equity £m
UK interest rates	+/-1.00	16/(16)	19/(23)	+/-0.50	5/(5)	(4)/4
US interest rates	+/-1.00	(2)/2	(12)/14	+/-0.50	–/–	(2)/2
Canadian interest rates	+/-1.00	–/–	–/–	+/-0.50	(2)/2	–/–
Euro interest rates	+/-1.00	3/(3)	–/–	+/-0.50	–/–	–/–
Japanese interest rates	+/-1.00	–/–	(17)/23	+/-0.50	–/–	(1)/1
New Zealand interest rates	+/-1.00	(2)/2	–/–	+/-0.50	(1)/1	–/–

The impacts of reasonably possible changes in foreign currency rates relative to pounds sterling on profit and equity, both after taxation, based on the assumptions provided above are as follows:

			2008			2007
Foreign exchange rates and incremental profit/(loss)	Reasonably possible change in variable %	Impact on profit £m	Impact on equity £m	Reasonably possible change in variable %	Impact on profit £m	Impact on equity £m
US dollar	+/-10	(46)/45	(12)/12	+/-10	(32)/28	(14)/12
Canadian dollar	+/-10	(3)/1	(31)/28	+/-10	(3)/1	(12)/10
Euro	+/-10	3/(2)	(20)/17	+/-10	1/(1)	(18)/17
Japanese yen	+/-10	–/–	3/(2)	+/-10	–/–	1/–
New Zealand dollar	+/-10	(10)/10	–/–	+/-10	–/–	–/–
Norwegian krone	+/-10	–/–	(4)/3	+/-10	2/(2)	–/–

4. FINANCIAL RISK MANAGEMENT CONTINUED

(b) Credit risk management

Credit risk is the risk of loss associated with a counterparty's inability or failure to discharge its obligations under a contract. The Group is exposed to credit risk in its treasury, trading, energy procurement and downstream activities. During 2008, there has been a continuing shortage of available credit in the market. In addition, many of the markets in which the Group operates are experiencing a slowing of growth or, in some cases, economic contraction. As a result of these external market factors, the Group is encountering an increase in credit risk compared with that experienced at the end of 2007. The Group continues to manage credit risk in accordance with its financial risk management processes and has not incurred any additional significant credit losses as a result of the increased credit risk.

Treasury, trading and energy procurement activities

Counterparty credit exposures are monitored by individual counterparty and by category of credit rating, and are subject to approved limits. The majority of significant exposures are with A-rated counterparties or better. The Group uses master netting agreements to reduce credit risk and net settles payments with counterparties where net settlement provisions exist. In addition, the Group employs a variety of other methods to mitigate credit risk: margining, various forms of bank and parent company guarantees and letters of credit.

100% of the Group's credit risk associated with its treasury, trading and energy procurement activities is with counterparties in related energy industries or with financial institutions. The Group measures and manages the credit risk associated with the Group's entire treasury, trading and energy procurement portfolio. In contrast, IFRS 7 defines credit risk as the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation and requires disclosure of information about the exposure to credit risk arising from financial instruments only. Only certain of the Group's energy procurement contracts constitute financial instruments under IAS 39 (note 2). As a result, while the Group manages the credit risk associated with both financial and nonfinancial energy procurement contracts, it is the carrying value of financial assets within the scope of IAS 39 (note 28) that represents the maximum exposure to credit risk in accordance with IFRS 7 because credit losses associated with contracts that are not recognised on the Balance Sheet will not be recognised as such in the Income Statement.

Downstream activities

In the case of business customers, credit risk is managed by checking a company's creditworthiness and financial strength both before commencing trade and during the business relationship. For residential customers, creditworthiness is ascertained normally before commencing trade by reviewing an appropriate mix of internal and external information to determine the payment mechanism required to reduce credit risk to an acceptable level. Certain customers will only be accepted on a prepayment basis.

In some cases, an ageing of receivables is monitored and used to manage the exposure to credit risk associated with both business and residential customers. In other cases, credit risk is monitored and managed by grouping customers according to method of payment or profile.

Note 21 provides further detail of the Group's exposure to credit risk on derivative financial instruments, note 20 provides detail of the Group's exposure to credit risk on trade and other receivables, note 23 provides detail of the Group's exposure to credit risk on cash and cash equivalents and note 28 provides the carrying value of all financial assets representing the Group's maximum exposure to credit risk.

(c) Liquidity risk management and going concern

Liquidity risk is the risk that the Group is unable to meet its financial obligations as they fall due. The Group can incur significant movements in its liquidity position due particularly to the seasonal nature of its business and margin cash arrangements associated with certain wholesale commodity contracts.

The Group's liquidity position has been particularly volatile during 2008 as significant volatility in commodity prices has seen large increases in cash required to fund working capital and margin cash balances. At 31 December 2008, the Group was holding £43 million (2007: £93 million) of cash as collateral against counterparty balances, and had pledged £669 million (2007: £118 million) of cash as collateral, principally under margin calls to cover exposure to mark-to-market positions on derivative contracts representing a net cash outflow during the year of £556 million (2007: £2 million inflow), write-offs of pledged balances of £22 million (2007: £nil), acquisition of cash collateral balances held of £33 million (2007: £nil) and exchange adjustments of £100 million (2007: £5 million). Generally, cash paid or received as collateral is interest-bearing and is free from any restriction over its use by the holder. To mitigate this risk the Group holds cash on deposit and maintains significant committed facilities.

The Group closely monitors, and has a number of treasury policies to manage its liquidity risk. Cash forecasts identifying the Group's liquidity requirements are produced regularly and are stress-tested for different scenarios including, but not limited to, reasonably possible increases or decreases in commodity prices and the potential cash implications of a ratings downgrade. The Group seeks to ensure that sufficient financial headroom exists for at least a 12-month period to safeguard the Group's ability to continue as a going concern. It is the Group's policy to maintain committed facilities of at least £1,200 million less available surplus cash resources, to raise at least 75% of its net debt (excluding non-recourse debt) over £200 million in the long-term debt market and to maintain an average term to maturity in the recourse long-term debt portfolio greater than five years.

4. FINANCIAL RISK MANAGEMENT CONTINUED

At 31 December 2008, the Group held £2,939 million (2007: £1,130 million) of cash and cash equivalents, had undrawn committed bank borrowing facilities of £1,350 million (2007: £1,300 million), plus a committed letter of credit facility for Canadian \$200 million (2007: C\$nil) made available to the Direct Energy business in North America of which Canadian \$146 million was drawn at 31 December 2008 (2007: C\$nil), 367% (2007: 321%) of the Group's net debt over £200 million has been raised in the long-term debt market and the average term to maturity of the long-term debt portfolio was 9.3 years (2007: 7.1 years).

The relatively high level of available cash resources and undrawn committed bank borrowing facilities has enabled the Directors to conclude that the Group has sufficient headroom to continue as a going concern. The statement of going concern is included in the Directors' Report – Governance, on page 42.

The Group's liquidity position at 31 December 2008 was significantly improved by the proceeds of the Rights Issue which completed in December 2008. The Rights Issue was undertaken in the expectation of acquiring a 25% stake in Lake Acquisitions Limited, the owner of the British Energy Group plc, from Electricité de France S.A. The Group will reassess its liquidity position before committing to any acquisition and would seek to finance any transaction with the Rights Issue proceeds, additional debt and, possibly, the sale of certain assets.

Maturities of derivative financial liabilities, trade and other payables, bank borrowings and provisions are provided in notes 21, 24, 25 and 27, respectively. Details of commitments and contingencies are provided in note 36 and details of undrawn committed bank borrowing facilities are provided in note 25.

5. CAPITAL MANAGEMENT

The Group's objective when managing capital is to maintain an optimal capital structure and strong credit rating to minimise the cost of capital. In addition, in a number of areas in which the Group operates, the Group's strong capital structure and good credit standing are important elements of the Group's competitive position.

At 31 December 2008, the Group's long-term credit rating was A3 stable outlook for Moody's Investor Services Inc. (2007: A3 stable outlook) and A negative outlook for Standard & Poor's Rating Services (2007: A negative outlook).

The Group monitors capital, using a medium term view of three to five years, on the basis of a number of financial ratios generally used by industry and by the rating agencies. This includes monitoring gearing ratios, interest cover and cash flow to debt ratios. The Group is not subject to externally imposed capital requirements but as is common for most companies the level of debt that can be raised is restricted by the Company's Articles of Association. Net debt is limited to the greater of £5 billion and a gearing ratio of three times adjusted capital and reserves. This restriction can be amended or removed by the shareholders of the Company passing an ordinary resolution. The Group's capital structure is managed against the various financial ratios as required to maintain strong credit ratings.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, repurchase shares, issue debt or repay debt.

During the year, the Group raised proceeds of approximately £2,164 million, net of issue costs of approximately £65 million, through a three for eight Rights Issue of new ordinary shares at 160 pence per share, representing a bonus to existing shareholders of 0.1233 ordinary shares per ordinary share held based on the closing share price of 267.75 pence per ordinary share on 21 November 2008, the last day the shares traded cum-rights. Centrica and Electricité de France S.A. (EDF) announced that they were in discussions in relation to an option for Centrica to acquire a 25% interest in British Energy Group plc. Centrica and EDF continue these discussions. Centrica would seek to finance any transaction with the Rights Issue proceeds, additional debt and, possibly, the sale of certain assets. If Centrica does not acquire an interest in British Energy Group, Centrica would evaluate the use of funds for other acquisition opportunities that meet its vertical integration objective, for general corporate purposes or for returns to shareholders with a view to maintaining an appropriate capital structure and maximising long-term shareholder value. On 13 January 2009, Standard & Poor's Rating Services placed the Group's long-term credit rating on CreditWatch with negative implications reflecting the increased likelihood of the Group completing this transaction and the impact on the financial risk of the Group. Standard & Poor's Rating Services has stated that any downgrade of the Group's credit rating was likely to be limited to one notch.

6. SEGMENTAL ANALYSIS

(i) Primary reporting format – business segments

The Group's business segments are distinguished on the basis of the internal management reporting system, and reflect the day-today management of the business. The products and services included within each segment are described in the Directors' Report – Business Review, on pages 8 to 34.

Year ended 31 December			2008			2007 (restated) (iv)
(a) Revenue	Gross segment revenue £m	Less inter segment revenue (i),(ii),(iii) £m	Group revenue £m	Gross segment revenue £m	Less inter segment revenue (i),(ii),(iii) £m	Group revenue £m
Continuing operations:
British Gas Residential	7,769	–	7,769	6,457	–	6,457
British Gas Business	3,063	–	3,063	2,431	–	2,431
British Gas Services	1,349	–	1,349	1,279	–	1,279
British Gas	12,181	–	12,181	10,167	–	10,167
Gas production and development (i)	1,784	(1,318)	466	923	(624)	299
Power generation (i)	1,264	(595)	669	880	(578)	302
Industrial and commercial (ii)	1,522	(486)	1,036	838	–	838
Accord energy trading (iii)	61	(12)	49	24	(12)	12
Centrica Energy	4,631	(2,411)	2,220	2,665	(1,214)	1,451
Centrica Storage (i),(iv)	280	(59)	221	327	(57)	270
Direct Energy	5,824	–	5,824	3,992	–	3,992
European Energy (i)	890	(1)	889	395	(3)	392
Other operations (v)	10	–	10	–	–	–
	23,816	(2,471)	21,345	17,546	(1,274)	16,272
Discontinued operations:
The Consumers' Waterheater Income Fund	–	–	–	42	–	42
	–	–	–	42	–	42

Group revenue from continuing operations is derived from the following activities:

Year ended 31 December	2008 £m	2007 (restated) (iv) £m
Sale of goods (iv)	19,575	14,551
Rendering of services	1,729	1,693
Other income	41	28
Group revenue	21,345	16,272

(i) Inter-segment revenue reflects the level of revenue generated on sales to other Group segments on an arm's length basis. During the second half of 2008, Gas production and development began to sell gas downstream at forward market prices. Prior to this, Gas production and development sold all gas produced at month ahead prices. This change resulted in an additional £54 million of net revenue being reported in Gas production and development in 2008 than would have been reported had Gas production and development continued to sell gas downstream at month ahead prices.

(ii) Inter-segment revenue in the Industrial and commercial segment reflects the sale of upstream gas produced or procured to other Group segments on an arm's length basis. Prior to 2008, the Group's downstream businesses procured gas directly from Gas production and development or external counterparties.

(iii) The external revenue presented for Accord energy trading comprises both realised (settled) and unrealised (fair value changes) from trading in physical and financial energy contracts. Inter-segment revenue arising in Accord represents the recharge of brokerage fees to other Group segments.

(iv) Gross segment revenue, inter-segment revenue and Group revenue have been restated to report gas sales revenue of Centrica Storage net of cost of sales to better reflect the nature of the transactions as explained in note 2.

(v) Other operations comprise British Gas New Energy, Group Treasury, Group Property, Information Services and other shared services.

6. SEGMENTAL ANALYSIS CONTINUED

Year ended 31 December		Operating profit/(loss) before exceptional items and certain re-measurements		Exceptional items (note 8)		Certain re-measurements (note 8)		Operating profit/(loss) after exceptional items and certain re-measurements
(b) Operating profit	2008 £m	2007 £m	2008 £m	2007 £m	2008 £m	2007 £m	2008 £m	2007 £m
Continuing operations:
British Gas Residential	379	571	–	–	(787)	39	(408)	610
British Gas Business	143	120	–	–	(233)	317	(90)	437
British Gas Services	195	151	–	–	–	–	195	151
British Gas	717	842	–	–	(1,020)	356	(303)	1,198
Gas production and development (i)	1,164	429	–	–	55	(16)	1,219	413
Power generation	7	46	–	–	(8)	(43)	(1)	3
Industrial and commercial	(329)	179	–	–	104	(95)	(225)	84
Accord energy trading	37	9	–	–	(1)	(3)	36	6
Centrica Energy	879	663	–	–	150	(157)	1,029	506
Centrica Storage	195	240	–	–	7	(8)	202	232
Direct Energy	215	187	–	–	(465)	53	(250)	240
European Energy (ii)	(56)	17	(67)	–	(87)	(9)	(210)	8
Other operations (iii)	(8)	–	–	–	–	–	(8)	–
	1,942	1,949	(67)	–	(1,415)	235	460	2,184
Discontinued operations:
The Consumers' Waterheater Income Fund	–	39	–	227	–	–	–	266

Year ended 31 December		Share of results of joint ventures and associates net of interest and taxation		Depreciation of property, plant and equipment		Amortisation, write downs and impairments of intangibles
(c) Included within operating profit	2008 £m	2007 £m	2008 £m	2007 £m	2008 £m	2007 £m
Continuing operations:
British Gas Residential	–	–	10	16	26	27
British Gas Business	–	–	3	3	8	19
British Gas Services	–	–	13	13	5	4
British Gas	–	–	26	32	39	50
Gas production and development	–	–	280	250	21	8
Power generation	9	4	101	93	31	1
Industrial and commercial	–	–	1	1	2	–
Accord energy trading	–	–	–	–	–	–
Centrica Energy	9	4	382	344	54	9
Centrica Storage	–	–	22	24	–	–
Direct Energy	–	–	75	62	14	15
European Energy	3	1	2	2	12	10
Other operations (iii)	–	–	8	9	10	8
	12	5	515	473	129	92
Discontinued operations:
The Consumers' Waterheater Income Fund	–	–	–	21	–	1

(i) During the second half of 2008, Gas production and development began to sell gas downstream at forward market prices. Prior to this, Gas production and development sold all gas produced at month ahead prices. This change resulted in an additional £54 million of operating profit being reported in Gas production and development in 2008 than would have been reported had Gas production and development continued to sell gas downstream at month ahead prices.

(ii) During 2008, exceptional charges of £67 million were incurred in the European Energy segment, including a £45 million impairment of the Oxxio goodwill, explained in note 16, and a £22 million

impairment of a receivable balance in Oxxio relating to historic overpayments of regulatory energy revenue tax, reflecting the reduced likelihood of realising the balance in the future. (iii) Other operations comprise British Gas New Energy, Group Treasury, Group Property, Information Services and other shared services. Depreciation of property, plant and equipment and amortisation and write-downs of intangibles in the Other operations segment are charged out to other Group segments.

6. SEGMENTAL ANALYSIS CONTINUED

31 December		Segment assets		Segment liabilities		Net segment assets/(liabilities)		Average capital employed Year ended 31 December (iii)
(d) Assets and liabilities	2008 £m	2007 £m	2008 £m	2007 £m	2008 £m	2007 £m	2008 £m	2007 £m
British Gas Residential (i)	2,281	1,035	(2,907)	(1,063)	(626)	(28)	318	400
British Gas Business (i)	1,129	817	(852)	(430)	277	387	506	418
British Gas Services	239	258	(149)	(167)	90	91	75	67
British Gas	3,649	2,110	(3,908)	(1,660)	(259)	450	899	885
Gas production and
development	1,975	1,576	(747)	(480)	1,228	1,096	731	678
Power generation	2,135	2,173	(88)	(272)	2,047	1,901	1,545	1,422
Industrial and commercial (i)	592	1,532	(703)	(1,889)	(111)	(357)	(165)	(80)
Accord energy trading	3,765	1,243	(3,560)	(1,377)	205	(134)	(254)	34
Centrica Energy	8,467	6,524	(5,098)	(4,018)	3,369	2,506	1,857	2,054
Centrica Storage	688	503	(272)	(189)	416	314	344	350
Direct Energy	3,994	2,560	(2,043)	(993)	1,951	1,567	1,910	1,844
European Energy	742	432	(421)	(113)	321	319	391	292
Other operations (ii)	317	99	(541)	(295)	(224)	(196)	(93)	(106)
	17,857	12,228	(12,283)	(7,268)	5,574	4,960	5,308	5,319
Deferred tax assets/(liabilities)	311	27	(448)	(596)	(137)	(569)
Current tax assets/(liabilities)	39	40	(365)	(281)	(326)	(241)
Short-term deposits and other
financial assets	2,950	1,166	–	–	2,950	1,166
Bank overdrafts and loans	–	–	(3,548)	(2,014)	(3,548)	(2,014)
Retirement benefit assets/
(obligations)	73	152	(186)	(55)	(113)	97
Other	4	7	(18)	(24)	(14)	(17)
Non-operating assets/(liabilities)	3,377	1,392	(4,565)	(2,970)	(1,188)	(1,578)
	21,234	13,620	(16,848)	(10,238)	4,386	3,382
Less inter-segment
(receivables)/payables	(2,887)	(1,765)	2,887	1,765	–	–
	18,347	11,855	(13,961)	(8,473)	4,386	3,382

(i) 2008 segment assets include the allocation of mark-to-market assets to British Gas Residential of £824 million and mark-to-market liabilities to British Gas Residential of £1,643 million and British Gas Business of £291 million from Industrial and commercial. In 2007, mark-to-market assets and liabilities were retained in Industrial and commercial.

(ii) Other operations comprise assets and liabilities of British Gas New Energy, Group Treasury, Group Property, Information Services, GF One Limited, GF Two Limited and other shared services.

(iii) Capital employed represents the investment required to operate each of the Group's segments. Capital employed is used by the Group to calculate the return on capital employed for each of the Group's segments as part of the Group's managing for value concept. Additional value is created when the return on capital employed exceeds the cost of capital. Net segment assets of the Group can be reconciled to the Group's capital employed as follows:

	2008 £m	2007 £m
Net segment assets at 31 December	5,574	4,960
Add back/(deduct):
Net derivative financial liabilities	2,174	429
Net power generation assets under construction and gas and storage assets under development	(815)	(563)
Cash at bank, in transit and in hand	(87)	(53)
Effect of averaging month-end balances	(1,538)	546
Average capital employed for year ended 31 December	5,308	5,319

6. SEGMENTAL ANALYSIS CONTINUED
Year ended 31 December	Capital expenditure on equipment (note 17)		Capital expenditure on intangible assets other than goodwill (note 15) (ii)
(e) Capital expenditure	2008 £m	2007 £m	2008 £m	2007 £m
British Gas Residential	15	3	13	2
British Gas Business	1	–	6	6
British Gas Services	16	16	–	3
British Gas	32	19	19	11
Gas production and development	169	117	12	15
Power generation	299	344	264	104
Industrial and commercial	–	7	4	2
Accord energy trading	–	–	–	–
Centrica Energy	468	468	280	121
Centrica Storage	23	19	2	1
Direct Energy	92	99	21	29
European Energy	9	12	15	10
Other operations (i)	7	11	2	9
Additions	631	628	339	181
Decrease in prepayments related to capital expenditure	(24)	(39)	–	–
Capital expenditure of discontinued operations	–	(26)	–	–
Decrease/(increase) in trade payables related to capital expenditure	19	–	(155)	4
Net cash outflow	626	563	184	185

(i) Other operations comprise British Gas New Energy, Group Treasury, Group Property, Information Services and other shared services.

(ii) See note 35 for additions to goodwill.

(ii) Secondary reporting format – geographical segments

The Group operates in three main geographical areas:

Year ended 31 December		Revenue (based on location of customer)		Total assets (based on location of assets) At 31 December		Capital expenditure on property, plant and equipment (note 17) (based on location of assets)		Capital expenditure on intangible assets other than goodwill (note 15) (based on location of assets) (ii)
	2008 £m	2007 (restated) (i) £m	2008 £m	2007 £m	2008 £m	2007 £m	2008 £m	2007 £m
Continuing operations:
UK	14,612	11,884	13,076	8,823	529	516	295	134
North America	5,824	3,992	4,051	2,576	92	99	21	29
Rest of world	909	396	1,220	456	10	13	23	18
	21,345	16,272	18,347	11,855	631	628	339	181

(i) Restated to reflect gas sales revenue of Centrica Storage net of cost of sales to better reflect the nature of the transactions as explained in note 2.

(ii) See note 35 for additions to goodwill.

Shareholder Information

7. COSTS OF CONTINUING OPERATIONS

Analysis of costs by nature	2008 £m	2007 (restated) (i) £m
Transportation, distribution and metering costs	(3,000)	(2,775)
Commodity costs	(12,240)	(7,670)
Depreciation, amortisation and write-downs	(451)	(415)
Employee costs	(451)	(415)
Other costs relating to energy consumption and provision of services	(997)	(872)
Total cost of sales	(17,139)	(12,147)
Depreciation, amortisation and write-downs	(193)	(150)
Employee costs	(922)	(901)
Loss on disposal of property, plant and equipment and other intangible assets	–	(7)
Profit on disposal of businesses	–	2
Impairment of trade receivables (note 20)	(237)	(184)
Foreign exchange gains	1	–
Other operating costs	(929)	(950)
Total operating costs before exceptional items	(2,280)	(2,190)
Exceptional items (note 8)	(67)	–
Total operating costs	(2,347)	(2,190)

(i) Cost of sales has been restated to report gas sales revenue of Centrica Storage net of cost of sales to better reflect the nature of the transactions as explained in note 2.

Auditors' remuneration	2008 £m	2007 £m
Fees payable to the Company's auditors for the audit of the Company's annual accounts and Group consolidation	2.2	2.2
The auditing of other accounts within the Group pursuant to legislation (including that of countries and territories outside the UK) (i)	1.3	1.2
Total fees related to audit of parent and subsidiary entities	3.5	3.4
Fees payable to the Company's auditors and its associates for other services:
Other services pursuant to legislation (i)	0.9	0.5
Services related to information technology	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	0.4	–
All other services	0.8	0.5
	5.8	4.4
Fees in respect of pension schemes:
Audit	0.1	0.1

(i) Includes fees in respect of review performed on the interim Financial Statements.

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 additional to their statutory audit duties where their expertise and experience with the Group are particularly important, including tax advice and due diligence reporting on acquisitions.

(a) Exceptional items (note 2)	2008 £m	2007 £m
Continuing operations:
Impairment of Oxxio goodwill and other assets (i)	(67)	–
Discontinued operations:
Profit on disposal of The Consumers' Waterheater Income Fund (ii)	–	227
(i) During 2008, exceptional charges of £67 million were incurred in the European Energy segment, including a £45 million impairment of the Oxxio goodwill, explained in note 16, and a £22 million impairment of a receivable balance in Oxxio relating to historic overpayments of regulatory energy revenue tax, reflecting the reduced likelihood of realising the balance in the future. (ii) The Group deconsolidated the Fund with effect from 1 December 2007 recognising an exceptional profit on disposal amounting to £227 million in 2007. (b) Certain re-measurements (note 2)	2008 £m	2007 £m
Certain re-measurements recognised in relation to energy contracts
Net gains arising on delivery of contracts (i)	10	352
Net losses arising on market price movements and new contracts (ii)	(1,417)	(95)
Net losses arising on positions in relation to cross-border transportation or capacity contracts (iii)	(4)	(13)
Net re-measurement of energy contracts included within gross profit	(1,411)	244
Net losses arising on re-measurement of joint ventures' energy contracts (iv)	(4)	(9)
Net re-measurement included within Group operating profit	(1,415)	235
Taxation on certain re-measurements	434	(60)
Net re-measurement after taxation	(981)	175
Discontinued operations:

Fair value losses arising on re-measurement of the publicly traded units of The Consumers' Waterheater Income Fund – (19) Total certain re-measurements (981) 156

(i) As energy is delivered or consumed from previously contracted positions, the related fair value recognised in the opening balance sheet (representing the discounted difference between forward energy prices at the opening balance sheet date and the contract price of energy to be delivered) is charged or credited to the Income Statement.

(ii) Represents fair value losses arising from the change in fair value of future contracted sales and purchase contracts as a result of changes in forward energy prices between reporting dates (or date of inception and the reporting date, where later).

(iii) Comprises movements in fair value arising on proprietary trades in relation to cross-border transportation or storage capacity, on which economic value has been created which is not wholly accounted for under the provisions of IAS 39.

(iv) Certain re-measurements included within Group operating profit also include the Group's share of certain re-measurements relating to the energy procurement activities of joint ventures.

9. DIRECTORS AND EMPLOYEES

(a) Employee costs	2008 £m	2007 £m
Wages and salaries	1,147	1,078
Social security costs	88	88
Other pension and retirement benefits costs	109	123
Share scheme costs	35	31
	1,379	1,320
Capitalised employee costs	(6)	(4)
Employee costs recognised in the Group Income Statement	1,373	1,316

Details of Directors' remuneration, share-based payments and pension entitlements in the Remuneration Report on pages 44 to 55 form part of these Financial Statements. Details of employee share-based payments are given in note 33. Details of the remuneration of key management personnel are given in note 37.

9. DIRECTORS AND EMPLOYEES CONTINUED

(b) Average number of employees during the year	2008 Number	2007 Number
British Gas Residential	8,077	9,227
British Gas Business	2,065	2,008
British Gas Services	15,412	15,186
Centrica Energy	1,152	1,053
Centrica Storage	199	191
Direct Energy	4,991	4,839
European Energy	253	214
Other operations	668	1,190
	32,817	33,908
UK	27,538	28,829
North America	4,991	4,839
Rest of world	288	240
	32,817	33,908

10.NET INTEREST

			2008			2007
	Interest expense £m	Interest income £m	Total £m	Interest expense £m	Interest income £m	Total £m
Continuing operations
Cost of servicing net debt
Interest income	–	106	106	–	95	95
Interest expense on bank loans and overdrafts	(128)	–	(128)	(109)	–	(109)
Interest expense on finance leases (i)	(23)	–	(23)	(87)	–	(87)
	(151)	106	(45)	(196)	95	(101)
(Losses)/gains on revaluation
(Losses)/gains on fair value hedges	(82)	81	(1)	(6)	5	(1)
Fair value (losses)/gains on other derivatives (ii)	(396)	47	(349)	(89)	24	(65)
Net foreign exchange translation of monetary
assets and liabilities (iii)	–	345	345	–	58	58
	(478)	473	(5)	(95)	87	(8)
Other interest
Notional interest arising on discounted items	(20)	59	39	(20)	55	35
Interest on cash collateral balances	(20)	5	(15)	(1)	6	5
Interest on supplier early payment arrangements	–	15	15	–	15	15
Other interest (iv)	–	–	–	(19)	–	(19)
	(40)	79	39	(40)	76	36
Interest (expense)/income	(669)	658	(11)	(331)	258	(73)

(i) 2007 includes £40 million of net interest expense incurred on termination of the Humber finance lease.

(ii) Primarily reflects changes in the fair value of derivatives used to hedge the foreign exchange exposure associated with inter-company loans denominated in foreign currencies.

(iii) Primarily reflects foreign exchange gains on inter-company loans denominated in foreign currencies.

(iv) In 2007 the Group reached an agreement with Her Majesty's Revenue and Customs (HMRC) on a technical matter concerning intra-group transfer pricing of gas produced within the UK Continental Shelf dating back to 2000. The terms of the settlement resulted in a net charge of £13 million, comprising finance costs of £19 million on corporation tax deemed to have been paid late net of an associated £6 million tax credit.

11. TAXATION

			2008			2007
(a) Analysis of tax charge for the year	Results for the year before exceptional items and certain re-measurements £m	Exceptional items and certain re-measurements £m	Results for the year £m	Results for the year before exceptional items and certain re-measurements £m	Exceptional items and certain re-measurements £m	Results for the year £m
The tax charge comprises:
Current tax
UK corporation tax	398	5	403	309	–	309
UK petroleum revenue tax	517	–	517	200	–	200
Foreign tax	24	2	26	48	2	50
Adjustments in respect of prior years	(20)	–	(20)	4	–	4
Total current tax	919	7	926	561	2	563
Deferred tax
Current year (i)	165	(236)	(71)	253	53	306
Adjustments in respect of prior years	(8)	–	(8)	(19)	–	(19)
Change in tax rates (ii)	(1)	–	(1)	(9)	–	(9)
UK petroleum revenue tax	(52)	–	(52)	(32)	–	(32)
Foreign deferred tax	4	(205)	(201)	(1)	5	4
Total deferred tax	108	(441)	(333)	192	58	250
Total tax on profit from continuing operations	1,027	(434)	593	753	60	813

(i) The Finance Act 2008 changed the rules concerning loss relief on decommissioning costs and, as a result of this change, the current year deferred tax charge is stated net of a £55 million credit in respect of previously unrecognised deferred tax assets.

(ii) 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 2007 was a credit of £12 million and a further credit of £1 million in 2008. No other material amounts arose as a result of changes introduced by the Finance Act 2007. The effect of changes to foreign tax rates on the relevant temporary differences at 31 December 2008 was £nil (2007: charge of £3 million).

Tax on items taken directly to equity is disclosed in note 30.

The Group earns its profits primarily in the UK, therefore the tax rate used for tax on profit on ordinary activities is the standard rate for UK corporation tax, which was 28.5% for 2008 (2007: 30%). Additional charges of 21.5% (2007: 20%) are applicable on the Group's UK upstream profits. 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:

			2008			2007
	Results for the year before exceptional items and certain re-measurements £m	Exceptional items and certain re-measurements £m	Results for the year £m	Results for the year before exceptional items and certain re-measurements £m	Exceptional items and certain re-measurements £m	Results for the year £m
Profit from continuing operations before tax	1,931	(1,482)	449	1,876	235	2,111
Less: share of profits in joint ventures and associates, net of interest and taxation	(16)	4	(12)	(14)	9	(5)
Group profit from continuing operations before tax	1,915	(1,478)	437	1,862	244	2,106
Tax on profit from continuing operations at standard UK corporation tax rate of 28.5% (2007: 30%)	546	(421)	125	559	73	632
Effects of:
Net expenses not deductible for tax purposes	48	13	61	11	–	11
Adjustments in respect of prior years	(28)	–	(28)	(15)	(15)	(30)
Movement in unrecognised deferred tax assets (i)	(31)	6	(25)	16	–	16
UK petroleum revenue tax rates	335	–	335	118	–	118
Overseas tax rates	(8)	(46)	(54)	8	5	13
Additional charges applicable to upstream profits	166	10	176	65	(3)	62
Changes to tax rates	(1)	4	3	(9)	–	(9)
Taxation on profit from continuing operations	1,027	(434)	593	753	60	813

(i) 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.

11. TAXATION CONTINUED

(c) Factors that may affect future tax charges

The Group earns income from many activities, including oil and gas production in the UK, North America and elsewhere. On average, the Group pays taxes at higher rates than the current UK statutory rate of 28% (2007: 30%). The impact of higher rates, including petroleum revenue tax and the supplementary charge on UK Continental Shelf profits, is subject to the mix of the Group's income. In the medium term, the Group's effective tax rate is expected to remain above the UK statutory rate.

12. DIVIDENDS

	2008 £m	2007 £m
Prior year final dividend of 8.59 pence (2007: 7.12 pence) per ordinary share	356	294
Interim dividend of 3.47 pence (2007: 2.98 pence) per ordinary share	144	123
	500	417

The prior year final dividend was paid on 11 June 2008 (2007: 13 June). The interim dividend was paid on 12 November 2008 (2007: 14 November). The prior year final dividend of 9.65 pence (2007: 8.00 pence) per ordinary share and interim dividend of 3.90 pence (2007: 3.35 pence) per ordinary share have been adjusted to reflect the bonus element of the Rights Issue in the table above. Details of the Rights Issue are provided in notes 5, 29 and 30.

The Directors propose a final dividend of 8.73 pence per ordinary share (totalling £446 million) for the year ended 31 December 2008. The dividend will be submitted for formal approval at the Annual General Meeting to be held on 11 May 2009. 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 2009.

13. EARNINGS PER ORDINARY SHARE

Basic earnings per ordinary share has been calculated by dividing the loss attributable to equity holders of the Company for the year of £145 million (2007: earnings of £1,505 million) by the weighted average number of ordinary shares in issue during the year of 4,198 million (2007: 4,126 million). The weighted average number of ordinary shares outstanding and the dilutive impact for both periods presented has been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30. 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 and exceptional items, assists with understanding the underlying performance of the Group. The reconciliation of basic to adjusted basic earnings per ordinary share is as follows:

		2008		2007 (restated) (i)
(a) Continuing and discontinued operations	£m	Pence per ordinary share	£m	Pence per ordinary share
(Loss)/earnings – basic	(145)	(3.5)	1,505	36.5
Net exceptional items after tax (notes 2 and 8)	67	1.6	(227)	(5.5)
Certain re-measurement losses and (gains) after tax (notes 2 and 8)	981	23.4	(156)	(3.8)
Earnings – adjusted basic	903	21.5	1,122	27.2
(Loss)/earnings – diluted	(145)	(3.5)	1,505	35.9
Earnings – adjusted diluted	903	21.3	1,122	26.7

		2008		2007 (restated) (i)
(b) Continuing operations	£m	Pence per ordinary share	£m	Pence per ordinary share
(Loss)/earnings – basic	(145)	(3.5)	1,296	31.4
Net exceptional items after tax (notes 2 and 8)	67	1.6	–	–
Certain re-measurement losses and (gains) after tax (notes 2 and 8)	981	23.4	(175)	(4.2)
Earnings – adjusted basic	903	21.5	1,121	27.2
(Loss)/earnings – diluted	(145)	(3.5)	1,296	30.9
Earnings – adjusted diluted	903	21.3	1,121	26.7

(i) Restated to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

13.EARNINGS PER ORDINARY SHARE CONTINUED

		2008		2007 (restated) (i)
(c) Discontinued operations	£m	Pence per ordinary share	£m	Pence per ordinary share
Earnings – basic	–	–	209	5.1
Earnings – diluted	–	–	209	5.0

(i) Restated to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

Certain re-measurements (notes 2 and 8) included within operating profit comprise re-measurements arising on energy procurement activities and re-measurement of proprietary trades in relation to cross-border transportation or capacity contracts. Certain remeasurements included within discontinued operations in 2007 comprise re-measurement of the publicly traded units of The Consumers' Waterheater Income Fund. 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 2008 or 2007, 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 are considered to be potentially dilutive for diluted earnings per ordinary share, because doing so would decrease the loss per ordinary share. However, potentially dilutive ordinary shares were taken into account when calculating adjusted diluted earnings per ordinary share.

	2008 million shares	2007 (restated) (i) million shares
Weighted average number of shares used in the calculation of basic earnings per ordinary share	4,198	4,126
Dilutive impact of share-based payment schemes	35	71
Weighted average number of shares used in the calculation of diluted earnings per ordinary share	4,233	4,197

(i) Restated to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

14. GOODWILL

	2008 £m	2007 £m
Cost and net book value
1 January	1,074	1,055
Acquisitions (note 35)	269	58
Adjustments to provisional fair values of acquisitions completed in previous year	2	–
Impairment (note 16)	(45)	–
Disposals	–	(124)
Exchange adjustments	210	85
31 December	1,510	1,074
Analysis of goodwill at 31 December by acquisition	2008 £m	2007 £m
Direct Energy	369	335
Energy America	31	23
Enron Direct/Electricity Direct	133	133

Enbridge Services 87 79 CPL/WTU 253 186 ATCO 51 46 Dyno-Rod 17 17 Residential Services Group 92 67 Oxxio 69 90 Newfield 57 55 Strategic Energy 104 – Caythorpe 33 – Heimdal 151 – Other 63 43

Di rec tor s' R
ep or t –
Bu sin ess
R ev iew

1,510 1,074

15. OTHER INTANGIBLE ASSETS

	Application software £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 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 35)	–	–	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
Impairment 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

	Application software £m	Renewable obligation certificates £m	Brands (i) £m	Customer relationships £m	Consents £m	Exploration and evaluation expenditure £m	Other £m	Total £m
Cost
1 January 2007	398	27	57	69	29	24	37	641
Additions – acquired from a third party	23	97	–	–	–	30	5	155
Additions – internally generated	26	–	–	–	–	–	–	26
Acquisitions	–	–	–	10	–	12	–	22
Disposals of subsidiaries	–	–	–	(9)	–	–	(1)	(10)
Disposals	(11)	–	–	–	–	–	–	(11)
Exploration and evaluation expenditure transferred to producing assets	–	–	–	–	–	(17)	–	(17)
Surrenders	–	(72)	–	–	–	–	–	(72)
Write-downs recognised in income	–	–	–	–	–	(13)	–	(13)
Exchange adjustments	11	1	–	2	–	5	3	22
31 December 2007	447	53	57	72	29	41	44	743
Aggregate amortisation and impairment
1 January 2007	160	–	–	20	–	–	15	195
Amortisation	53	–	–	10	–	–	17	80
Disposals of subsidiaries	–	–	–	(1)	–	–	–	(1)
Disposals	(6)	–	–	–	–	–	–	(6)
Exchange adjustments	7	–	–	3	–	–	–	10
31 December 2007	214	–	–	32	–	–	32	278
Net book value at 31 December 2007	233	53	57	40	29	41	12	465

(i) Brands include £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.

(ii) A £21 million write-down of exploration and evaluation expenditure was recognised in Gas production and development, and a £1 million write-down was recognised in the Direct Energy segment,

in operating costs to reflect a reduction in the recoverable amount of certain assets to £nil, related to projects that are not commercially viable. (iii) A £31 million impairment of emissions allowances was recognised in the Power generation segment, 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 partially offset by a reduction in the obligation related to emission allowances of £30m.

16. 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:

				2008			2007
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
British Gas Business	Enron Direct/Electricity Direct	133	–	133	133	–	133
British Gas Services – Dyno-Rod	Dyno-Rod	17	57	74	17	57	74
Centrica Energy – Gas production and development	Newfield/Heimdal	208	–	208	55	–	55
Direct Energy – Mass markets energy (i)	Direct Energy/ATCO/CPL/WTU (ii)	612	–	612	506	–	506
Direct Energy – Commercial and industrial energy (i)	Direct Energy/ATCO/Strategic Energy (ii)	196	–	196	83	–	83
Direct Energy – Home and business services (i)	Enbridge Services/Residential Services Group (ii)	200	–	200	158	–	158
European Energy – Oxxio	Oxxio	69	–	69	90	–	90
Other (iii)	Various (iii)	75	–	75	32	–	32
		1,510	57	1,567	1,074	57	1,131

(i) During the year, the aggregation of assets in determining the cash-generating units for Direct Energy changed in line with the restructuring of the business into four pan-North American lines of business. Direct Energy – Mass markets energy combines Canada mass markets, US North mass markets, Texas Direct mass markets and Texas residential energy, Direct Energy – Commercial and industrial energy combines Canada commercial and industrial, US North commercial and industrial and Texas commercial and industrial, and Direct Energy – Home and business services combines Canada home services, US home services, Canada business services and US business services. Comparative figures have been restated to reflect the change in the allocation of goodwill to cashgenerating units.

(ii) 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 cashgenerating unit.

(iii) 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.

(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 Centrica Energy – Gas production and development cashgenerating 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 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 28 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 cashgenerating 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.

16. IMPAIRMENT TESTING OF GOODWILL AND INTANGIBLES WITH INDEFINITE USEFUL LIVES CONTINUED

(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 Centrica Energy – Gas production and development. This methodology is deemed to be more appropriate because it is based on the post-tax cash flows arising from each field within Centrica Energy – Gas production and development, which 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 Centrica Energy – Gas production and development, 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 Centrica Energy – Gas production and development, 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 28 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, the 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 forecast on a consistent basis. The future post-tax cash flows are discounted using a post-tax nominal discount rate of 8.5% to determine the fair value less costs to sell of Centrica Energy – Gas production and development. Fair value less costs to sell is compared to the carrying value of the Centrica Energy – Gas production and development 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

The Group uses surrogates in an attempt to estimate a market assessment of the time value of money and the risks inherent in the Group's business plans in order to discount the forecast cash flows of each of the Group's cash-generating units. Discount rates are derived from the Group's weighted average cost of capital by replacing the Group's beta with the betas of companies comparable to each of the Group's cash-generating units to estimate a cash-generating unit specific weighted average cost of capital. Each cashgenerating unit's specific 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.

	British Gas Business	British Gas Services – Dyno-Rod	Direct Energy – Mass markets energy	Direct Energy – Commercial and industrial energy	Direct Energy – Home and business services	European Energy – Oxxio
Growth rate to perpetuity	2.0%	2.5%	1.5%	2.0%	2.0%	2.0%
Pre-tax discount rate	9.3%	9.9%	9.3%	9.3%	9.3%	10.9%

(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, Europe, Canada and the US. Inflation rates used for the value in use calculations were as follows: UK and Europe – 2.5% in 2009 and 2% in 2010 and 2011, Canada – 2.3% in 2009 and 2% in 2010 and 2011 and the US – 2.9% in 2009 and 2% in 2010 and 2011.

16. IMPAIRMENT TESTING OF GOODWILL AND INTANGIBLES WITH INDEFINITE USEFUL LIVES CONTINUED

(d) Key assumptions used and summary of results

(i) British Gas Business Key assumptions

• x Gross margin percentage: based on contractual terms for customers on existing contracts and achieved gross margin percentages 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.
• x 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.
• x 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 British Gas Business 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) British Gas Services – Dyno-Rod

Key assumptions

• x Gross margin percentage: based on achieved gross margins in the period leading up to approval of the business plan.
• x Revenues: based on revenue levels achieved in the period leading up to 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.
• x 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 British Gas 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) Centrica Energy – Gas production and development

Key assumptions

• x 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 estimates.
• x Cash outflows: based on planned capital expenditure and the estimated future costs of abandonment.
• x 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 Centrica Energy – 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) Direct Energy – Mass markets energy

Key assumptions

• x Gross margin percentage: based on contractual terms for customers on existing contracts and achieved gross margin percentages in the period leading up to 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.
• x 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 jurisdiction 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.
• x 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 negative economic environment in the US, and, to a lesser extent, Canada.

16. IMPAIRMENT TESTING OF GOODWILL AND INTANGIBLES WITH INDEFINITE USEFUL LIVES CONTINUED

Summary of results

The recoverable amount of the Direct Energy – Mass markets energy 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) Direct Energy – Commercial and industrial energy

Key assumptions

• x Gross margin percentage: based on achieved gross margin percentages in the period leading up to approval of the business plan, increased to reflect an expected easing of competitive pressure throughout the plan period and decreased to reflect the current negative economic environment in the US, and, to a lesser extent, Canada.
• x Revenues: based on historical growth trends and planned sales activities by individual market sector with an adjustment to reflect an increase in volumes driven by the acquisition of Strategic Energy as explained in note 35. Prices are based on forward market curves for gas and electricity in Canada and the US.
• x Operating costs: based on expected increases in existing cost base to reflect increased activity as a slightly declining percentage of gross margins to reflect expected synergies associated with the acquisition of Strategic Energy as explained in note 35.

Summary of results

The recoverable amount of the Direct Energy – Commercial and industrial energy 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) Direct Energy – Home and business services

Key assumptions

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

Summary of results

The recoverable amount of the Direct Energy – Home 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.

(vii) European Energy – Oxxio

Key assumptions

• x Gross margin percentage: based on the gross margin percentages achieved in the period leading up to approval of the business plan, adjusted to reflect the increase in levels of competition currently being experienced in The Netherlands.
• x Revenues: based on customer account growth achieved in the period leading up to approval of the business plan, adjusted downward to reflect the impact of the recent increases in competition, with prices reflecting forward market curves for gas and electricity.
• x Operating costs: based on projected headcount and inflationary increases adjusted to reflect recently implemented cost improvement programmes and an increase in web enabled customer solutions.

Summary of results

The recoverable amount of the European Energy – Oxxio cash-generating unit was below its carrying value by £45 million at the impairment test date and accordingly an impairment loss of this amount has been recognised in the Income Statement for the year ended 31 December 2008 within exceptional operating costs. The impairment loss arose due to a mixture of more competitive markets and lower margins in the forecast period due to procurement issues that arose during 2008 with the increased volatility in energy markets. The European Energy – Oxxio value in use calculation was based on a discount rate of 10.9% (2007: 10.7%), and assumed an average gross margin percentage of 9.0% over the three years with closing customer numbers of approximately 750,000 in all three years. At 31 December 2008, the carrying value of the European Energy – Oxxio cash-generating unit was equal to its recoverable amount. As a result, a reasonably possible decrease in gross margin percentage or customer numbers, below the levels used in the value in use calculation above, would potentially result in the recoverable amount of the European Energy – Oxxio cash-generating unit falling below its carrying value, triggering a further impairment loss. If, for example, the value in use calculation assumed gross margin percentages 0.5ppts lower, than those used, a further goodwill impairment loss of approximately £32 million would have been recorded, while a 5% reduction in customer numbers would have resulted in an additional goodwill impairment loss of approximately £23 million.

17. PROPERTY, PLANT AND EQUIPMENT
	Land and buildings	Plant, equipment and vehicles	Power generation	Gas storage and production
	(i) £m	(ii) £m	(ii),(iii) £m	(ii),(iii),(iv) £m	Total £m
Cost
1 January 2008	39	288	2,076	5,433	7,836
Additions	–	115	312	204	631
Acquisitions (note 35)	–	4	–	342	346
Disposals	(18)	(8)	(8)	–	(34)
Revisions and additions to decommissioning liability (note 27)	–	–	16	165	181
Exchange adjustments	1	25	87	81	194
31 December 2008	22	424	2,483	6,225	9,154
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	12	257	2,049	2,362	4,680
	Land and buildings (i) £m	Plant, equipment and vehicles (ii) £m	Power generation (ii),(iii) £m	Gas storage and production (ii),(iii),(iv) £m	Total £m
Cost
1 January 2007	38	648	1,732	4,860	7,278
Additions	–	76	386	166	628
Exploration and evaluation expenditure transferred
to producing assets	–	–	–	17	17
Acquisitions	–	10	–	244	254
Disposals of subsidiaries	–	(323)	–	–	(323)
Disposals	–	(173)	(52)	(1)	(226)
Revisions and additions to decommissioning liability	–	–	12	80	92
Exchange adjustments	1	50	(2)	67	116
31 December 2007	39	288	2,076	5,433	7,836
Aggregate depreciation and impairment
1 January 2007	16	222	244	3,141	3,623
Charge for the year	1	75	107	311	494
Disposals of subsidiaries	–	(102)	–	–	(102)
Disposals	–	(90)	(48)	–	(138)
Exchange adjustments	–	16	2	31	49
31 December 2007	17	121	305	3,483	3,926

17.PROPERTY, PLANT AND EQUIPMENT CONTINUED

(i) The net book value of land and buildings comprises the following:	2008 £m	2007 £m
Freeholds	5	14
Long leaseholds	1	1
Short leaseholds	6	7
	12	22

(ii) Assets in the course of construction are included within the following categories of property, plant and equipment:	2008 £m	2007 £m
Plant, equipment and vehicles	33	7
Power generation	697	393
Gas storage and production	186	202
	916	602

			2008			2007
(iii) Assets held under finance leases included in totals above	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	882	415	1,297
Additions	–	–	–	4	–	4
Transferred out of assets held under finance leases (v)	–	–	–	(417)	–	(417)
Cost at 31 December	469	415	884	469	415	884
Aggregate depreciation at 1 January	90	352	442	89	344	433
Charge for the year	28	8	36	60	8	68
Transferred out of assets held under finance leases (v)	–	–	–	(59)	–	(59)
Aggregate depreciation at 31 December	118	360	478	90	352	442
Net book value at 31 December	351	55	406	379	63	442

(iv) The net book value of decommissioning costs included within gas storage and production assets was £413 million (2007: £209 million).

(v) Relates to the Humber Power Station that was the subject of a finance lease that was terminated in 2007.

The net book value of assets to which title was restricted (Spalding finance lease asset) at 31 December 2008 was £351 million (2007: £379 million).

18. INTERESTS IN JOINT VENTURES AND ASSOCIATES

	Investments in joint ventures and associates
(a) Interest in joint ventures and associates	Investments £m	Goodwill £m	Shareholder loans £m	Total £m
1 January 2008	192	30	63	285
Decrease in shareholder loans	–	–	(19)	(19)
Share of profits for the year	12	–	–	12
Exchange adjustments	52	–	–	52
31 December 2008	256	30	44	330

18.INTERESTS IN JOINT VENTURES AND ASSOCIATES CONTINUED
		Investments in joint ventures and associates
	Investments £m	Goodwill £m	Shareholder loans £m	Total £m
1 January 2007	171	26	23	220
Additions	1	4	38	43
Increase in shareholder loans	–	–	2	2
Share of profits for the year	5	–	–	5
Exchange adjustments	15	–	–	15
31 December 2007	192	30	63	285

(b) Share of joint ventures' assets and liabilities

The Group's share of joint ventures' gross assets and gross liabilities at 31 December 2008 principally comprises its interests in Braes of Doune Wind Farm (Scotland) Limited (renewable power generation), Barrow Offshore Wind Limited (renewable power generation) and Segebel SA (energy supply).

				2008	2007
Braes of Doune Wind Farm (Scotland) Limited £m	Barrow Offshore Wind Limited £m	Segebel SA £m	Other (i) £m	Total £m	Total £m
12	7	185	–	204	100
39	64	309	–	412	350
51	71	494	–	616	450
(24)	(1)	(148)	–	(173)	(78)
(18)	(24)	(114)	(1)	(157)	(150)
(42)	(25)	(262)	(1)	(330)	(228)
9	46	232	(1)	286	222
32	10	–	2	44	63
41	56	232	1	330	285
(36)	(15)	42	(2)	(11)	(35)

(i) Other includes the Group's interest in Coots (CO2 pipeline construction). The Group's interest in Coots is not significant relative to the Group's interests in joint ventures in aggregate.

					2008	2007
(c) Share of profits/(losses) in joint ventures and associates	Braes of Doune Wind Farm (Scotland) Limited £m	Barrow Offshore Wind Limited £m	Segebel SA £m	Other (i) £m	Total £m	Total £m
Income	10	11	496	–	517	386
Expenses	(3)	(5)	(495)	–	(503)	(379)
	7	6	1	–	14	7
Interest	–	(1)	1	–	–	–
Tax	(2)	(1)	1	–	(2)	(2)
Share of post-tax results of joint ventures and associates	5	4	3	–	12	5

(i) Other includes the Group's interest in Coots (CO2 pipeline construction). The Group's interest in Coots is not significant relative to the Group's interests in joint ventures in aggregate.

The Group's share of the investments in and results of Braes of Doune Wind Farm (Scotland) Limited and Barrow Offshore Wind Limited are included within the Power generation segment. The Group's share of the investment in and results of Segebel SA are included within the European Energy segment.

19. INVENTORIES

	2008 £m	2007 £m
Gas in storage and transportation	223	134
Other raw materials and consumables	93	84
Finished goods and goods for resale	96	23
	412	241

There are no inventories which are carried at fair value less cost to sell (2007: £nil). The Group consumed £515 million of inventories (2007: £488 million) during the year. Write-downs of inventory of £23 million (2007: £nil) 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 £10 million recognised in Direct Energy, £8 million recognised in Centrica Energy and £5 million recognised in Centrica Storage.

20. TRADE AND OTHER RECEIVABLES

		2008		2007
	Current £m	Non-current £m	Current £m	Non-current £m
Financial assets:
Trade receivables	2,142	25	1,405	22
Accrued energy income	2,480	–	1,678	–
Cash collateral pledged	669	–	118	–
Other receivables	330	9	435	11
	5,621	34	3,636	33
Less: Provision for credit losses	(541)	–	(431)	–
	5,080	34	3,205	33
Non-financial assets:
Prepayments and other receivables	255	–	218	–
	5,335	34	3,423	33

Trade and other receivables include financial assets representing the contractual right to receive cash or other financial assets from residential customers, business customers and treasury, trading and energy procurement counterparties as follows:

		2008		2007
	Current £m	Non-current £m	Current £m	Non-current £m
Financial assets by class:
Residential customers	2,217	25	1,960	23
Business customers	1,651	9	802	9
Treasury, trading and energy procurement counterparties	1,753	–	874	1
	5,621	34	3,636	33
Less: Provision for credit losses	(541)	–	(431)	–
	5,080	34	3,205	33

Receivables from residential and business customers are generally considered to be fully performing until such time as the payment that is due remains outstanding past the contractual due date. Contractual due dates range from being due upon receipt to due in 30 days. An ageing of the carrying value of trade and other receivables that are past due but not considered to be individually impaired by class is as follows:

			2008			2007
Days past due	Residential customers £m	Business customers £m	Treasury, trading and energy procurement counterparties £m	Residential customers £m	Business customers £m	Treasury, trading and energy procurement counterparties £m
Less than 30 days	299	123	5	276	55	–
30–89 days	127	141	2	174	41	–
Less than 90 days	426	264	7	450	96	–
90–182 days	89	34	–	91	47	–
183–365 days	109	51	5	98	37	–
Greater than 365 days	126	17	5	62	17	–
	750	366	17	701	197	–

20.TRADE AND OTHER RECEIVABLES CONTINUED

At 31 December 2008 there were £107 million (2007: £87 million) of receivables, net of provisions for credit losses, from residential customers and £25 million (2007: £nil) from treasury, trading and energy procurement counterparties that were considered to be individually impaired. There were no individually impaired receivables, net of provisions for credit losses, from business customers. Receivables from residential customers are generally reviewed for impairment on an individual basis once a customer discontinues their relationship with the Group. The provision for credit losses is based on an incurred loss model and is determined by application of expected default and loss factors, determined by historical loss experience and current sampling to the various balances receivable from residential and business customers on a portfolio basis, in addition to provisions taken against individual accounts. Balances are written off when recoverability is assessed as being remote. Movements in the provision for credit losses by class are as follows:

			Treasury,
	Residential customers	Business customers	trading and energy procurement counterparties	Total
2008	£m	£m	£m	£m
1 January	(350)	(81)	–	(431)
Impairment of trade receivables	(141)	(85)	(11)	(237)
Receivables written off	118	38	–	156
Exchange adjustments	(26)	(3)	–	(29)
31 December	(399)	(131)	(11)	(541)

2007	Residential customers £m	Business customers £m	Treasury, trading and energy procurement counterparties £m	Total £m
1 January	(270)	(49)	–	(319)
Impairment of trade receivables	(132)	(52)	–	(184)
Receivables written off	55	20	–	75
Exchange adjustments	(3)	–	–	(3)
31 December	(350)	(81)	–	(431)

The charge for the impairment of trade receivables is stated net of credits for the release of specific provisions made in previous years, relating mainly to residential customers in the UK, which are no longer required. At 31 December 2008 the Group held £23 million (2007: £36 million) of customer deposits for the purposes of mitigating the credit risk associated with receivables from residential and business customers. Exposure to credit risk associated with receivables from treasury, trading and energy procurement counterparties is monitored by counterparty credit rating as follows:

Receivables from treasury, trading

and energy procurement counterparties by credit rating	Carrying value £m	AAA £m	AA £m	A £m	BBB £m	BB or lower £m	Unrated £m
2008	1,753	3	478	891	260	14	107
2007	875	7	189	277	129	26	247

The unrated counterparty receivables are comprised primarily of amounts due from subsidiaries of rated entities, exchanges or clearing houses. Receivables from treasury, trading and energy procurement counterparties are managed in accordance with the Group's counterparty credit policy as described in note 4.

21. DERIVATIVE FINANCIAL INSTRUMENTS

Derivative financial instruments are generally held for the purposes of proprietary energy trading, treasury management or energy procurement. Derivatives held for the purposes of proprietary energy trading are carried at fair value, with changes in fair value recognised in the Group's results for the year before exceptional items and certain re-measurements, with the exception of certain derivatives related to cross-border transportation and capacity contracts (note 2). Derivative financial instruments held for the purposes of treasury management or energy procurement are also carried at fair value, with changes in the fair value of derivatives relating to treasury management reflected in the results for the year before exceptional items and certain re-measurements, and those relating to energy procurement reflected in certain re-measurements. In cases where a derivative qualifies for hedge accounting, derivatives are classified as fair value hedges, cash flow hedges or hedges of a net investment in a foreign operation. Notes 2 and 22 provide further detail on the Group's hedge accounting.

Energy contracts designated at fair value through profit and loss include certain energy contracts that the Group has, at its option, designated at fair value through profit and loss under IAS 39 because the energy contract contains one or more embedded derivatives that significantly modify the cash flows under the contract (note 2).

21.DERIVATIVE FINANCIAL INSTRUMENTS CONTINUED

The carrying values of derivative financial instruments by product type for accounting purposes are as follows:

	2008 £m	2007 £m
Derivative financial instruments – held for proprietary energy trading
Derivative financial instruments – held for trading under IAS 39
Energy derivatives – assets	119	44
Energy derivatives – liabilities	(6)	(52)
	113	(8)
Derivative financial instruments – held for the purposes of treasury management or energy procurement
Derivative financial instruments – held for trading under IAS 39
Energy derivatives – assets	1,299	789
Energy derivatives – liabilities	(3,228)	(1,100)
Interest rate derivatives – assets	2	2
Interest rate derivatives – liabilities	(19)	(5)
Foreign exchange derivatives – assets	200	19
Foreign exchange derivatives – liabilities	(295)	(80)
	(2,041)	(375)
Energy contracts designated at fair value through profit and loss
Energy derivatives – assets	109	9
Energy derivatives – liabilities	(95)	(86)
	14	(77)
Derivative financial instruments in hedge accounting relationships
Energy derivatives – assets	24	123
Energy derivatives – liabilities	(365)	(68)
Interest rate derivatives – assets	62	–
Interest rate derivatives – liabilities	(4)	(7)
Foreign exchange derivatives – assets	100	–
Foreign exchange derivatives – liabilities	(77)	(17)
	(260)	31
Net total	(2,174)	(429)

The net total reconciles to the Balance Sheet as follows:

	2008 £m	2007 £m
Derivative financial instruments – non-current assets	195	72
Derivative financial instruments – current assets	1,720	914
	1,915	986
Derivative financial instruments – current liabilities	(3,932)	(1,404)
Derivative financial instruments – non-current liabilities	(157)	(11)
	(4,089)	(1,415)
Net total	(2,174)	(429)

The contracts included within energy derivatives are subject to a wide range of detailed specific terms but comprise the following general components:

	2008 £m	2007 £m
Short-term forward market purchases and sales of gas and electricity:
UK and Europe	(748)	107
North America	(814)	(80)
Structured gas purchase contracts	(28)	250
Structured gas sales contracts	(450)	(553)
Other	(103)	(65)
Net total	(2,143)	(341)

		2008		2007
Net (losses)/gains on derivative financial instruments due to re-measurement	Income Statement £m	Equity £m	Income Statement £m	Equity £m
Financial assets and liabilities measured at fair value through profit and loss:
Derivative financial instruments – held for proprietary energy trading	117	–	(5)	–
Derivative financial instruments – held for trading under IAS 39	(1,621)	–	230	–
Energy contracts designated at fair value through profit and loss	(16)	–	(35)	–
Derivative financial instruments in hedge accounting relationships	82	(360)	3	535
	(1,438)	(360)	193	535

Derivative-related credit risk – assets

Credit risk from derivative transactions is generated by the potential for the counterparty to default on its contractual obligations. Therefore, derivative-related credit risk is represented by the positive fair value of the instrument and is normally a small fraction of the contract's notional amount. Credit risk from derivatives is measured and managed by counterparty credit rating as follows:

Fair value of derivative financial instruments with a positive fair value by counterparty credit rating	Carrying value £m	AAA £m	AA £m	A £m	BBB £m	BB or lower £m	Unrated £m
2008	1,915	–	294	1,326	128	9	158
2007	986	–	372	272	51	–	291

To manage derivative-related counterparty credit exposure, the Group employs the use of margining and set-off rights in some agreements. Under margining agreements, the Group has the right to request that the counterparty pay down or collateralise the current fair value of its derivatives position when the position passes a specified threshold. Details of collateral balances held at 31 December 2008 are provided in note 4.

Maturity profiles of derivative financial instruments – liabilities

The following maturity analysis shows the remaining contractual maturities on an undiscounted basis for the Group's derivative financial instruments that are in a loss position at the balance sheet date and will be settled on a net basis:

Energy derivatives that will be settled on a net basis	2008 £m	2007 £m
Less than one year	(456)	(128)
One to five years	(148)	(53)
More than five years	–	(2)
	(604)	(183)
Interest rate derivatives that will be settled on a net basis	2008 £m	2007 £m
Less than one year	(18)	(9)
One to five years	(7)	(4)
More than five years	–	(1)
	(25)	(14)

21.DERIVATIVE FINANCIAL INSTRUMENTS CONTINUED

Certain of the Group's energy contracts that are accounted for as derivatives are for the physical purchase of energy. In these cases, IFRS 7 requires disclosure of a maturity analysis that shows cash outflows on all purchase contracts on an undiscounted basis, including those derivative contracts in a gain position at the balance sheet date as follows:

Energy procurement contracts that are carried at fair value	2008 £m	2007 £m
Less than one year	(20,426)	(12,076)
One to five years	(21,538)	(17,559)
More than five years	(8,095)	(6,719)
	(50,059)	(36,354)

The Group's foreign exchange derivative contracts will be settled on a gross basis. In these cases, IFRS 7 requires disclosure of a maturity analysis that shows cash outflows on all derivative contracts on an undiscounted basis, including those derivative contracts in a gain position at the balance sheet date. In addition to cash outflows on all foreign exchange derivative contracts that are gross settled on an undiscounted basis, the following analysis also provides disclosure of the related cash inflows as follows:

		2008		2007
Foreign exchange derivatives that will be settled on a gross basis	Outflow £m	Inflow £m	Outflow £m	Inflow £m
Less than one year	(4,394)	4,227	(1,898)	1,851
One to five years	(487)	528	(811)	785
More than five years	(150)	137	(130)	112
	(5,031)	4,892	(2,839)	2,748

22. HEDGE ACCOUNTING

For the purposes of hedge accounting, hedges are classified either as fair value hedges, cash flow hedges or hedges of net investments in foreign operations. Note 2 details the Group's accounting policies in relation to derivatives qualifying for hedge accounting under IAS 39. The fair values of derivative and primary financial instruments in hedge accounting relationships at 31 December were as follows:

		2008		2007
	Assets £m	Liabilities £m	Assets £m	Liabilities £m
Fair value hedges	72	–	–	9
Cash flow hedges	96	369	123	67
Net investment hedges:
Primary financial instruments	–	225	–	74
Derivative financial instruments	18	77	–	16

Fair value hedges

The Group's fair value hedges consist of interest rate swaps, cross-currency interest rate swaps and forward rate agreements used to protect against changes in the fair value of fixed-rate long-term debt due to movements in market interest rates. For qualifying fair value hedges, all changes in the fair value of the hedging instrument and in the fair value of the hedged item in relation to the risk being hedged are recognised as income within net interest expense.

22.HEDGE ACCOUNTING CONTINUED
Gains or losses arising on fair value hedges at 31 December were as follows:
Gains/(losses)	2008 £m	2007 £m
On hedging instruments	81	5
On hedged items attributable to the hedged risk	(82)	(6)
	(1)	(1)

Cash flow hedges

The Group's cash flow hedges consist primarily of: (a) physical and financial gas and power purchase contracts used to protect against the variability in future cash flows associated with highly probable forecast purchases of gas and power due to movements in market commodity prices; (b) forward foreign exchange contracts used to protect against the variability of functional currency denominated cash flows associated with non-functional currency denominated highly probable forecast transactions; and (c) interest rate swaps, cross-currency interest rate swaps and forward rate agreements used to protect against the variability in cash flows associated with floating-rate borrowings due to movements in market interest rates.

Gains and losses are initially recognised in the cash flow hedging reserve in equity and are transferred to the Income Statement when the forecast cash flows affect the Income Statement. Note 30 details movements in the cash flow hedging reserve. The ineffective portion of gains and losses on cash flow hedging are recognised immediately in the Income Statement. During 2008, the Group recognised a £4 million loss (2007: £nil) due to cash flow hedge ineffectiveness.

Net investment hedges

The Group's net investment hedges consist of foreign currency debt issued in the same currency as the net investment, foreign exchange forwards and cross-currency interest rate swaps used to protect against the variability in the pounds sterling value of the Group's net investments in foreign operations due to movements in the relative strength of foreign currencies to pounds sterling.

Gains and losses on the effective portion of the hedge are recognised in equity and transferred to the Income Statement on disposal of the foreign operation. Gains and losses on the ineffective portion of the hedge are recognised immediately in the Income Statement. During 2008, the Group did not recognise any gains or losses due to net investment hedge ineffectiveness (2007: £nil).

23. CASH AND CASH EQUIVALENTS

	2008 £m	2007 £m
Cash at bank, in transit and in hand	87	53
Short-term deposits	2,852	1,077
Cash and cash equivalents	2,939	1,130

Cash and cash equivalents includes £34 million (2007: £40 million) held by the Group's insurance subsidiary undertakings that is not readily available to be used for other purposes within the Group.

Cash and cash equivalents by counterparty credit rating	Carrying value £m	AAA £m	AA £m	A £m	Unrated £m
2008	2,939	1,488	751	692	8
2007	1,130	246	783	95	6

Credit risk associated with cash and cash equivalents is managed in accordance with the Group's counterparty credit policy as described in note 4.

24. TRADE AND OTHER PAYABLES

		2008		2007
	Current £m	Non-current £m	Current £m	Non-current £m
Financial liabilities:
Trade payables	1,384	–	925	–
Cash collateral received	43	–	93	–
Other payables	559	4	663	14
Accruals
Commodity costs	1,244	–	736	–
Transportation, distribution and metering costs	70	–	104	–
Operating and other accruals	494	–	572	–
	1,808	–	1,412	–
	3,794	4	3,093	14
Non-financial liabilities:
Other payables and accruals	381	60	131	2
Deferred income	189	3	147	4
	4,364	67	3,371	20

Maturity analysis of financial liabilities within trade and other payables on an undiscounted basis	2008 £m	2007 £m
Less than 90 days	3,683	2,908
90–182 days	35	24
183–365 days	76	161
	3,794	3,093
Greater than 365 days	4	14
	3,798	3,107

25. BANK OVERDRAFTS, LOANS AND OTHER BORROWINGS

					2008			2007
	Interest rate %	Principal m	Current £m	Non-current £m	Total £m	Current £m	Non-current £m	Total £m
Bank overdrafts and loans			52	429	481	70	277	347
Bonds (by maturity date)
25 July 2008	3.500	€75	–	–	–	57	–	57
8 September 2008	Floating	€100	–	–	–	74	–	74
9 March 2009	4.129	£250	253	–	253	–	253	253
2 November 2012	6.103	£400	–	416	416	–	400	400
27 February 2013	1.045	¥3,000	–	23	23	–	13	13
9 December 2013 (i)	7.307	€750	–	718	718	–	–	–
24 October 2016	5.706	£300	–	316	316	–	300	300
19 September 2018 (ii)	7.100	£300	–	340	340	–	–	–
4 September 2026	Floating (iii)	£150	–	153	153	–	153	153
19 September 2033 (ii)	7.250	£450	–	447	447	–	–	–
			253	2,413	2,666	131	1,119	1,250
Commercial paper			4	–	4	–	–	–
Obligations under finance leases			21	376	397	20	397	417
			330	3,218	3,548	221	1,793	2,014

(i) Issued on 9 December 2008.

(ii) Issued on 19 September 2008. (iii) Capped at 6.854%.

Future finance lease commitments:	Minimum lease payments 2008 £m	Capital element of lease payments 2008 £m	Minimum lease payments 2007 £m	Capital element of lease payments 2007 £m
Amounts payable:
Within one year	44	21	43	20
Between one and five years	181	107	179	98
After five years	330	269	376	299
	555	397	598	417
Less future finance charges	(158)		(181)
Present value of lease obligations	397		417
Maturity profile of the Group's borrowings including interest and principal:			2008 £m	2007 £m
Within one year (i)			454	322
Between one and five years			1,797	1,198
After five years			2,189	1,215
			4,440	2,735
Interest payments			(892)	(721)
			3,548	2,014

(i) Borrowings include amounts repayable on demand of £35 million (2007: £30 million).

At 31 December 2008, the Group had undrawn committed bank borrowing facilities of £1,350 million (2007: £1,300 million), of which £300 million matures in 2010, with the remaining £1,050 million maturing in 2012, plus a committed letter of credit facility for Canadian \$200 million (2007: £nil) maturing in 2012, of which Canadian \$146 million was drawn at 31 December 2008.

			2008			2007
Currency composition of the Group's borrowings:	Before impact of foreign currency derivatives £m	Impact of foreign currency derivatives (i) £m	After impact of foreign currency derivatives £m	Before impact of foreign currency derivatives £m	Impact of foreign currency derivatives (i) £m	After impact of foreign currency derivatives £m
Pounds sterling	2,509	(2,346)	163	1,731	(1,188)	543
Euros	718	(37)	681	131	163	294
New Zealand dollars	122	(120)	2	27	(27)	–
US dollars	98	1,261	1,359	56	480	536
Japanese yen	85	(85)	–	42	(42)	–
Canadian dollars	16	1,067	1,083	27	614	641
Norwegian kroner	–	260	260	–	–	–
	3,548	–	3,548	2,014	–	2,014

(i) Includes the impact of hedges of net investments in foreign operations and foreign currency denominated inter-company loans.

Interest rate exposure by earlier of contractual re-pricing and maturity date: 2008	Average effective interest rate %	Total £m	Within one year £m	One to five years £m	More than five years £m
Bank overdrafts and loans	5.6	481	207	14	260
Bonds	6.2	2,666	406	1,157	1,103
Commercial paper	4.5	4	4	–	–
Obligations under finance leases	5.8	397	–	–	397
	6.1	3,548	617	1,171	1,760
Impact of interest rate derivatives	0.4	–	1,156	(658)	(498)
	6.5	3,548	1,773	513	1,262
2007
Bank overdrafts and loans	5.8	347	232	21	94
Bonds	5.3	1,250	284	651	315
Obligations under finance leases	5.8	417	20	98	299
	5.5	2,014	536	770	708
Impact of interest rate derivatives	0.5	–	627	(464)	(163)
	6.0	2,014	1,163	306	545

Shareholder Information

26. DEFERRED AND CURRENT CORPORATION TAX LIABILITIES AND ASSETS

The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting periods:

	Accelerated tax depreciation (petroleum revenue tax) £m	Deferred corporation tax effect thereon £m	Decommissioning (petroleum revenue tax) £m	Deferred corporation tax effect thereon £m	Retirement benefit obligation and other provisions £m	Accelerated tax depreciation (corporation tax) £m	Other timing differences including losses carried forward £m	Marked-to market £m	Total £m
1 January 2007	177	(89)	(63)	32	(89)	607	(221)	(339)	15
Changes to tax rates	–	–	–	–	(6)	(23)	20	–	(9)
(Credit)/charge to income	(10)	5	(23)	11	48	96	74	58	259
Charge to equity	–	–	–	–	75	–	–	173	248
Acquisition of subsidiary	–	–	–	–	–	127	(81)	–	46
Exchange and other adjustments	–	–	–	–	–	–	7	3	10
31 December 2007	167	(84)	(86)	43	28	807	(201)	(105)	569
Changes to tax rates	–	–	–	–	–	(1)	–	–	(1)
Charge/(credit) to income	42	(21)	(94)	47	53	63	19	(441)	(332)
Credit to equity (i)	–	–	–	–	(111)	–	–	(97)	(208)
Acquisition of subsidiary (note 35)	–	–	–	–	–	148	(1)	–	147
Exchange and other adjustments	–	–	–	–	–	19	(10)	(47)	(38)
31 December 2008	209	(105)	(180)	90	(30)	1,036	(193)	(690)	137

(i) The credit to equity for retirement benefit obligations and other provisions includes a credit of £nil (2007: credit of £11 million) in respect of tax rate changes.

Certain deferred tax assets and liabilities have been offset where there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following is an analysis of the deferred tax balances (after offset) for financial reporting purposes:

	2008 £m	2007 £m
Deferred tax liabilities	448	596
Deferred tax assets	(311)	(27)
	137	569

The following is an analysis of the deferred tax balances before offset:

	2008 £m	2007 £m
Deferred tax assets crystallising within one year	(423)	(124)
Deferred tax assets crystallising after one year	(890)	(502)
	(1,313)	(626)
Offset against deferred tax liabilities	1,002	599
Net deferred tax assets	(311)	(27)
Deferred tax liabilities crystallising within one year	58	113
Deferred tax liabilities crystallising after one year	1,392	1,082
	1,450	1,195
Offset against deferred tax assets	(1,002)	(599)
Net deferred tax liabilities	448	596

At the balance sheet date the Group had certain deductible temporary differences of £178 million (2007: £376 million) available for utilisation against future profits. No deferred tax asset has been recognised in respect of these temporary differences, due to the unpredictability of future profit streams. These assets may be carried forward indefinitely. At the balance sheet date temporary differences of £76 million (2007: £62 million) existed in respect of the Group's overseas investments. The deferred tax liability arising on these temporary differences is estimated to be £3 million (2007: £3 million), which has been provided for.

Current tax assets of £39 million (2007: £40 million) include £20 million (2007: £20 million) of recoverable petroleum revenue tax.

Current provisions for other liabilities and charges	1 January 2008 £m	Charged in the year £m	Unused and reversed in the year £m	Revisions and additions £m	Transferred (to)/from non-current £m	Utilised £m	Exchange adjustments £m	31 December 2008 £m
Restructuring costs (i)	37	9	(6)	–	2	(20)	–	22
Decommissioning costs (ii)	3	3	–	–	(7)	–	1	–
Sales contract loss provision (iii)	2	–	–	–	–	(2)	–	–
Renegotiation provisions (iv)	84	–	–	–	(20)	(64)	–	–
Other (v)	14	–	(3)	–	1	(5)	–	7
	140	12	(9)	–	(24)	(91)	1	29
Non-current provisions for other liabilities and charges	1 January 2008 £m	Acquisitions and disposals £m	Charged in the year £m	Unused and reversed in the year £m	Revisions and additions £m	Transferred (to)/from current £m	Exchange adjustments £m	31 December 2008 £m
Restructuring costs (i)	32	–	4	–	–	(2)	–	34
Decommissioning costs (ii)	511	47	17	–	181	7	6	769
Renegotiation provisions (iv)	7	–	–	–	–	20	–	27
Other (v)	31	–	6	(1)	–	(1)	–	35
	581	47	27	(1)	181	24	6	865
Financial and non-financial liabilities within provisions for other				Current	Non-current £m	2008 £m	Current £m	2007 Non-current £m
liabilities and charges
Financial liabilities:
Restructuring costs (i)				20		34	35	31
Renegotiation provisions (iv)					–	27	84	7
Other (v)					7	18	7	5
				27		79	126	43
Non-financial liabilities:
Restructuring costs (i)					2	–	2	1
Decommissioning costs (ii)					–	769	3	511
Sales contract loss provision (iii) Other (v)					– –	– 17	2 7	– 26
					2	786	14	538

Maturity analysis for financial liabilities within provisions for other
liabilities and charges on an undiscounted basis	2008 £m	2007 £m
Within one year	27	126
Between one and two years	19	13
Between two and five years	53	16
After five years	7	16
	106	171

(i) The restructuring provisions relate to significant restructuring programmes undertaken to achieve the Group's stated cost reduction targets. Included within the provision are costs related to surplus properties of £50 million (2007: £51 million) estimated with reference to the expected cost to be incurred to the point of lease termination, including costs for dilapidations and sub-letting. The provisions are expected to be utilised between 2009 and 2022.

(ii) Provision has been made for the estimated net present cost of decommissioning gas production and storage facilities at the end of their useful lives. The estimate has been based on proven and probable reserves, price levels and technology at the balance sheet date. The timing of decommissioning payments is dependent on the lives of the facilities but is anticipated to occur between 2010 and 2062, with the substantial majority of the provision being utilised between 2015 and 2030. The charge to income includes £20 million of notional interest (2007: £13 million). (iii) The sales contract loss provision relates to the acquisition of a portfolio of gas customers by the Group. Certain of the contracts acquired were identified as being out-of-the-money at the date of

acquisition, and the sales contract loss provision was established in respect of them. (iv) In previous years, the Group renegotiated certain long-term take-or-pay contracts which would have resulted in commitments to pay for gas that would be in excess of requirements and/or at prices above

likely market rates. The provision represents the net present cost of estimated payments due to suppliers as consideration for the renegotiations, most of which was settled in 2008, based on the reserves in a group of third-party fields. The charge for the year includes £nil of notional interest (2007: £6 million).

(v) Other provisions include outstanding litigation for a number of items (none of which are individually significant) and provision for National Insurance payable in respect of Long Term Incentive Scheme liabilities. The National Insurance provision was based on a share price of 266.00 pence at 31 December 2008 (2007: 319.21 pence after adjusting for the bonus element of the Rights Issue) and is expected to be utilised between 2009 and 2014.

28. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the amount at which the financial instrument could be exchanged in an arm's length transaction between knowledgeable and willing parties under no compulsion to act. The Group has documented internal policies for determining fair value, including methodologies used to establish valuation adjustments required for credit risk.

The fair values of the Group's financial instruments, together with the carrying amounts included in the Balance Sheet are analysed as follows:

			2008		2007
Financial assets	Notes	Carrying value £m	Fair value £m	Carrying value £m	Fair value £m
Loans and receivables:
Trade and other receivables, net of provisions	20	5,114	5,114	3,238	3,238
Cash and cash equivalents	23	2,939	2,939	1,130	1,130
		8,053	8,053	4,368	4,368
Financial assets measured at fair value through profit and loss:
Derivative financial instruments	21	1,915	1,915	986	986
Available-for-sale financial assets:
Debt		89	89	79	79
Equity		9	9	10	10
		98	98	89	89

			2008		2007
Financial liabilities	Notes	Carrying value £m	Fair value £m	Carrying value £m	Fair value £m
Financial liabilities measured at amortised cost:
Trade and other payables	24	(3,798)	(3,798)	(3,107)	(3,107)
Bank overdrafts, loans and other borrowings
Bank overdrafts and loans	25	(481)	(535)	(347)	(338)
Bonds	25	(2,666)	(2,660)	(1,250)	(1,246)
Commercial paper		(4)	(4)	–	–
Obligations under finance leases	25	(397)	(397)	(417)	(417)
Provisions	27	(106)	(106)	(169)	(169)
		(7,452)	(7,500)	(5,290)	(5,277)
Financial liabilities at fair value through profit and loss:
Derivative financial instruments	21	(4,089)	(4,089)	(1,415)	(1,415)

Financial instruments valued at their carrying values

Due to their nature and/or short-term maturity, the fair values of trade and other receivables, cash and cash equivalents, trade and other payables and provisions are estimated to approximate their carrying values.

Available-for-sale financial assets

The fair values of available-for-sale financial assets are based on quoted market prices, when available. If quoted market prices are not available, fair values are estimated using observable market data.

Bank overdrafts, loans and other borrowings

The fair values of bonds are based on quoted market prices. The fair values of bank loans have been determined by discounting cash flows with reference to relevant market rates of interest. The fair values of overdrafts and commercial paper are assumed to equal their book values due to the short-term nature of these amounts. The fair values of obligations under finance leases have been determined by discounting contractual cash flows with reference to the Group's cost of borrowing.

28.FAIR VALUE OF FINANCIAL INSTRUMENTS CONTINUED

Derivative financial instruments and energy contracts designated at fair value through profit and loss

The fair values of foreign exchange and interest rate derivatives are determined by reference to closing market rates at the balance sheet date. The fair values of energy derivatives are determined using valuation techniques based in part on observable market data and in part on internal estimates not currently supported by observable market data. The extent to which fair values of energy derivatives are based on observable market data is determined by the extent to which the market for the underlying commodity is judged to be active. The Group has judged each of the markets in which it operates as active for the purposes of accounting as follows:

Active period of markets	Gas	Power	Coal	Emissions	Oil
UK (years)	2	2	3	2-4	3
North America (years)	5	5	n/a	n/a	n/a
Europe (years)	n/a	Up to 5	n/a	n/a	n/a

The fair values of energy contracts within the scope of IAS 39 that settle inside the active period of the market are based on quoted market prices and expected volumes, discounted at a rate of 3% (2007: 6%). The fair values of derivative financial instruments in North America and Europe are based primarily on quoted market prices. In the UK, however, certain energy contracts extend beyond the active period of the market. The fair values of energy contracts that extend beyond the active period of the market are determined by reference in part to published price quotations in active markets and in part by using valuation techniques based on commodity prices derived using assumptions that are based on internal market expectations and expected volumes, discounted using a discount rate of 3% (2007: 5%).

The net fair value of energy contracts recorded in the Financial Statements determined using valuation techniques based on nonobservable market variables at 31 December 2008 is a £272 million liability (2007: £322 million liability). The total change in fair value of energy contracts estimated using valuation techniques based on variables not supportable by market prices that was recognised in the Income Statement during the year ended 31 December 2008 amounted to a gain of £17 million (2007: loss of £100 million).

While internal market forecasts outside the active period of the market reasonably reflect all factors that market participants would consider in setting a price, these expectations are not currently supportable by active forward market quotes. The fair values of these contracts would change significantly if the assumptions in respect of gas, power, coal, emissions or oil prices were changed to reasonably possible alternatives. The impacts of reasonably possible changes to assumed gas, power, emissions, coal and oil prices on the net fair value of the Group's derivative financial instruments determined using valuation models based on non-observable market data are as follows:

	2008	2007
Energy price	Reasonably possible change in variable	Reasonably possible change in variable
UK gas (p/therm)	+/-14	+/-12
UK power (£/MWh)	+/-10	+/-11
UK coal (US\$/tonne)	+/-25	+/-15
UK emissions (€/tonne)	+/-4	+/-6
UK oil (US\$/bbl)	+/-15	+/-14

Increase/(decrease) in fair value	2008 £m	2007 £m
UK energy prices – increase/decrease	179/(175)	85/(100)

The impacts disclosed above result from changing the assumptions used for fair valuing energy contracts in relation to gas, power, emissions, coal and oil prices to reasonably possible alternative assumptions at the balance sheet date. The fair value impacts only concern those contracts entered into which are within the scope of IAS 39 and are marked-to-market based on valuation models using assumptions that are not currently observable in an active market. The sensitivity analysis provided is hypothetical only and should be used with caution as the impacts provided are not necessarily indicative of the actual impacts that would be experienced because the Group's actual exposure to market rates is constantly changing as the Group's portfolio of energy contracts changes. Changes in fair values based on a variation in a market variable cannot be extrapolated because the relationship between the change in market variable and the change in fair value may not be linear.

28.FAIR VALUE OF FINANCIAL INSTRUMENTS CONTINUED

Where the fair value at initial recognition for such contracts differs from the transaction price a day-one gain or loss will arise. Such gains and losses are deferred and amortised to the Income Statement based on volumes purchased or delivered over the contractual period until such time as observable market data becomes available (see note 2 for further detail). The amount that has yet to be recognised in the Income Statement relating to the difference between the fair value at initial recognition (the transaction price) and the amount that would have arisen had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows:

Net deferred losses/(gains)	2008 £m	2007 £m
1 January	(166)	(62)
Net losses/(gains) deferred on new transactions	128	(103)
Recognised in the Income Statement during the period	89	(1)
31 December	51	(166)

29. CALLED UP SHARE CAPITAL

	2008 £m	2007 £m
Authorised share capital of the Company
7,000,000,000 ordinary shares of 614/81p each (2007: 4,455,000,000 ordinary shares of 614/81p each) (i)	432	275
100,000 cumulative redeemable preference shares of £1 each	–	–
Allotted and fully paid share capital of the Company
5,107,658,569 ordinary shares of 614/81p each (2007: 3,679,980,311 ordinary shares of 614/81p each)	315	227

The movement in allotted and fully paid share capital of the Company for the year was as follows:

	2008 Number	2007 Number
1 January	3,679,980,311	3,662,721,068
Rights Issue (ii)	1,392,789,173	–
Issued under employee share schemes (iii)	34,889,085	17,259,243
31 December	5,107,658,569	3,679,980,311

(i) At a General Meeting of the Company held on 21 November 2008, the authorised share capital of the Company was increased from £275 million to £432 million by the creation of 2,545,000,000 ordinary shares of a nominal value of 614/81 pence each, forming a single class with the existing ordinary shares.

(ii) On 31 October 2008, the Company announced a Rights Issue, which was approved by shareholders on 21 November 2008, on the basis of three new ordinary shares for every eight ordinary shares held at 160 pence per share, all with a nominal value of 614/81 pence each. The Company raised proceeds of approximately £2,164 million, net of issue costs of approximately £65 million. The last day for acceptance was 12 December 2008 and dealing in new ordinary shares fully paid commenced on the London Stock Exchange on 15 December 2008.

(iii) Ordinary shares were allotted and issued to satisfy the exercise of share options, share incentive schemes, the Direct Energy Employee Share Purchase Plan and the matching element of the Share Incentive Plan as follows:

	2008	2007
Number	34,889,085	17,259,243
Nominal value (£m)	2.2	1.1
Consideration (£m) (net of issue costs of £nil (2007: £nil))	38	22

The closing price of one Centrica ordinary share on 31 December 2008 was 266.00 pence (2007: 319.21 pence after adjusting for the bonus element of the Rights Issue).

Centrica employee share ownership trusts purchase Centrica ordinary shares from the open market and receive newly issued shares to satisfy future obligations of certain employee share schemes. During the year, the trusts purchased 1.0 million shares (2007: 0.6 million), received 6.5 million newly allotted shares (2007: 5.3 million) and released 4.5 million shares (2007: 5.3 million shares) to employees on vesting. At 31 December 2008, the trusts held 3.6 million shares (2007: 0.6 million shares) at a carrying amount of £10 million (2007: £2 million). Until such time as the Company's own shares held by these trusts vest unconditionally, the amount paid for those shares, or the value they were issued at, are held as treasury shares and are deducted from shareholders' equity. The number of ordinary shares held in trust for both periods presented has been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5 and 30.

30. RESERVES

30. RESERVES
					Attributable to equity holders of the Company
	Share capital £m	Share premium £m	Merger reserve £m	Capital redemption reserve £m	Other reserves £m	Total £m	Minority interest £m	Total equity £m
1 January 2008	227	685	467	16	1,928	3,323	59	3,382
Exchange differences on translation of foreign operations	–	–	–	–	(29)	(29)	–	(29)
Actuarial losses on pensions (note 34)	–	–	–	–	(399)	(399)	–	(399)
Losses on revaluation of available-for-sale assets	–	–	–	–	(19)	(19)	–	(19)
Cash flow hedges: Net fair value losses	–	–	–	–	(318)	(318)	–	(318)
Transfers to Income Statement	–	–	–	–	(30)	(30)	–	(30)
Transfers to Balance Sheet	–	–	–	–	1	1	–	1
Rights Issue	86	–	2,078	–	–	2,164	–	2,164
Transfer	–	–	(2,078)	–	2,078	–	–	–
Tax on above items	–	–	–	–	208	208	–	208
	313	685	467	16	3,420	4,901	59	4,960
Loss for the year	–	–	–	–	(145)	(145)	1	(144)
Employee share schemes:
Increase in treasury shares	–	–	–	–	(9)	(9)	–	(9)
Share issue	2	44	–	–	–	46	–	46
Exercise of awards	–	–	–	–	(7)	(7)	–	(7)
Value of services provided	–	–	–	–	40	40	–	40
Dividends	–	–	–	–	(500)	(500)	–	(500)
31 December 2008	315	729	467	16	2,799	4,326	60	4,386
							Profit and loss reserve
Other reserves		Revaluation reserve £m	Foreign currency translation reserve £m	Cash flow hedging reserve £m	Treasury shares £m	Share-based payments reserve £m	Other £m	Total other reserves £m
1 January 2008		10	(14)	51	(2)	51	1,832	1,928

					Profit and loss reserve
Other reserves	Revaluation reserve £m	Foreign currency translation reserve £m	Cash flow hedging reserve £m	Treasury shares £m	Share-based payments reserve £m	Other £m	Total other reserves £m
1 January 2008	10	(14)	51	(2)	51	1,832	1,928
Exchange differences on translation of foreign operations	–	(10)	(19)	–	–	–	(29)
Actuarial losses on pensions (note 34)	–	–	–	–	–	(399)	(399)
Losses on revaluation of available-for-sale
assets	–	–	–	–	–	(19)	(19)
Cash flow hedges:
Net fair value losses	–	–	(318)	–	–	–	(318)
Transfers to Income Statement	–	–	(30)	–	–	–	(30)
Transfers to Balance Sheet	–	–	1	–	–	–	1
Rights Issue Transfer	–	–	–	–	–	2,078	2,078
Tax on above items	–	–	97	–	–	111	208
	10	(24)	(218)	(2)	51	3,603	3,420
Loss for the year	–	–	–	–	–	(145)	(145)
Employee share schemes:
Increase in treasury shares	–	–	–	(9)	–	–	(9)
Exercise of awards	–	–	–	1	(25)	17	(7)
Value of services provided	–	–	–	–	40	–	40
Dividends	–	–	–	–	–	(500)	(500)
31 December 2008	10	(24)	(218)	(10)	66	2,975	2,799

111

30.RESERVES CONTINUED

	Attributable to equity holders of the Company
	Share capital £m	Share premium £m	Merger reserve £m	Capital redemption reserve £m	Other reserves £m	Total £m	Minority interest £m	Total equity £m
1 January 2007	226	657	467	16	219	1,585	57	1,642
Exchange differences on translation of foreign operations	–	–	–	–	15	15	–	15
Exchange differences transferred to Income Statement	–	–	–	–	(4)	(4)	–	(4)
Actuarial gains on pensions	–	–	–	–	284	284	–	284
Gains on revaluation of available for-sale assets	–	–	–	–	1	1	–	1
Cash flow hedges:
Net fair value gains	–	–	–	–	169	169	–	169
Transfers to Income Statement	–	–	–	–	382	382	–	382
Tax on above items	–	–	–	–	(248)	(248)	–	(248)
	226	657	467	16	818	2,184	57	2,241
Profit for the year	–	–	–	–	1,505	1,505	2	1,507
Employee share schemes:
Increase in treasury shares	–	–	–	–	(2)	(2)	–	(2)
Share issue	1	28	–	–	–	29	–	29
Exercise of awards	–	–	–	–	(7)	(7)	–	(7)
Value of services provided	–	–	–	–	31	31	–	31
Dividends	–	–	–	–	(417)	(417)	–	(417)
31 December 2007	227	685	467	16	1,928	3,323	59	3,382

					Profit and loss reserve
Other reserves	Revaluation reserve £m	Foreign currency translation reserve £m	Cash flow hedging reserve £m	Treasury shares £m	Share-based payments reserve £m	Other £m	Total other reserves £m
1 January 2007	10	(26)	(326)	–	38	523	219
Exchange differences on translation of foreign operations	–	16	(1)	–	–	–	15
Exchange differences transferred to Income Statement	–	(4)	–	–	–	–	(4)
Actuarial gains on pensions	–	–	–	–	–	284	284
Gains on revaluation of available-for-sale assets	–	–	–	–	–	1	1
Cash flow hedges:
Net fair value gains	–	–	169	–	–	–	169
Transfers to Income Statement	–	–	382	–	–	–	382
Tax on above items	–	–	(173)	–	–	(75)	(248)
	10	(14)	51	–	38	733	818
Profit for the year	–	–	–	–	–	1,505	1,505
Employee share schemes:
Increase in treasury shares	–	–	–	(2)	–	–	(2)
Exercise of awards	–	–	–	–	(18)	11	(7)
Value of services provided	–	–	–	–	31	–	31
Dividends	–	–	–	–	–	(417)	(417)
31 December 2007	10	(14)	51	(2)	51	1,832	1,928

30.RESERVES CONTINUED

Merger reserve

On 17 February 1997 BG plc (formerly British Gas plc) demerged certain businesses (grouped together under GB Gas Holdings Limited (GBGH)) to Centrica plc. Prior to demerger, the companies comprising the Centrica businesses were transferred to GBGH, a subsidiary undertaking of BG plc. Upon demerger, the share capital of GBGH was transferred to Centrica plc and was recorded at the nominal value of shares issued to BG plc shareholders. In accordance with sections 131 and 133 of the Companies Act 1985, no premium was recorded on the shares issued. On consolidation, the difference between the nominal value of the Company's shares issued and the amount of share capital and share premium of GBGH at the date of demerger was credited to a merger reserve.

On 15 December 2008, a Rights Issue was completed and 1,392,789,173 new ordinary shares with an aggregate nominal value of approximately £86 million were issued for cash consideration of £2,164 million, net of issue costs of £65 million. The Rights Issue was effected through a structure which resulted in a merger reserve arising under section 131 of the Companies Act 1985. Centrica plc issued shares in exchange for shares in Centrica CB Limited, which subsequently redeemed its no par value redeemable preference shares for cash. Following the receipt of the cash proceeds through the structure, the excess of the net proceeds received over the nominal value of the share capital issued has been transferred from the merger reserve to other profit and loss reserves.

Capital redemption reserve

In accordance with section 170 (1) of the Companies Act 1985, the Company has transferred to the capital redemption reserve an amount equal to the nominal value of shares repurchased and subsequently cancelled.

Revaluation reserve

During 2005, the revaluation of the Group's existing interest in Centrica SHB Limited to fair value, following the acquisition by the Group of the remaining 40% stake in the company, was recorded as a revaluation reserve adjustment.

Foreign currency translation and net investment hedging reserve

The foreign currency translation and net investment hedging reserve comprises exchange translation differences on foreign currency net investments, offset by exchange translation differences on borrowings and derivatives classified as net investment hedges under the requirements of IAS 39. Exchange gains of £175 million (2007: £48 million) on net investments in overseas undertakings have been offset in reserves against exchange losses of £185 million (2007: £32 million) on foreign currency borrowings and other instruments used for hedging purposes.

Cash flow hedging reserve

The cash flow hedging reserve comprises fair value movements on instruments designated as cash flow hedges under the requirements of IAS 39. Note 22 provides further detail on cash flow hedging.

Analysis of transfers from cash flow hedging reserve to Income Statement by line item	2008 £m	2007 £m
Gross profit	30	(391)
Net interest expense	–	9
	30	(382)

The maturity analysis of amounts included in the cash flow hedging reserve, which includes fair value gains and losses in relation to commodity, interest rate and currency hedges, is as follows:

	2008 £m	2007 £m
Within one year	(147)	17
Between one and five years	(79)	34
After five years	8	–
	(218)	51

The maturity profile reflects the timing of expected transfers from the cash flow hedging reserve to the Income Statement as and when the hedged item affects the Income Statement which is, for the most part, on delivery of physical volumes for energy contracts and the accrual of interest for debt contracts.

30.RESERVES CONTINUED

Profit and loss reserve

Treasury shares reserve reflects the cost of shares in the Company held in share-based payment plans to meet future obligations to deliver shares to employees on vesting.

Cumulative actuarial gains arising on defined benefit pension schemes recognised in the profit and loss reserve amounted to £324 million (2007: £723 million). Cumulative losses of £16 million (2007: gains of £3 million) on available-for-sale financial assets were included within the profit and loss reserve.

Aggregate tax taken directly to reserves amounted to a credit of £208 million (2007: £248 million charge), of which a credit of £111 million relates to deferred tax arising on actuarial losses on the Group's defined benefit schemes (2007: £75 million charge), and a credit of £97 million relates to deferred tax arising on gains and losses on available-for-sale investments and cash flow hedges (2007: £173 million charge).

The share-based payments reserve reflects the obligation to deliver shares to employees under the Group's share schemes in return for services provided.

31. MINORITY INTERESTS

	2008 £m	2007 £m
At 1 January	59	57
Profit on ordinary activities after taxation	1	2
At 31 December	60	59

Minority interests at 31 December 2008 relate primarily to a 30% economic interest (2007: 30%) held by Lloyds TSB Bank plc in GF Two Limited (formerly Goldfish Holdings Limited) and its subsidiary, GF One Limited (formerly Goldfish Bank Limited).

32. NOTES TO THE GROUP CASH FLOW STATEMENT
(a) Reconciliation of Group operating profit to net cash flow from operating activities	2008 £m	2007 £m
Continuing operations
Group operating profit including share of result of joint ventures and associates	460	2,184
Less share of profits of joint ventures and associates	(12)	(5)
Group operating profit before share of profits of joint ventures and associates	448	2,179
Add back/(deduct):
Amortisation and write-down of intangible assets and impairment of goodwill	174	92
Depreciation of property, plant and equipment	515	473
Employee share scheme costs	35	29
Profit on sale of businesses	–	(2)
Loss on sale of property, plant and equipment and other intangible assets	–	7
Movement in provisions	(141)	(66)
Re-measurement of energy contracts (i)	1,369	(218)
Unrealised foreign exchange gains on operating cash and cash equivalents	(3)	–
Operating cash flows before movements in working capital	2,397	2,494
(Increase)/decrease in inventories	(143)	38
(Increase)/decrease in trade and other receivables (ii)	(1,377)	181
Increase in trade and other payables (ii)	425	44
Cash generated from continuing operations	1,302	2,757
Income taxes paid	(374)	(341)
Net petroleum revenue tax paid	(533)	(60)
Interest received	23	27
Interest paid	(47)	(3)
Payments relating to exceptional charges	(74)	(90)
Net cash flow from continuing operating activities	297	2,290
Discontinued operations
Group operating profit before share of joint ventures and associates	–	266
Add back/(deduct):
Amortisation of intangible assets	–	1
Depreciation of property, plant and equipment	–	21
Profit on disposal of subsidiary	–	(227)
Loss on sale of property, plant and equipment and other intangible assets	–	5
Operating cash flows before movements in working capital	–	66
Decrease in receivables	–	1
Net cash flow from discontinued operating activities	–	67
Net cash flow from operating activities	297	2,357

(i) Adds back/(deducts) unrealised losses/(profits) arising from re-measurement of energy contracts, including those related to proprietary trading activities.

(ii) Includes net outflow of £556 million of cash collateral in 2008 (2007: inflow of £2 million).

32.NOTES TO THE GROUP CASH FLOW STATEMENT CONTINUED

(b) Net debt	2008 £m	2007 £m
Current borrowings (note 25) (i)	(295)	(191)
Non-current borrowings (note 25)	(3,218)	(1,793)
Less:
Cash and cash equivalents (i)	2,904	1,100
Current available-for-sale financial assets	63	50
Non-current available-for-sale financial assets	35	39
	(511)	(795)

(i) Overdrafts of £35 million (2007: £30 million) are excluded from current borrowings and are included net within cash and cash equivalents.

(c) Reconciliation of net increase in cash and cash equivalents to movement in net debt	2008 £m	2007 £m
Net increase in cash and cash equivalents	1,778	505
Add back/(deduct):
Net purchase of available-for-sale financial assets	22	2
Cash inflow from additional debt	(1,513)	(256)
Cash outflow from payment of capital element of finance leases	20	383
Cash outflow from repayment of other debt	175	107
	482	741
Revaluation of:
Available-for-sale financial assets	(19)	1
Loans and other borrowings	(82)	(6)
	381	736
(Increase)/decrease in interest payable on loans and other borrowings	(9)	11
Acquisitions	(19)	–
Exchange adjustments	(72)	(17)
Other non-cash movements	3	2
Movement in net debt	284	732
Net debt at 1 January	(795)	(1,527)
Net debt at end of period	(511)	(795)

(d) Relationship between current tax charge and taxes paid	UK £m	North America £m	Other £m	2008 £m	2007 £m
Current tax charge:
Corporation tax charge	383	49	(23)	409	363
Petroleum revenue tax	517	–	–	517	200
	900	49	(23)	926	563
Taxes paid:
Corporation tax charge	343	35	(4)	374	341
Petroleum revenue tax	533	–	–	533	60
	876	35	(4)	907	401

Differences between current tax charged and taxes paid arose principally due to the following factors:

x UK corporation tax is paid, based on estimated profits, partly during the year and partly in the following year. Fluctuations in profits from year to year may therefore give rise to divergence between the charge for the current year and taxes paid; and

x Petroleum revenue tax payments are based on income realised in the preceding period, with subsequent adjustments to reflect actual profits. Variations in production from period to period may therefore lead to temporary differences between tax charged and tax paid.

33. SHARE-BASED PAYMENTS

Employee share schemes are designed to encourage participants to align their objectives with those of shareholders. Centrica operates eight main employee share schemes: the Deferred and Matching Share Scheme (DMSS), the Executive Share Option Scheme (ESOS), the Long Term Incentive Scheme (LTIS), Sharesave, the Share Award Scheme (SAS), the Restricted Share Scheme (RSS), the Share Incentive Plan (SIP) and the Direct Energy Employee Share Purchase Plan (ESPP).

On 15 December 2008 the Company raised proceeds of £2,164 million, net of issue costs of £65 million, through a Rights Issue as explained in notes 5, 29 and 30. The number of shares allocated to employees under the Group's share schemes has been adjusted to reflect the bonus element of the Rights Issue. The terms of the Group's employee share schemes were adjusted such that participants of the various plans were no better or worse off as a result of the Rights Issue. Consequently, no additional expense was or will be recognised as a result of changes to the Group's employee share schemes. Details of the adjustments made to the terms of the Group's employee share schemes as a result of the Rights Issue are provided in sections (b) and (c) below.

(a) Summary of share-based payment plans and movements in the number of shares and options outstanding DMSS

Awards under the DMSS are generally reserved for employees within the senior executive group. The scheme operates over a four-year vesting period. Under normal conditions the grant date of the scheme is the first day of each bonus year. This is followed by a vesting period of four years, being the bonus year plus a three-year performance period. The fair value of the award reflects the market value of the shares at the grant date. The scheme comprises three separate elements:

(i) Deferred shares

The scheme requires participants to defer 20% of their annual pre-tax bonus into the scheme. The shares are held in trust over the three-year performance period, during which time they cannot be withdrawn. An employee who leaves prior to the vesting date will forfeit their right to the shares (except where permitted by the rules of the scheme). All shares held in trust will be eligible to receive dividends. The number of shares deferred is estimated from the participant's maximum bonus and the likelihood of bonus payout in the bonus year. Subsequent revisions are made based on the actual bonus paid in the year.

(ii) Investment shares

The scheme allows participants to elect to invest an additional amount of their annual bonus into the scheme up to a maximum of 50% of their total potential after-tax bonus for the year. This 50% limit includes the amount automatically deferred each year pre-tax. The number of shares invested is estimated based on the maximum bonus in year one. The shares may be funded directly from the employee or through a release of the employee's LTIS shares and thus the shares do not attract an IFRS 2 charge. Subsequent to the bonus year, the shares are held in trust over the three-year performance period and will vest unconditionally. Participants can withdraw the investment shares unconditionally at any point throughout the vesting period, although the related matching shares will be forfeited. The shares are eligible to receive dividends.

(iii) Matching shares

Deferred and investment shares will be matched with conditional matching shares, which will be released upon the achievement, over a three-year performance period, of three-year cumulative Group economic profit performance targets. Group economic profit is calculated by taking Group operating profit before exceptional items and certain re-measurements after tax and subtracting a charge for capital employed based on the Group's weighted average cost of capital. The number of matching shares that will vest will be determined on a straight-line basis from a zero match for no growth in economic profit up to a two-times match for growth of 25% or more. The number of investment matching shares, subject to the performance conditions, is grossed up to reflect the impact of tax and National Insurance. The number of matching shares released following the satisfaction of the performance conditions will be increased to reflect the dividends that would have been paid during the three-year performance period. The likelihood of achieving the performance conditions is taken into account in calculating the number of awards expected to vest. Estimates are made in year one and revised in subsequent years. An employee who leaves prior to the vesting date will forfeit their right to the shares (except where permitted by the rules of the scheme).

The number of shares originally granted and fair value allocated are estimated on the grant date and then adjusted following the announcement of the actual annual performance bonus and subsequent investment by participants. Details of the fair values of awards granted and related assumptions are included in section (c) below.

33.SHARE-BASED PAYMENTS CONTINUED

A reconciliation of movements in allocations of deferred and matching shares actually made is shown below:

	2008 Number (i)	2007 Number (i)
Outstanding at start of period	3,393,500	–
Granted	3,425,689	3,453,802
Forfeited	(254,794)	(60,302)
Outstanding at end of period	6,564,395	3,393,500
Vested at end of period	–	–

(i) Movements in allocations prior to 14 November 2008 have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

There were no shares released during the period or in 2007.

ESOS

Under the ESOS, the Board may grant options over shares in Centrica plc to employees of the Group. Options are granted with a fixed exercise price equal to the market price of the shares at the legal date of grant which approximates, or is the same as, the grant date for accounting purposes. Awards under the ESOS are generally reserved for employees within the senior executive group. Options granted under the ESOS will become exercisable in full on the third anniversary of the date of grant, subject to the growth in earnings per share over that period exceeding RPI growth by 18 percent or more. The number of options becoming exercisable is determined on a straight-line basis between 40% and 100% if EPS growth exceeds RPI growth by between nine and 18 percent. Options granted up to March 2004 permitted retesting of EPS growth annually for a further two years. The exercise of options is subject to continued employment within the Group (except where permitted by the rules of the scheme). No performance conditions were included in the fair value calculations. Early exercise has been taken into account by estimating the expected life of the options. Details of the fair values of awards granted and related assumptions are included in section (b) below. A reconciliation of option movements is as follows:

		2008		2007
	Number (i)	Weighted average exercise price (i)	Number (i)	Weighted average exercise price (i)
Outstanding at start of period	21,953,085	£2.07	27,062,070	£2.07
Granted (ii)	336,012	£2.56	–	–
Exercised	(3,199,991)	£1.94	(2,880,618)	£1.97
Forfeited	(1,102,971)	£2.25	(2,228,367)	£2.20
Outstanding at end of period	17,986,135	£2.09	21,953,085	£2.07
Exercisable at end of period	13,031,276	£1.92	9,879,752	£1.81

(i) Movements in allocations prior to 14 November 2008 and the corresponding weighted average exercise price have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

(ii) Options granted in 2008 relate to a special grant of options that vested and become exercisable immediately.

For options outstanding at the end of the period, the range of exercise prices and average remaining life was as follows:

			2008				2007
Range of exercise prices (i)	Weighted average exercise price (i)	Number of shares (i)	Average remaining contractual life Years	Range of exercise prices (i)	Weighted average exercise price (i)	Number of shares (i)	Average remaining contractual life Years
£1.30–£1.39	£1.31	2,313,157	4.2	£1.30–£1.39	£1.31	2,984,952	5.3
£1.90–£1.99	£1.99	2,264,509	5.2	£1.90–£1.99	£1.99	3,075,259	6.3
£2.00–£2.09	£2.03	6,576,689	5.3	£2.00–£2.09	£2.03	8,388,293	6.4
£2.10–£2.19	£2.14	1,357,308	2.6	£2.10–£2.19	£2.14	1,454,838	3.6
£2.20–£2.29	£2.23	183,601	6.7	£2.20–£2.29	£2.23	248,997	7.8
£2.50–£2.59	£2.54	5,290,871	7.4	£2.50–£2.59	£2.54	5,800,746	8.3
	£2.09	17,986,135	5.6		£2.07	21,953,085	6.5

(i) Exercise prices and the number of shares in each range have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

For options exercised during the period, the weighted average share price adjusted to reflect the bonus element of the Rights Issue was £2.81 (2007: £3.44).

33.SHARE-BASED PAYMENTS CONTINUED

LTIS

Under the LTIS, allocations of shares in Centrica plc are generally reserved for employees at senior management level. For awards made up to 2005, the number of shares to be released to participants is calculated subject to the Company's total shareholder return (TSR) during the three years following the grant date, compared with the TSR of other shares in the FTSE 100 Index over the same period. The number of shares released is reduced on a sliding scale if Centrica's TSR is ranked between 50th and 25th. Shares are released to participants immediately following the end of the period in which TSR performance is assessed, however release of shares is subject to continued employment within the Group at the date of release (except where permitted by the rules of the scheme). Allocations were valued using the Black-Scholes option pricing model. Performance conditions were included in the fair value calculations, through the use of a Monte Carlo simulation model. For awards made from 2006, the vesting of only half of each award is made on the basis of TSR performance. For this half of the award, the calculation of TSR performance as compared with the TSR of other FTSE 100 Index shares is consistent with awards made to the end of 2005, except that allocations are valued using a Monte Carlo simulation model. The number of shares released is determined on a straight-line basis between 25% and 100% if Centrica's TSR is ranked between 50th and 20th. The vesting of the remaining half of awards made since 2006 is dependent on earnings per share (EPS) growth. This is considered a non-market condition under IFRS 2. For shares that vest on awards made from 2006 (for both TSR and EPS portions), additional shares are awarded or a cash payment is made to reflect dividends that would have been paid on the allocations during the performance period. The fair value of the awards is therefore considered to be the market value at the grant date. The likelihood of achieving the performance conditions is taken into account in calculating the number of awards expected to vest. Details of the fair values of awards granted and related assumptions are included in section (c) below. A reconciliation of movements in allocations is as follows:

	2008 Number (i)	2007 Number (i)
Outstanding at start of period	22,272,975	23,580,460
Granted	13,026,508	7,266,456
Released	(3,882,647)	(5,230,265)
Forfeited – performance related	(2,649,148)	(64,390)
Forfeited – non-performance related	(2,270,544)	(3,279,286)
Outstanding at end of period	26,497,144	22,272,975
Vested at end of period	264,143	39,499

(i) Movements in allocations prior to 14 November 2008 have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

For shares released during the period, the weighted average share price adjusted to reflect the bonus element of the Rights Issue was £2.72 (2007: £3.48).

Sharesave

Under Sharesave, the Board may grant options over shares in Centrica plc to all UK-based employees of the Group. To date, the Board has approved the grant of options with a fixed exercise price equal to 80% of the average market price of the shares for the three days prior to invitation which is three to four weeks prior to the grant date. Employees pay a fixed amount from salary into a savings account each month, and may elect to save over three or five years. At the end of the savings period, employees have six months in which to exercise their options using the funds saved. If employees decide not to exercise their options, they may withdraw the funds saved, and the options expire. Exercise of options is subject to continued employment within the Group (except where permitted by rules of the scheme). Details of the fair values of awards granted and related assumptions are included in section (b) below. A reconciliation of movements in allocations is as follows:

		2008		2007
	Number (i)	Weighted average exercise price (i)	Number (i)	Weighted average exercise price (i)
Outstanding at start of period	57,663,048	£1.58	62,120,635	£1.41
Granted	15,823,636	£2.27	10,477,514	£2.59
Exercised	(30,637,590)	£1.08	(10,823,787)	£1.46
Forfeited	(4,603,041)	£1.76	(4,105,305)	£1.86
Expired	(59,488)	£1.28	(6,009)	£1.58
Outstanding at end of period	38,186,565	£2.20	57,663,048	£1.58
Exercisable at end of period	144,015	£1.13	75,456	£1.61

(i) Movements in allocations prior to 14 November 2008 and the corresponding weighted average exercise price have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

33.SHARE-BASED PAYMENTS CONTINUED

For options outstanding at the end of the period, the range of exercise prices and the average remaining life was as follows:

			2008				2007
Range of exercise prices (i)	Weighted average exercise price (i)	Number of shares (i)	Average remaining contractual life Years	Range of exercise prices (i)	Weighted average exercise price (i)	Number of shares (i)	Average remaining contractual life Years
£0.90–£0.99	£0.95	109,440	–	£0.90–£0.99	£0.95	26,249,916	0.9
£1.50–£1.59	–	–	–	£1.50–£1.59	£1.58	27,833	–
£1.60–£1.69	£1.66	5,731,196	0.9	£1.60–£1.69	£1.66	10,654,356	1.8
£1.70–£1.79	–	–	–	£1.70–£1.79	£1.70	793	–
£2.10–£2.19	£2.12	9,801,088	2.3	£2.10–£2.19	£2.12	11,011,582	2.5
£2.20–£2.29	£2.27	14,930,249	4.3	–	–	–	–
£2.50–£2.59	£2.59	7,614,592	3.3	£2.50–£2.59	£2.59	9,718,568	3.6
	£2.20	38,186,565	3.0		£1.58	57,663,048	1.9

(i) Exercise prices and the number of shares in each range have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

For options exercised during the period, the weighted average share price at the date of exercise adjusted to reflect the bonus element of the Rights Issue was £2.64 (2007: £3.36).

SAS

Under the SAS, allocations of shares in Centrica plc are made to selected employees at middle management levels, based on recommendation by the Chief Executive and the Group Human Resources Director. There is no contractual eligibility for SAS and each year's award is made independently from previous awards. Allocations are subject to no performance conditions and vest unconditionally subject to continued employment within the Group (except where permitted by the rules of the scheme) in two stages – half of the award vesting after two years, the other half vesting after three years. On vesting, additional shares are awarded or a cash payment is made to reflect dividends that would have been paid on the allocations during the vesting period. The fair value is therefore considered to be the market value at date of grant. Details of the fair values of awards granted and related assumptions are included in section (c) below. A reconciliation of movements in the allocations is as follows:

	2008 Number (i)	2007 Number (i)
Outstanding at start of period	2,768,440	1,645,338
Granted	1,787,004	1,314,198
Released	(685,573)	(25,593)
Forfeited	(263,338)	(165,503)
Outstanding at end of period	3,606,533	2,768,440
Vested at end of period	–	–

(i) Movements in allocations prior to 14 November 2008 have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

For shares released during the period, the weighted average share price at the date of release adjusted to reflect the bonus element of the Rights Issue was £2.71 (2007: £3.34).

RSS

Awards under the RSS are reserved for certain selected key employees at senior management levels, based on recommendation by the Chief Executive and the Group Human Resources Director. Neither the Executive Directors nor the next tier of executive management are eligible to participate. There is no contractual eligibility for RSS and each year's award is made independently from previous awards. Allocations are subject to no performance conditions and vest unconditionally subject to continued employment within the Group (except where permitted by the rules of the scheme) in one or two stages dependent on the individual awards. On vesting, additional shares are awarded or a cash payment is made to reflect dividends that would have been paid on the allocations during the vesting period. The fair value is therefore considered to be the market value at date of grant. Details of the fair values of awards granted and related assumptions are included in section (c) below.

33.SHARE-BASED PAYMENTS CONTINUED
A reconciliation of movements in the allocations is as follows:
	2008 Number (i)	2007 Number (i)
Outstanding at start of period	408,597	–
Granted	32,795	408,597
Released	(40,684)	–
Outstanding at end of period	400,708	408,597
Vested at end of period	–	–

(i) Movements in allocations prior to 14 November 2008 have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

For shares released during the period, the weighted average share price at the date of release adjusted to reflect the bonus element of the Rights Issue was £2.69 (2007: £nil).

SIP

Under SIP, employees in the UK may purchase 'partnership shares' through monthly salary deductions. The Company then awards one 'matching share' for every two purchased, up to a maximum of 20 matching shares per employee per month (since increased to 22 matching shares from 2009 to reflect the bonus element of the Rights Issue). Both partnership shares and matching shares are held in a trust. Partnership shares may be withdrawn at any time, but matching shares are forfeited if the related partnership shares are withdrawn within three years from the original purchase date. Matching shares vest unconditionally for employees after being held for three years in the trust. Vesting of matching shares is also subject to continued employment within the Group (except where permitted by the rules of the scheme). Matching shares are valued at the market price at the grant date. Details of the fair values of awards granted and related assumptions are included in section (c) below.

A reconciliation of matching shares held in trust is as follows:

	2008 Number (i)	2007 Number (i)
Unvested at start of period	2,873,180	2,642,434
Granted	730,122	669,188
Released	(182,117)	(308,529)
Forfeited	(133,070)	(129,913)
Unvested at end of period	3,288,115	2,873,180

(i) Movements in allocations prior to 14 November 2008 have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

For shares released during the period, the weighted average share price at the date of release adjusted to reflect the bonus element of the Rights Issue was £2.77 (2007: £3.33).

ESPP

Under the ESPP, employees in North America may purchase 'partnership shares' through salary deductions. The Company then awards one 'matching share' for every two shares purchased. Partnership shares may be withdrawn at any time, but the entitlement to matching shares is forfeited if the related partnership shares are withdrawn within two years from the original purchase date. Matching shares vest unconditionally for employees after being held for two years. Vesting of matching shares is also subject to continued employment within the Group (except where permitted by the rules of the scheme). Matching shares are valued at the market price at the grant date. Details of the fair values of awards granted and related assumptions are included in section (c) below.

A reconciliation of matching shares granted is shown below:

	2008 Number (i)	2007 Number (i)
Unvested at start of period	383,230	386,776
Granted	287,300	209,959
Released	(151,024)	(175,687)
Forfeited	(43,418)	(37,818)
Unvested at end of period	476,088	383,230

(i) Movements in allocations prior to 14 November 2008 have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

For shares released during the period, the weighted average share price at the date of release adjusted to reflect the bonus element of the Rights Issue was £2.75 (2007: £3.30).

33.SHARE-BASED PAYMENTS CONTINUED

(b) Fair values and associated details of options granted

		ESOS
	2008	2007	2008	2007
Number of options originally granted	14,168,889	9,326,314	299,130	–
Number of options originally granted adjusted for Rights Issue (i)	15,823,636	10,477,514	336,012	–
Weighted average fair value at grant date	£0.73	£1.19	£0.68	–
Weighted average fair value at grant date adjusted for Rights Issue (i)	£0.65	£1.06	£0.60	–
Weighted average share price at grant date	£3.05	£3.91	£3.27	–
Weighted average share price at grant date adjusted for Rights Issue (i)	£2.71	£3.48	£2.91	–
Weighted average exercise price at grant date	£2.55	£2.91	£2.88	–
Weighted average exercise price adjusted for Rights Issue (i)	£2.27	£2.59	£2.56	–
Expected volatility (ii)	23%	23%	23%	–
Contractual option life	4.4 years	4.2 years	10 years	–
Expected life	4.1 years	3.7 years	5 years	–
Vesting period	4.1 years	3.7 years	–	–
Expected dividend yield	3.50%	3.70%	4.20%	–
Risk-free interest rate (iii)	4.08%	5.33%	4.30%	–
Expected forfeitures	32%	30%	0%	–

(c) Fair values and associated details of shares granted

2008	DMSS	LTIS	SAS	RSS	SIP	ESPP
Number of equity instruments at grant date	3,030,836	11,595,241	1,590,660	32,795	691,019	274,217
Number of equity instruments at grant date adjusted for Rights Issue (i)	3,404,949	13,026,508	1,787,004	32,795	730,122	287,300
Weighted average fair value at grant date	£2.95	£2.24	£3.05	£2.47	£3.02	£3.33
Weighted average fair value at grant date adjusted for Rights Issue (i)	£2.63	£2.00	£2.71	£2.47	£2.69	£2.96
Expected performance lapses	0%	n/a	n/a	n/a	n/a	n/a
Expected dividend yield	n/a	n/a	n/a	n/a	n/a	n/a
Vesting period	4 years	3 years	2.5 years	3 years	3 years	2 years
Expected volatility (ii)	n/a	22%	n/a	n/a	n/a	n/a
Expected forfeitures	25%	25%	20%	25%	0%	20%
Risk-free rate (iii)	n/a	4.05%	n/a	n/a	n/a	n/a
Average volatility of FTSE 100	n/a	27%	n/a	n/a	n/a	n/a
Average cross-correlation of FTSE 100 (iv)	n/a	30%	n/a	n/a	n/a	n/a

2007	DMSS	LTIS	SAS	RSS	SIP	ESPP
Number of equity instruments at grant date	3,049,297	6,468,066	1,169,803	363,703	633,348	200,398
Number of equity instruments at grant date adjusted for
Rights Issue (i)	3,425,689	7,266,456	1,314,198	408,597	669,188	209,959
Weighted average fair value at grant date	£2.93	£3.08	£3.91	£3.86	£3.72	£3.69
Weighted average fair value at grant date adjusted for
Rights Issue (i)	£2.61	£2.74	£3.48	£3.44	£3.31	£3.28
Expected performance lapses	0%	n/a	n/a	n/a	n/a	n/a
Expected dividend yield	n/a	n/a	n/a	n/a	n/a	n/a
Vesting period	4 years	3 years	2.5 years	2.4 years	3 years	2 years
Expected volatility (ii)	n/a	21%	n/a	n/a	n/a	n/a
Expected forfeitures	25%	20%	20%	19%	0%	20%
Risk-free rate (iii)	n/a	5.40%	n/a	n/a	n/a	n/a
Average volatility of FTSE 100	n/a	30%	n/a	n/a	n/a	n/a
Average cross-correlation of FTSE 100 (iv)	n/a	20%	n/a	n/a	n/a	n/a

(i) Adjusted to take account of the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.

(ii) The expected volatility is based on historical volatility over the last three years.

(iii) The risk-free rate of return is the yield on zero-coupon UK government bonds of a term consistent with the expected option life.

(iv) The cross-correlation of the FTSE 100 has been obtained from a model which calculates the correlation between Centrica's historical share price and each of the FTSE 100 over the period commensurate with the performance period of the awards.

34. PENSIONS

Pension schemes

A substantial majority of the Group's UK employees at 31 December 2008 were members of one of the three main schemes: the Centrica Pension Scheme, the Centrica Engineers' Pension Scheme and the Centrica Management Pension Scheme (together the approved pension schemes). The Centrica Pension Scheme (final salary section) and the Centrica Management Pension Scheme (a final salary scheme) were closed to new members from 1 April 2003. The Centrica Pension Scheme also has a career average salary section which was closed to new members with effect from 1 July 2008 and replaced by a defined contribution section which is open to new members. The Centrica Engineers' Pension Scheme (final salary section) was closed to new members from 1 April 2006, and a career average salary section was added to the scheme at that date. These schemes are defined benefit schemes and are taxapproved funded arrangements. They are subject to independent valuations at least every three years, on the basis of which the qualified actuary certifies the rate of employer contributions which, together with the specified contributions payable by the employees and proceeds from the schemes' assets, are expected to be sufficient to fund the benefits payable under the schemes.

The Centrica Unapproved Pension Scheme is an unfunded arrangement which provides benefits to certain employees whose benefits under the main schemes would otherwise be limited by the earnings cap. The Group also has a commitment to provide certain pension and post-retirement benefits to employees of Direct Energy Marketing Limited (Canada) under a defined benefit scheme.

The latest full actuarial valuations were carried out at the following dates: the approved pension schemes at 31 March 2006, the Unapproved Pension Scheme at 6 April 2008 and the Direct Energy Marketing Limited pension plan at 14 June 2008. These have been updated to 31 December 2008 for the purposes of meeting the requirements of IAS 19. Investments have been valued, for this purpose, at market value.

Governance

The UK schemes are managed by trustee companies where boards consist of both company nominated and member nominated directors. Each UK scheme holds units in the Centrica Combined Common Investment Fund (CCCIF), which holds the combined assets of the participating schemes. The method of allocation of units is set out in the Trust Deed of the CCCIF. The trustee of the CCCIF is a company, Centrica Combined Common Investment Fund Limited (CCCIF Limited) which was incorporated on 23 September 2002. The trustee of the CCCIF may be appointed or removed by the participant schemes. The board of CCCIF Limited comprises six directors, of which three are appointed by Centrica plc (including the chairman and one independent director) and a director is appointed by each of the participating schemes. No direct investments are made in securities issued by Centrica plc or any of its subsidiaries, property leased to or owned by Centrica plc or any of its subsidiaries or securities of any fund manager or any of their associated companies.

Under the terms of the Pensions Act 2004, the Company and each trustee board must agree the funding rate for its defined benefit pension scheme and a recovery plan to fund any deficit against the scheme specific statutory funding objective. This approach was first adopted for the triennial valuations completed at 31 March 2006 and will again be reflected in the valuations due to be completed at 31 March 2009.

In addition, the Group has a commitment to provide contributions to defined contribution schemes for certain employees in the UK and North America who are not members of one of the Group's defined benefit pension schemes.

Major assumptions used for the actuarial valuation	31 December 2008 %	31 December 2007 %
Rate of increase in employee earnings	4.30	4.40
Rate of increase in pensions in payment and deferred pensions	3.30	3.40
Discount rate	6.70	5.80
Inflation assumption	3.30	3.40

The assumptions relating to longevity underlying the pension liabilities at the balance sheet date have been based on a combination of standard actuarial mortality tables, scheme experience and other relevant data, and include a medium cohort allowance for future improvements in longevity, as published by the Institute of Actuaries. The assumptions are equivalent to future longevity for members in normal health approximately as follows:

		2008		2007
Life expectancy at age 65 for a member:	Male Years	Female Years	Male Years	Female Years
Currently aged 65	20.4	21.8	20.2	21.8
Currently aged 45	21.6	22.9	21.4	22.9

At 31 March 2006, the date of the most recent actuarial review, the schemes had approximately 31,900 members and beneficiaries (20,850 male and 11,050 female).

The other demographic assumptions have been set having regard to the latest trends in scheme experience and other relevant data. The assumptions are reviewed and updated as necessary as part of the periodic actuarial valuation of the pension schemes.

34. PENSIONS CONTINUED

		2008		2007
Impact of changing material assumptions	Increase/ decrease in assumption	Indicative effect on scheme liabilities %	Increase/ decrease in assumption	Indicative effect on scheme liabilities %
Rate of increase in employee earnings	0.25%	+/-2	0.25%	+/-2
Rate of increase in pensions in payment and deferred pensions	0.25%	+/-4	0.25%	+/-4
Discount rate	0.25%	-/+6	0.25%	-/+6
Inflation assumption	0.25%	+/-6	0.25%	+/-6
Longevity assumption	1 year	+/-2	1 year	+/-2

The expected rate of return and market value of the assets and the present value of the liabilities in the schemes at 31 December were:

		2008		2007
	Expected rate of return per annum %	Valuation £m	Expected rate of return per annum %	Valuation £m
UK equities	8.5	884	8.1	1,549
Non-UK equities	8.5	996	8.1	931
Fixed-interest bonds	6.3	404	5.8	412
Index-linked bonds	4.3	258	4.5	351
Property	7.2	55	6.8	50
Cash and other assets	4.1	45	5.4	34
Total fair value of plan assets	7.7	2,642	7.4	3,327
Present value of defined benefit obligation		(2,755)		(3,230)
Net (liability)/asset recognised in the Balance Sheet		(113)		97
Associated deferred tax asset/(liability) recognised in the Balance Sheet		30		(28)
Net pension (liability)/asset		(83)		69
Net (liability)/asset recognised in the Balance Sheet comprises:
Surpluses		73		152
Deficits		(186)		(55)
		(113)		97

The overall expected rate of return on assets is a weighted average based on the actual plan assets held and the respective expected returns on separate asset classes less costs of administering the plan and taxes paid by the plan itself. The returns on separate asset classes were derived as follows: the expected rate of return on equities is based on the expected median return over a ten-year period, as calculated by the independent company actuary. The median return over a longer period than ten years was not expected to be materially dissimilar. The expected rate of return on bonds was measured directly from actual market yields for UK gilts and corporate bond stocks. The rate above takes into account the actual mixture of UK gilts, UK corporate bonds and overseas bonds held at the balance sheet date. The expected rate of return on property takes into account both capital growth and allowance for expenses, rental growth and depreciation. The expected rate of return on cash is comparable to current bank interest rates.

Included within the schemes' liabilities above are £24 million (2007: £31 million) relating to unfunded pension arrangements. Included within non-current available-for-sale financial assets are £26 million (2007: £30 million) of investments, held by the Law Debenture Trust on behalf of the Company, as security in respect of the Centrica Unapproved Pension Scheme.

The Company has agreed with the trustees of the Centrica Pension Scheme and the Centrica Management Pension Scheme that it will provide collateral equal to the 31 December IAS 19 deficits two months after the relevant financial year or make additional contributions. At 31 December 2008, the IAS 19 net deficit on these two schemes totalled £94 million. The agreements provide that a charge over assets or letters of credit from a bank with a minimum credit rating of AA will be acceptable collateral for the trustees.

34. PENSIONS CONTINUED					Di rec
Analysis of the amount charged to operating profit				2008 £m	2007 tor £m
Current service cost				106	s' R 127
Past service credit		(3)	ep –
Loss on curtailment				6	or – t –
Net charge to operating profit				109	127 Bu
					sin
Analysis of the amount credited to notional interest				2008 £m	2007 ess £m
Expected return on pension scheme assets				249	R 221
Interest on pension scheme liabilities				(190)	ev (166)
Net credit to notional interest income					iew 55
Analysis of the actuarial (loss)/gain recognised in the Statement
of Recognised Income and Expense				2008 £m	Di 2007 rec £m
Actual return less expected return on pension scheme assets				(1,121)	tor (38)
Experience gains and losses arising on the scheme liabilities				–	s' R (16)
Changes in assumptions underlying the present value of the schemes' liabilities				722	338 ep
Actuarial (loss)/gain to be recognised in the Statement of Recognised Income and					or
Expense before adjustment for tax				(399)	t – 284 G
Cumulative actuarial gains recognised in reserves at 1 January				723	439 ov
Cumulative actuarial gains recognised in reserves at 31 December				324	723 ern
					an
Five year history of (deficit)/surplus	2008 £m	2007 £m	2006 £m	2005 £m	ce 2004 £m
Plan assets	2,642	3,327	2,988	2,570	2,041
Defined benefit obligation	(2,755)	(3,230)	(3,284)	(3,390)	(2,760)
(Deficit)/surplus	(113)	97	(296)	(820)	(719) Fin
Five year history of experience gains and losses	2008	2007	2006	2005	an 2004
Difference between the expected and actual return on					cia
scheme assets:					l S
Amount (£m)	(1,121)	(38)	95	307	tat 64 em
Percentage of scheme assets	42.4%	1.1%	3.2%	11.9%	3.1% en
Experience gains and losses on scheme liabilities:					ts
Amount (£m)	–	(16)	145	21	134
Percentage of the present value of scheme liabilities	–	0.5%	4.4%	0.6%	4.9%
Total actuarial (loss)/gain recognised in the Statement of Recognised Income and Expense:
Amount (£m)	(399)	284	475	(126)	90
Percentage of the present value of scheme liabilities	14.5%	8.8%	14.5%	3.7%	3.3%
Movement in the defined benefit obligation during the year				2008 £m	Sh 2007 ar £m
1 January				3,230	eh 3,284
Current service cost				106	old 127
Past service credit				(3)	er –
Loss on curtailment				6	In 36 for
Interest on scheme liabilities				190	166 ma
Plan participants' contributions				26	25 tio
Benefits paid from schemes				(79)	n (87)
Benefits paid by company				(1)	(1)
Actuarial gain				(722)	(322)
Acquisitions				–	2

Exchange adjustments 2 – 31 December 2,755 3,230

34.PENSIONS CONTINUED

Movement in plan assets during the year	2008 £m	2007 £m
1 January	3,327	2,988
Movements in the year:
Expected return on scheme assets	249	221
Actuarial loss	(1,121)	(38)
Employer contributions (i)	243	218
Plan participants' contributions	26	25
Benefits paid from schemes	(79)	(87)
Pension Protection Fund Levy paid	(3)	–
31 December	2,642	3,327

(i) Includes £58 million (2007: £42 million) related to exceptional charges recorded in prior years.

Agreed future employer contribution rates (pensionable salary and % of pensionable salary) for the three main defined benefit schemes	2008 £m	2008 %
Centrica Pension Scheme – Final salary section	7	22.4
Centrica Pension Scheme – CRIS section	92	10.9
Centrica Engineers' Pension Scheme – Final salary section	170	23.0
Centrica Engineers' Pension Scheme – CERIS section	48	12.5
Centrica Management Pension Scheme	70	22.6
Centrica Management Pension Scheme – 2008 section	124	20.4

35. BUSINESS COMBINATIONS

During the year, the Group acquired 100% of the outstanding common shares of Rockyview Energy Inc. (Rockyview Energy), 100% of the membership interests of Strategic Energy LLC (Strategic Energy), a subsidiary of Great Plains Energy Inc., 100% of the Canadian assets of TransGlobe Energy Corp. (TransGlobe Energy), 100% of the share capital of Caythorpe Gas Storage Ltd (Caythorpe) and interests in a number of non-operated gas and oil assets in Norway (Heimdal assets). Other smaller acquisitions are described in section (f).

The purchase method of accounting was adopted in all cases. The assets and liabilities acquired and their fair values are shown below. The residual excess of cash consideration over the net assets acquired on each acquisition is recognised as goodwill in the Financial Statements. Unless otherwise stated, the fair values disclosed are provisional because the Directors have not yet reached a final determination on all aspects of the fair value exercise.

(a) Rockyview Energy

On 14 January 2008 the Group acquired 88.4% of the outstanding common shares of publicly traded oil and gas company Rockyview Energy for cash consideration of C\$70 million (£35 million) and the remaining 11.6% of the outstanding common shares of Rockyview Energy by 19 February 2008 in a series of transactions for additional cash consideration of C\$9 million (£5 million). In addition, borrowings with a fair value of C\$38 million (£19 million) as assumed by the Group as part of the acquisition have been reflected in the opening balance sheet of the acquiree. The acquired business contributed a profit after tax of £7 million to the Group for the period from 14 January 2008 to 31 December 2008. The book values of the assets and liabilities have been adjusted to align with the fair values of the assets and liabilities acquired. The adjustments to recognise other intangible assets and property, plant and equipment at fair value mainly relate to the acquired exploration and evaluation assets, and the producing oil and gas field assets. Other adjustments were made in respect of the recognition of decommissioning provisions at fair value and deferred tax relating to the fair value adjustments. During the year, the Directors reached a final determination on all aspects of the fair value exercise. No material adjustments have been made to the fair values disclosed in the 2008 interim Financial Statements.

(b) TransGlobe Energy

On 1 May 2008 the Group acquired 100% of the assets of TransGlobe Energy for cash consideration of C\$51 million (£26 million). TransGlobe Energy is a publicly-traded oil and gas producer based in Calgary, Canada. The acquired business contributed a profit after tax of £1 million to the Group for the period from 1 May 2008 to 31 December 2008. The book values of the assets and liabilities have been adjusted to align with the fair values of the assets and liabilities acquired. Adjustments have been made to property, plant and equipment and to other intangible assets to recognise the producing oil and gas field assets and the exploration and evaluation assets at their respective fair values.

35.BUSINESS COMBINATIONS CONTINUED

(c) Strategic Energy

On 2 June 2008 the Group acquired 100% of the membership interests of Strategic Energy, a subsidiary of Great Plains Energy Inc., for cash consideration of US\$309 million (£157 million). Strategic Energy is a US electricity supplier serving non-residential customers in eleven states within the US. The acquired business contributed a profit after tax of £9 million to the Group for the period from 2 June 2008 to 31 December 2008. The book values of the assets and liabilities have been adjusted to align with the fair values of the assets and liabilities acquired. Adjustments have been made in respect of other intangible assets, primarily to recognise contractual customer relationships and the acquired Strategic Energy brand, to trade and other payables in order to recognise acquired customer contracts priced below the market rate at the date of acquisition and to trade and other receivables in order to recognise acquired wholesale energy contracts at fair value. Goodwill of £77 million has arisen principally in relation to expected synergies.

Revisions to the fair values disclosed in the 2008 interim Financial Statements were made in respect of other intangible assets (£5 million increase) to reflect updated assumptions and estimates within the intangible assets valuation models, to trade and other receivables in order to reflect updated assumptions on the valuation of in-the-money energy procurement contracts (£4 million decrease), and to trade and other payables (£9 million increase) in order to recognise a legal liability and to reflect updated assumptions on the valuation of out-of-the-money sales contracts. In addition, the acquired in-the-money energy procurement contracts were reclassified from trade and other receivables to derivative financial instruments. These revisions resulted in an overall reduction in acquired net assets of £8 million, with a corresponding increase in goodwill.

(d) Caythorpe

On 8 September 2008 the Group acquired 100% of the share capital of Caythorpe and related assets for cash consideration of £71 million. Caythorpe owns a substantially depleted onshore gas field in the UK, together with planning permission and licences for conversion to an onshore gas storage facility. The acquired business did not generate any profit or incur any loss from 8 September 2008 to 31 December 2008. The book values of the assets and liabilities have been adjusted to align with the fair values of the assets and liabilities acquired. Adjustments have been made in respect of other intangible assets and property, plant and equipment in order to recognise the reservoir and related assets at their fair value, as well as the corresponding deferred tax liability, and to provisions for other liabilities and charges in order to recognise a decommissioning provision in respect of the existing site. Goodwill of £33 million has arisen due to the unique positioning of the acquired business, expected synergies from operating Caythorpe as part of a portfolio of storage assets and the recognition of deferred tax as a result of the fair values of the assets and liabilities acquired differing from their tax bases.

(e) Heimdal assets

On 31 October 2008 the Group acquired interests in a number of non-operated gas and oil assets in Norway, collectively the Heimdal assets, for cash consideration of US\$312 million (£194 million). A net amount of £5 million, which has been reflected as a reduction to the consideration amount, was due at 31 October 2008 from the vendor. The net amount of £5 million comprised an amount receivable from the vendor of £10 million in respect of an adjustment for gas and oil produced and sold prior to the completion date and an amount payable to the vendor of £5 million in respect of deferred consideration. As at 31 December 2008, the amount receivable from the vendor was fully settled. The £5 million payable to the vendor was settled subsequent to the year end. The US dollar consideration amount was hedged between the date the sale and purchase agreement was signed (8 July 2008) and the date the transaction completed (31 October 2008). This resulted in a foreign exchange gain of £32 million being realised by the Group, which hedged the cash consideration on the acquisition.

The Heimdal assets comprise a combination of non-operating interests in producing fields, potential development projects and exploration opportunities. The acquired business contributed a profit after tax of £3 million from 31 October 2008 to 31 December 2008. The assets and liabilities acquired have been recognised at their respective fair values. The Group does not have access to the vendor's books and records which would include the assets and liabilities of the Heimdal assets at their pre-acquisition net book values and, hence, it is impracticable to disclose the carrying amounts on this basis. Goodwill of £142 million has arisen principally in relation to the recognition of deferred tax as a result of the fair values of the assets and liabilities acquired differing from their tax bases.

35.BUSINESS COMBINATIONS CONTINUED

North American business combinations		Rockyview Energy		TransGlobe Energy		Strategic Energy	Total
	IFRS carrying values pre-acquisition £m	Fair value £m	IFRS carrying values pre-acquisition £m	Fair value £m	IFRS carrying values pre-acquisition £m	Fair value £m	Fair value £m
Other intangible assets	7	11	–	3	–	11	25
Property, plant and equipment	48	53	30	25	3	3	81
Trade and other receivables: current	6	6	–	–	146	146	152
Trade and other receivables: non-current	–	–	–	–	2	2	2
Derivative financial instruments: current	–	–	–	–	111	72	72
Derivative financial instruments: non-current	–	–	–	–	83	61	61
Cash and cash equivalents	–	–	–	–	77	77	77
Trade and other payables: current	(5)	(5)	–	–	(162)	(235)	(240)
Trade and other payables: non-current	–	–	–	–	–	(57)	(57)
Bank loans	(19)	(19)	–	–	–	–	(19)
Provisions for other liabilities and charges	(2)	(5)	(1)	(1)	–	–	(6)
Deferred tax liabilities	(4)	(1)	(1)	(1)	–	–	(2)
Net assets acquired	31	40	28	26	260	80	146
Goodwill		–		–		77	77
Cash consideration		40		26		157	223

UK and European business combinations		Caythorpe	Heimdal assets (i)	Total
	IFRS carrying values pre-acquisition £m	Fair value £m	Fair value £m	Fair value £m
Other intangible assets	5	–	40	40
Property, plant and equipment	–	58	206	264
Trade and other receivables: current	–	–	7	7
Trade and other payables: current	–	–	(53)	(53)
Trade and other payables: non-current	–	–	(14)	(14)
Provisions for other liabilities and charges	–	(5)	(36)	(41)
Deferred tax liabilities	–	(15)	(130)	(145)
Net assets acquired	5	38	20	58
Goodwill		33	142	175
Gain on foreign exchange hedging instrument		–	32	32
Cash consideration		71	194	265

(i) The Group does not have access to the vendor's books and records which would include the Heimdal assets at their pre-acquisition net book values and, hence, it is impracticable to disclose the carrying amounts on this basis.

(f) Other acquisitions

The Group also acquired the assets and certain liabilities of Chilltrol Inc. on 29 February 2008 (consideration £4 million, goodwill £3 million), the assets and certain liabilities of Airco Mechanical Ltd and a number of related companies on 22 July 2008 (consideration £7 million, goodwill £4 million), Solar Technologies Group Ltd on 25 September 2008 (consideration £2 million, goodwill £2 million), BMSi Ltd on 14 October 2008 (consideration £10 million, which includes contingent consideration of £3 million, goodwill £6 million) and Semplice Energy Ltd on 20 October 2008 (consideration £1 million, goodwill £2 million). The acquired businesses contributed a profit after tax of £1 million to the Group from their respective dates of acquisition up to 31 December 2008.

The pro forma consolidated results of the Group, as if the 2008 acquisitions had been made at the beginning of the period, include revenue from continuing operations of £21,926 million (compared to reported Group revenue of £21,345 million) and an after tax loss of £143 million (compared to reported loss of £144 million). In determining these pro forma consolidated results, an estimate of the preacquisition results relating to the Heimdal assets has not been included as the lack of access to the vendor's books and records makes such an estimate impracticable. The pro forma results have been calculated using the Group's accounting policies. In preparing the pro forma results, revenue and costs have been included as if the businesses were acquired on 1 January 2008 and inter-company transactions had been eliminated. This information is not necessarily indicative of the results of the combined Group that would have occurred had the purchases actually been made at the beginning of the period presented, or indicative of the future results of the combined Group.

(a) Commitments
Commitments in relation to the acquisition of property, plant and equipment	2008 £m	2007 £m
Construction of a power station at Langage	64	201
Construction of Lynn and Inner Dowsing wind farms	5	114
Redevelopment of Statfjord gas field	62	83
Other gas field developments	60	–
Other	79	69
	270	467
Commitments in relation to the acquisition of intangible assets	2008 £m	2007 £m
Renewable obligation certificates	1,058	1,075
Carbon emissions certificates	399	224
Certified emission reduction certificates	139	99
Other	83	49
	1,679	1,447
Commitments in relation to other contracts	2008 £m	2007 £m
Liquefied natural gas capacity	783	754
Transportation capacity	829	445
Outsourcing of services	216	167
Other	355	110
	2,183	1,476

Commitments in relation to commodity purchase contracts	2008 £m	2007 £m
Within one year	15,202	8,400
Between one and five years	23,267	18,100
After five years	11,210	9,100
	49,679	35,600

The Group procures gas and electricity through a mixture of production from owned gas fields and power stations and procurement contracts. Procurement contracts include short-term forward market purchases of gas and electricity at fixed and floating prices. They also include gas contracts indexed to market prices and long-term gas contracts with non-gas indexation.

The total volume of gas to be taken under certain long-term structured contracts depends on a number of factors, including the actual reserves of gas that are eventually determined to be extractable on an economic basis. The resulting monetary commitment is based on the minimum quantities of gas that the Group is contracted to pay at estimated future prices.

The estimated commitment to make payments under gas procurement contracts differs in scope and in basis from the maturity analysis of energy derivatives disclosed in note 21. Only certain procurement and sales contracts are within the scope of IAS 39 and included in note 21. In addition, the volumes used in calculating principal values are estimated using valuation techniques. Contractual commitments which are subject to fulfilment of conditions precedent are excluded.

Financial Statements

36.COMMITMENTS AND CONTINGENCIES CONTINUED

(b) Decommissioning costs

The Group has provided certain guarantees and indemnities to BG Group plc in respect of the decommissioning costs of the Morecambe gas fields. The Company and its wholly owned subsidiary, Hydrocarbon Resources Limited, have agreed to provide security, in respect of such guarantees and indemnities, to BG International Limited, which, as original licence holder for the Morecambe gas fields, will have exposure to decommissioning costs relating to the Morecambe gas fields should liabilities not be fully discharged by the Group. The security is to be provided when the estimated future net revenue stream from the Morecambe gas fields falls below 150% of the estimated cost of such decommissioning. The nature of the security may take a number of different forms and will remain in force until the costs of such decommissioning have been irrevocably discharged and the relevant Department of Business, Enterprise and Regulatory Reform (formerly Department of Trade and Industry) decommissioning notice in respect of the Morecambe gas fields has been revoked.

(c) Operating lease commitments

At 31 December the total of future minimum lease payments under non-cancellable operating leases for each of the following periods were:

	2008 £m	2007 £m
Within one year	126	88
Between one and five years	230	165
After five years	142	146
	498	399
	2008 £m	2007 £m
The total of future minimum sub-lease payments expected to be received under non-cancellable operating sub-leases at 31 December	14	8
Lease and sub-lease payments recognised as an expense in the year were as follows:
Minimum lease payments	77	60
Contingent rents – renewables (i)	116	48
Contingent rents – other	3	–

(i) The Group has entered into long-term arrangements with renewable providers to purchase physical power, renewable obligation certificates and levy exemption certificates from renewable sources. Payments made under these contracts are contingent upon actual production and therefore the commitment to a minimum lease payment included above is £nil (2007: £nil). Payments made for physical power are charged to the Income Statement as incurred and disclosed as contingent rents.

(d) Contingent liabilities

There are no material contingent liabilities.

(e) Guarantees and indemnities

In connection with the Group's energy trading, transportation and upstream activities, certain Group companies have entered into contracts under which they may be required to prepay or provide credit support or other collateral in the event of a significant deterioration in creditworthiness. The extent of credit support is contingent upon the balance owing to the third party at the point of deterioration.

37. RELATED PARTY TRANSACTIONS

During the year, the Group entered into the following transactions with related parties who are not members of the Group:

			2008			2007
	Sale of goods and services £m	Purchase of goods and services £m	Other transactions £m	Sale of goods and services £m	Purchase of goods and services £m	Other transactions £m
Barrow Offshore Wind Limited	–	12	1	–	14	2
Braes of Doune Wind Farm (Scotland) Limited	–	13	–	–	10	–
The Consumers' Waterheater Income Fund	78	–	2	72	–	2
	78	25	3	72	24	4

37.RELATED PARTY TRANSACTIONS CONTINUED

Balances outstanding with related parties at 31 December were as follows:

			2008			2007
	Amounts owed from related parties £m	Amounts owed to related parties £m	Provision for bad or doubtful debt relating to amounts owed from related parties £m	Amounts owed from related parties £m	Amounts owed to related parties £m	Provision for bad or doubtful debt relating to amounts owed from related parties £m
Barrow Offshore Wind Limited	16	4	–	26	4	–
Braes of Doune Wind Farm (Scotland) Limited	32	8	–	38	4	–
The Consumers' Waterheater Income Fund	5	–	–	3	–	–
	53	12	–	67	8	–

Barrow Offshore Wind Limited and Braes of Doune Wind Farm (Scotland) Limited are both joint ventures of the Group.

The Consumers' Waterheater Income Fund (Fund) was deconsolidated with effect from 1 December 2007. The transactions disclosed in the tables above reflect all transactions entered into with the Fund for the full period disclosed. The Fund is a related party of the Group due to the significance of the contractual arrangements in place between the Fund and the Group to the operations of the Fund.

Remuneration of key management personnel	2008 £m	2007 £m
Short-term benefits	10	8
Post-employment benefits	1	3
Share-based payments	6	5
	17	16

Key management personnel comprise members of the Board and Executive Committee, a total of 15 individuals at 31 December 2008 (2007:15). Key management personnel and their families purchase gas, electricity and home services products from the Group for domestic purposes on an arm's length basis.

38. FIXED-FEE SERVICE CONTRACTS

Fixed-fee service contracts are entered into with home services customers in the UK and North America (HomeCare: 100, 200, 300, 400, HomeCare Flexi: 100, 200, 300, 400, Gas Appliance Care, Gas Appliance Check, Plumbing and Drains Care, Plumbing and Drains Care Flexi, Kitchen Appliance Care, Home Electrical Care and Home Electrical Care Flexi in the UK, and Heating Protection, Cooling Protection and Plumbing and Drains Protection in North America). These contracts continue until cancelled by either party to the contract. These plans incorporate both an annual service element and a maintenance element.

Fixed-fee service contracts protect purchasers of these contracts against the risk of breakdown of electrical, plumbing, heating, cooling and household appliances, resulting in the transfer of an element of risk from contract holders to Centrica. Benefits provided to customers vary in accordance with terms and conditions of the contracts entered into, however, generally include repair and/or replacement of the items affected.

The risk and level of service required within the maintenance element of the contracts is dependent upon the occurrence of uncertain future events, in particular the number of call-outs, the cost per call-out and the nature of the fault. Accordingly, the timing and amount of future cash outflows related to the contracts is uncertain.

The key terms and conditions that affect future cash flows are as follows:

• x provision of labour and parts for repairs, dependent on the agreement and associated level of service;
• x one safety and maintenance inspection in every year of the agreement (for HomeCare: 100, 200, 300, 400 (excluding electrical fixtures), HomeCare Flexi: 100, 200, 300, 400 (excluding electrical fixtures), Gas Appliance Care and Gas Appliance Check in the UK, and Heating Protection Plus and Cooling Protection Plus in North America);
• x one safety and maintenance inspection in every continuous two-year period of the agreement (for HomeCare 400 (electrical fixtures only), HomeCare Flexi: 400 (electrical fixtures only), Home Electrical Care, Home Electrical Care Flexi, Kitchen Appliance Care, Plumbing and Drains Care and Plumbing and Drains Care Flexi);
• x no limit to the number of call-outs to carry out work included within the selected agreement; and
• x caps on certain maintenance and repair costs within fixed-fee contracts.

38.FIXED-FEE SERVICE CONTRACTS CONTINUED

Revenue from fixed-fee service contracts is recognised on a straight-line basis over the life of the contract, reflecting the benefits receivable by the customer which span the life of the contract as a result of emergency maintenance potentially being required at any point within the contract term. Cost of sales relates directly to the engineer workforce employed by Centrica within home services, the cost of which is accounted for over a 12-month period with adjustments made to reflect the seasonality of workload over a given year. The costs of claims under the fixed-fee service contracts will be the costs of the engineer workforce employed by Centrica within home services. These costs are accounted for over a 12-month period with adjustments made to reflect the seasonality of workload over a given year. No further claims costs are accrued.

Weather conditions and the seasonality of maintenance can affect the number of call-outs, the cost per call-out and the nature of the fault. Centrica's obligations under the terms of its home services fixed-fee service contracts are based on the following types of uncertain future events taking place within the contract period:

• x boiler, radiator, controls, hot water cylinder and pipe work breakdown;
• x gas fire, water heater, wall heater and gas cooker breakdown;
• x hot and cold water pipe, overflow, cold tank, toilet siphon and radiator valve breakdown;
• x washing machine, tumble drier, dishwasher, fridge, freezer, cooker, oven, hob and microwave oven breakdown;
• x fixed electrical wiring system, fuse box, light switch, wall socket, circuit breaker and transformer breakdown;
• x ventor motor, circuit board, direct drive motor and flame sensor breakdown; and
• x evaporator and condenser fan motor breakdown.

Centrica actively manages the risk exposure of these uncertain events by undertaking the following risk mitigation activities:

• x an initial service visit is performed for central heating care. If, at the initial visit, faults that cannot be rectified are identified, the fixedfee service contract will be cancelled and no further cover provided;
• x an annual or biennial safety and maintenance inspection is performed to ensure all issues are identified prior to them developing into significant maintenance or breakdown issues; and
• x caps on certain maintenance and repair work are incorporated into fixed-fee service contracts to limit liability in areas considered to be higher risk in terms of prevalence and cost to repair.

The Group considers the adequacy of estimated future cash flows under the contracts to meet expected future costs under the contracts. Any deficiency is charged immediately to the Income Statement.

Service requests are sensitive to the reliability of appliances as well as the impact of weather conditions. Each incremental 1% increase in service requests would impact profit and equity by approximately £8 million (2007: £7 million). The contracts are not exposed to any interest rate risk or significant credit risk and do not contain any embedded derivatives.

The claims notified during the year were £291 million (2007: £269 million) and were exactly matched by expenses related to fixed-fee service contracts. All claims are settled immediately and in full.

	2008 £m	2007 £m
Total revenue	944	885
Expenses relating to fixed-fee service contracts	754	727
Deferred income	27	34

39. EVENTS AFTER THE BALANCE SHEET DATE

The Directors propose a final dividend of 8.73 pence per ordinary share (totalling £446 million) for the year ended 31 December 2008. The dividend will be submitted for formal approval at the Annual General Meeting to be held on 11 May 2009. 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 2009.

On 20 January 2009, the Group acquired 50% of the issued share capital of Segebel SA for total consideration of €590 million (£547 million), including deferred consideration of €70 million (£65 million) and transaction costs of €5 million (£5 million), bringing the Group's total ownership interest in Segebel SA to 100%. The transaction results in the Group acquiring a controlling interest in Segebel SA, which will result in it being consolidated as a subsidiary. Segebel SA holds a controlling stake of 51% in SPE SA, a Belgian energy company. As such, this transaction also results in the Group obtaining a controlling interest in SPE SA.

39.EVENTS AFTER THE BALANCE SHEET DATE CONTINUED

The provisional fair values of the consolidated assets and liabilities of Segebel SA, including 100% of the assets and liabilities of SPE SA, as at the acquisition date are disclosed below. These values are provisional because the Directors have not yet reached a final determination on all aspects of the fair value exercise. In order to calculate goodwill arising from the acquisition, the minority interests in SPE SA (49%) are eliminated from the consolidated net assets in order to present the net assets attributable to Segebel SA, of which the Group has acquired 50%.

In addition to the provisional estimate of £229 million of goodwill to be recognised as part of this transaction, the Group also holds previously recognised goodwill of £26 million arising from the acquisition of the initial 50% stake in Segebel SA in September 2005.

Goodwill of £229 million arises principally in relation to incremental benefits expected to arise from the Pax Electrica II arrangements, as well as the recognition of deferred tax on the fair value adjustments.

	IFRS carrying values pre-acquisition	Fair value
	£m	£m
Other intangible assets	203	576
Property, plant and equipment	343	940
Deferred tax assets	22	–
Retirement benefit assets	5	5
Trade and other receivables: current	406	532
Trade and other receivables: non-current	43	175
Inventories	32	33
Cash and cash equivalents	134	134
Net derivative financial instruments: current	(65)	(65)
Trade and other payables: current	(356)	(465)
Trade and other payables: non-current	–	(78)
Bank overdrafts, loans and other borrowings: current	(14)	(14)
Bank loans and other borrowings: non-current	(88)	(89)
Provisions for other liabilities and charges: current	–	(6)
Provisions for other liabilities and charges: non-current	(78)	(78)
Deferred tax liabilities	–	(329)
Retirement benefit obligations	(22)	(22)
Net assets (100%)	565	1,249
Minority interest in SPE SA		(612)
Net assets attributable to Segebel SA shareholders (51%)		637
Net assets acquired (50%)		318
Goodwill		229
Total consideration		547
Consideration comprises:
Deferred consideration		65
Cash consideration		482

On 30 June 2008, an agreement was entered into to transfer the active members of the Centrica Pension Scheme to the Centrica Management Pension Scheme with an effective date of 1 January 2009. Liabilities and assets will accordingly be transferred with effect from this date. There will be no tax effect arising on the transfer. The Group has paid an additional £30 million to the Centrica Management Pension Scheme in December 2008 in relation to the transfer and will be paying a further amount of up to £79 million plus interest to that scheme. In addition, the Group has agreed to provide security to the Centrica Management Pension Scheme in the form of a charge on assets and/or letters of credit of up to £70 million in relation to the transfer.

Shareholder Information

Directors' Report – Governance

Financial Statements

40. PRINCIPAL UNDERTAKINGS

	Country of	% Holding in ordinary shares
31 December 2008	incorporation/formation	and net assets	Principal activity
Subsidiary undertakings (i)
Accord Energy Limited	England	100	Wholesale energy trading
Accord Energy (Trading) Limited	England	100	Wholesale energy trading
Bastrop Energy Partners LP	USA	100	Power generation
British Gas Insurance Limited	England	100	Insurance provision
British Gas Services Limited	England	100	Servicing and installation of gas heating systems
British Gas Trading Limited	England	100	Energy supply
Caythorpe Gas Storage Limited	England	100	Gas storage
Centrica Barry Limited	England	100	Power generation
Centrica Brigg Limited	England	100	Power generation
Centrica Canada Limited	Canada	100	Holding company and gas production
Centrica Energía SL	Spain	100	Energy supply
Centrica Energie GmbH	Germany	100	Wholesale energy trading
Centrica Energy Operations Limited	England	100	Power generation
Centrica KL Limited	England	100	Power generation
Centrica KPS Limited	England	100	Power generation
Centrica Langage Limited	England	100	Power generation
Centrica PB Limited	England	100	Power generation
Centrica Renewable Energy Limited	England	100	Renewable energy holding company
Centrica Renewable Holdings Limited	England	100	Renewable energy holding company
Centrica Resources Limited	England	100	Gas and oil production
Centrica Resources (Nigeria) Limited	Nigeria	100	Upstream exploration
Centrica Resources (Norge) AS	Norway	100	Upstream exploration
Centrica RPS Limited	England	100	Power generation
Centrica SHB Limited	England	100	Power generation
Centrica Storage Limited	England	100	Gas storage
CPL Retail Energy LP	USA	100	Energy supply
DER Development No. 10 Limited	Canada	100	Gas production
DER Partnership 2	Canada	100	Gas production
Direct Energy LP	USA	100	Energy supply
Direct Energy Business LLC	USA	100	Energy supply
Direct Energy Marketing Inc	USA	100	Wholesale energy trading
Direct Energy Marketing Limited	Canada	100	Energy supply and home services
Direct Energy Partnership	Canada	100	Energy supply
Direct Energy Resources Partnership	Canada	100	Gas production
Direct Energy Services LLC	USA	100	Energy supply and home services
Dyno Holdings Limited	England	100	Home services
Energy America LLC	USA	100	Energy supply
Frontera Generation LP	USA	100	Power generation
GB Gas Holdings Limited	England	100	Holding company
Glens of Foudland Windfarm Limited	England	100	Power generation
Hydrocarbon Resources Limited	England	100	Gas production
Oxxio BV	Netherlands	100	Energy supply
Paris Generation LP	USA	100	Power generation
Residential Services Group Inc	USA	100	Holding company
Rockyview Energy Inc	Canada	100	Gas and oil production
The Centrica Gas Production LP	England	100	Gas production
WTU Retail Energy LP	USA	100	Energy supply
Joint ventures (i)
Barrow Offshore Wind Limited	England	50	Power generation
Braes of Doune Wind Farm (Scotland) Limited	Scotland	50	Power generation
Segebel SA	Belgium	50	Holding company

(i) All principal undertakings are indirectly held by the Company. The information is only given for those subsidiaries which in the Directors' opinion principally affect the figures shown in the Financial Statements.

Independent Auditors' Report to the Members of Centrica plc

Independent Auditors' report to the members of Centrica plc

We have audited the parent Company Financial Statements of Centrica plc for the year ended 31 December 2008 which comprise the Balance Sheet and the related notes. These parent Company Financial Statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors' Remuneration Report that is described as having been audited.

We have reported separately on the Group Financial Statements of Centrica plc for the year ended 31 December 2008.

Respective responsibilities of Directors and Auditors

The Directors' responsibilities for preparing the Annual Report, the Directors' Remuneration Report and the parent Company Financial Statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors' Responsibilities.

Our responsibility is to audit the parent Company Financial Statements and the part of the Directors' Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company's members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

We report to you our opinion as to whether the parent Company Financial Statements give a true and fair view and whether the parent Company Financial Statements and the part of the Directors' Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors' Report (comprising the Directors' Report – Business Review and the Directors' Report – Governance) is consistent with the parent Company Financial Statements.

In addition, we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors' remuneration and other transactions is not disclosed.

We read other information contained in the Annual Report and consider whether it is consistent with the audited parent Company Financial Statements. The other information comprises only At a Glance, Financial Highlights, the Chairman's Statement, the Directors' Report, the unaudited part of the Directors' Remuneration Report, the Gas and Liquids Reserves, Five Year Record and Shareholder Information. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent Company Financial Statements. Our responsibilities do not extend to any other information.

Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent Company Financial Statements and the part of the Directors' Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the parent Company Financial Statements, and of whether the accounting policies are appropriate to the Company's circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the parent Company Financial Statements and the part of the Directors' Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the parent Company Financial Statements and the part of the Directors' Remuneration Report to be audited.

Opinion

In our opinion:

• x the parent Company Financial Statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company's affairs as at 31 December 2008;
• x the parent Company Financial Statements and the part of the Directors' Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and
• x the information given in the Directors' Report is consistent with the parent Company Financial Statements.

PricewaterhouseCoopers LLP

Chartered Accountants and Registered Auditors London 26 February 2009

Company Balance Sheet

31 December	Notes	2008 £m	2007 £m
Fixed assets
Tangible fixed assets	iii	35	43
Investments in subsidiary undertakings	iv	2,091	2,080
		2,126	2,123
Current assets
Debtors	v	8,162	5,571
Current asset investments	vi	2,842	1,066
Cash at bank and in hand		–	1
		11,004	6,638
Creditors (amounts falling due within one year)
Borrowings	vii	(297)	(167)
Other creditors	viii	(4,970)	(3,830)
		(5,267)	(3,997)
Net current assets		5,737	2,641
Total assets less current liabilities		7,863	4,764
Creditors (amounts falling due after more than one year)
Borrowings	vii	(2,835)	(1,378)
Other creditors	viii	(4)	–
		(2,839)	(1,378)
Provisions for liabilities and charges	ix	(17)	(13)
Net assets		5,007	3,373
Capital and reserves – equity interests
Called up share capital	29	315	227
Share premium account	x	729	685
Capital redemption reserve	x	16	16
Other reserves	x	3,947	2,445
Shareholders' funds	xi	5,007	3,373

The Financial Statements on pages 136 to 142 were approved and authorised for issue by the Board of Directors on 26 February 2009 and were signed on its behalf by:

Sam Laidlaw Nick Luff

Chief Executive Group Finance Director

The notes on pages 137 to 142 form part of these Financial Statements, along with notes 29 and 33 to the Group Financial Statements.

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 loss after tax for the year ended 31 December 2008 was £93 million (2007: £5 million profit).

Employee share schemes

The Group has a number of employee share schemes, detailed in note 33, 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 nonmarket-based vesting conditions). 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. The issue of share incentives by the Company to employees of its subsidiaries represents additional capital contributions. An addition to the Company's investment in subsidiary undertakings is reported with a corresponding increase in shareholders' funds. The addition to the Company's investment in subsidiary undertakings is reduced on the issue of share incentives as these are recharged to the subsidiaries.

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: EPS awards after 2005	Market value on the date of grant
LTIS: TSR awards after 2005	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
SAS, SIP, DMSS, RSS and ESPP	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 pounds 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 of up to 10 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 post-retirement benefits

The Company's employees participate in a number of the Group's defined benefit pension schemes as described in note 34 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 34 to the Group Financial Statements.

Notes to the Company Balance Sheet continued

I. PRINCIPAL ACCOUNTING POLICIES OF THE COMPANY CONTINUED

Taxation

Current tax, including UK corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively 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 substantively enacted by the balance sheet date.

Deferred tax is measured on a non-discounted basis.

Financial instruments and borrowings

The Company's accounting policies for financial instruments and borrowings 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 – Governance on pages 41 to 42 and in note 4 to the Group Financial Statements.

The Company is exempted by FRS 29 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 the notes to the Group Financial Statements.

II. DIRECTORS AND EMPLOYEES

Included within the Company's profit and loss account for the year are wages and salaries costs of £42 million (2007: £74 million), social security costs of £4 million (2007: £7 million), share scheme costs of £8 million (2007: £8 million) and other pension and retirement benefit costs of £27 million (2007: £17 million).

Details of Directors' remuneration, share-based payments and pension entitlements in the Remuneration Report on pages 44 to 55 form part of these Financial Statements. Details of employee share-based payments are given in note 33. Details of the remuneration of key management personnel are given in note 37.

The average number of employees of the Company during the year was 631 (2007: 1,174), whom were primarily employed in the UK.

III. TANGIBLE FIXED ASSETS

	Plant, equipment and vehicles £m
Cost
1 January 2008	79
Additions	5
31 December 2008	84
Depreciation and amortisation
1 January 2008	36
Charge for the year	13
31 December 2008	49
Net book value
31 December 2008	35
31 December 2007	43

IV. INVESTMENTS IN SUBSIDIARY UNDERTAKINGS

31 December 2008	2,091
Additions and disposals (i)	11
1 January 2008	2,080
Cost
	Investments in subsidiaries' shares £m

(i) Additions and disposals represent the net change in shares to be issued under employee share schemes in Group undertakings.

V. DEBTORS

			2008			2007
	Due within one year £m	Due after more than one year £m	Total £m	Due within one year £m	Due after more than one year £m	Total £m
Amounts owed by Group undertakings	7,933	–	7,933	5,545	–	5,545
Derivative financial instruments (i)	60	138	198	11	–	11
Other debtors	18	–	18	4	–	4
Prepayments and other accrued income	13	–	13	11	–	11
	8,024	138	8,162	5,571	–	5,571

(i) Derivative financial instruments comprise foreign currency derivatives held for trading of £40 million (2007: £9 million), interest rate derivatives held for trading of £2 million (2007: £2 million), interest rate derivatives held for hedging of £62 million (2007: £nil) and foreign currency derivatives held for hedging of £94 million (2007: £nil). The fair value of these derivatives is equivalent to the carrying value.

Notes to the Company Balance Sheet continued

VI. CURRENT ASSET INVESTMENTS

	2008 £m	2007 £m
Money market investments	2,842	1,066

£26 million (2007: £30 million) of investments were held by the Law Debenture Trust, on behalf of the Company, as security in respect of the Centrica Unapproved Pension Scheme (note 34 to the Group Financial Statements).

VII. BORROWINGS

		2008		2007
Amounts falling due	Within one year £m	After one year £m	Within one year £m	After one year £m
Bank loans and overdrafts	40	422	36	259
Bonds	253	2,413	131	1,119
Commercial paper	4	–	–	–
	297	2,835	167	1,378

The Company's financial instruments and related disclosures are included within the consolidated accounts of the Group. In accordance with the requirements of FRS 29, further detailed disclosure in respect of the Company is not included. Disclosures in respect of the Group's borrowings are provided in note 25 to the Group Financial Statements.

VIII. OTHER CREDITORS

		2008		2007
	Due within one year £m	Due after more than one year £m	Due within one year £m	Due after more than one year £m
Trade creditors	17	–	19	–
Amounts owed to Group undertakings	4,597	–	3,671	–
Derivative financial instruments (i)	309	4	68	–
Taxation and social security	1	–	2	–
Accruals and deferred income	46	–	70	–
	4,970	4	3,830	–

(i) Derivative financial instruments comprise foreign currency derivatives held for trading of £213 million (2007: £39 million), interest rate derivatives held for trading of £19 million (2007: £5 million) interest rate derivatives held for hedging of £4 million (2007: £7 million) and foreign currency derivatives held for hedging of £77 million (2007: £17 million). The fair value of these derivatives is equivalent to the carrying value.

IX. PROVISIONS FOR LIABILITIES AND CHARGES

	1 January 2008 £m	Profit and loss charge £m	Utilised in the year £m	Unused and released £m	31 December 2008 £m
Other provisions	13	1	(3)	(1)	10
Deferred tax	–	7	–	–	7
	13	8	(3)	(1)	17

Potential unrecognised deferred corporation tax assets amounted to £6 million (2007: £14 million), primarily relating to unused tax losses. The Company does not expect to be able to utilise these losses within the foreseeable future.

Other provisions principally represent estimated liabilities for contractual settlements and National Insurance in respect of employee share scheme liabilities. The National Insurance provision was based on a share price of 266.00 pence at 31 December 2008 (2007: 319.21 pence adjusted for the Rights Issue). The majority of the amounts are expected to be utilised between 2009 and 2011.

X. RESERVES

	Share premium account £m	Merger reserve £m	Capital redemption reserve £m	Cash flow hedging reserve £m	Profit and loss reserve £m	Total £m
1 January 2008	685	–	16	4	2,441	3,146
Loss for the year (i)	–	–	–	–	(93)	(93)
Gains on revaluation of cash flow hedges	–	–	–	17	–	17
Deferred tax on revaluation gains	–	–	–	(7)	–	(7)
Dividends	–	–	–	–	(500)	(500)
Employee share schemes:
Increase in treasury shares	–	–	–	–	(9)	(9)
Value of services provided	–	–	–	–	40	40
Exercise of awards	–	–	–	–	(24)	(24)
Rights Issue (ii)	–	2,078	–	–	–	2,078
Transfer (ii)	–	(2,078)	–	–	2,078	–
Share issue	44	–	–	–	–	44
31 December 2008	729	–	16	14	3,933	4,692

(i) As permitted by section 230(3) of the Companies Act 1985, no profit and loss account is presented. The Company's loss for the year was £93 million (2007: profit of £5 million) before dividends paid of £500 million (2007: £417 million).

(ii) Details of the Rights Issue are provided in notes 5, 29 and 30 of the Group Financial Statements.

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

	Treasury shares £m	Share-based payments reserve £m	Other £m	Profit and loss reserve £m
1 January 2008	(2)	51	2,392	2,441
Loss for the year (i)	–	–	(93)	(93)
Dividends	–	–	(500)	(500)
Employee share schemes:
Increase in treasury shares	(9)	–	–	(9)
Value of services provided	–	40	–	40
Exercise of awards	1	(25)	–	(24)
Transfer	–	–	2,078	2,078
31 December 2008	(10)	66	3,877	3,933

(i) Includes a £1 million loss on re-measurement of interest rate derivatives and bonds designated as the hedged item (2007: £1 million gain) and a £138 million loss on re-measurement of foreign currency derivatives (2007: £2 million loss). Further details of the Company's interest rate and foreign currency derivatives are included within the financial instrument disclosures in notes 4, 21 and 22 to the Group Financial Statements.

Notes to the Company Balance Sheet continued

XI. MOVEMENTS IN SHAREHOLDERS' FUNDS

	2008 £m	2007 £m
1 January	3,373	3,731
(Loss)/profit attributable to the Company	(93)	5
Gains on revaluation of cash flow hedges	17	3
Deferred tax on revaluation gains	(7)	–
Dividends paid to shareholders	(500)	(417)
Employee share schemes:
Increase in treasury shares	(9)	(2)
Value of services provided	40	31
Exercise of awards	(24)	(7)
Rights Issue	2,164	–
Share issue	46	29
Net movement in shareholders' funds for the financial year	1,634	(358)
31 December	5,007	3,373

The Directors propose a final dividend of 8.73 pence per share (totalling £446 million) for the year ended 31 December 2008. The dividend will be submitted for formal approval at the Annual General Meeting to be held on 11 May 2009. 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 2009.

Details of the Company's share capital are provided in notes 29 and 30 to the Group Financial Statements.

XII. COMMITMENTS AND INDEMNITIES

(a) Other commitments

At 31 December 2008, the Company had commitments of £169 million (2007: £138 million) relating to contracts with outsource service providers. Other commitments at 31 December amount to £nil (2007: £7 million).

(b) Lease commitments

At 31 December 2008, there were £1 million of land and buildings and £1 million of vehicle lease commitments in relation to the annual value of non-cancellable operating leases for the Company expiring in one to five years (2007: £1 million and £1 million respectively). The Company has guaranteed operating commitments of a subsidiary undertaking at 31 December 2008 of £7 million (2007: £7 million) in respect of land and buildings.

(c) Guarantees and indemnities

Refer to note 36(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 2008, the credit risk exposure under financial guarantees issued by Centrica plc was £2,558 million (2007: £1,487 million).