Notes 1-10

1 Principal accounting policies

Accounting principles

The financial statements have been prepared in accordance with applicable accounting standards and under the historical cost convention and the Companies Act 1985 except for the accounting policy for energy trading activities; further details explaining this departure are in note 2. In accordance with the transitional arrangements of FRS 17 Retirement Benefits, additional disclosures are contained in the notes to the financial statements.

The accounting policies, where applicable, are materially in accordance with the SORP issued by the Oil Industry Accounting Committee entitled Accounting for Oil and Gas Exploration, Development, Production and Decommissioning Activities.

Basis of preparation

The group financial statements comprise a consolidation of the accounts of the company and all of its subsidiary undertakings and incorporate the results of its share of all joint ventures and associates. The results of undertakings acquired are consolidated from the date the group gains control. No profit and loss account is presented for the company as permitted by Section 230(3) of the Companies Act 1985.

An associated undertaking (associate) is an entity in which the group has a long term equity interest and over which it exercises significant influence. The consolidated financial statements include the group portion of the operating profit or loss, exceptional items, interest, taxation and net assets of associates (the equity method).

A joint venture is an entity in which the group has a long term interest and shares control with one or more co-venturers. The consolidated financial statements include the group portion of turnover, operating profit or loss, exceptional items, interest, taxation, gross assets and gross liabilities of the joint venture (the gross equity method).

Under FRS 5 Reporting the Substance of Transactions, the Consumers’ Waterheater Income Fund has been consolidated as a quasi-subsidiary.

Turnover

Turnover represents amounts receivable for goods and services provided in the normal course of business, net of trade discounts, VAT and other sales related taxes.

Energy supply: Turnover for energy supply activities includes an assessment of energy supplies 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 and is included in accrued energy income within debtors.

Home services: 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 turnover.

AA road services: Membership subscriptions are apportioned on a time basis over the period of the membership.

Financial services: Turnover includes interest receivable, fees and commissions receivable from financial services activities.

Telecommunications: Turnover is recognised on the basis of telephony services actually provided to customers in the financial period.

Cost of sales

Energy supply includes the cost of gas and electricity produced and purchased, and related transportation and royalty costs, bought in materials and services, and direct labour and related overheads on installation works, repairs and service contracts. Gas production costs include petroleum revenue taxes (PRT), calculated on a unit of production basis, with changes in estimates dealt with prospectively over the remaining lives of gas fields. Financial services cost of sales also includes finance charges on working capital facilities used to finance banking receivables, and interest payable on customer deposits.

Employee share schemes

The group has a number of employee share schemes, detailed in the directors’ report. As permitted by UITF Abstract 17, the group does not recognise the difference between market value and option price to employees in relation to the UK sharesave scheme within the profit and loss account, on the basis that the scheme is UK Inland Revenue-approved. Upon vesting, the difference between market value and the option price is taken directly to reserves. The cost of potential share awards under the group’s long term incentive schemes is charged to the profit and loss account over the period to which the performance criteria of each allocation relates. Cost is defined as the difference between the contribution receivable from employees and the market value at the date of grant, or the actual cost of shares where market purchases are made at, or around, grant date. Cost also includes provision for employer’s National Insurance charges expected to arise at exercise dates.

Research and development expenditure

Research and development expenditure is charged to the profit and loss account as incurred.

Foreign currencies

Assets and liabilities denominated in foreign currencies are translated into sterling at closing rates of exchange. The results of overseas subsidiary undertakings and joint ventures are translated into sterling at average rates of exchange for the relevant period. Differences resulting from the retranslation of the opening net investment in overseas subsidiary undertakings and from the retranslation of the opening net assets and the results of these entities for the year are taken to reserves, and are reported in the statement of total recognised gains and losses.

Exchange differences on monetary assets and liabilities are taken to the profit and loss account, except that exchange differences on foreign currency borrowings used to finance or hedge foreign currency net investments in overseas subsidiary undertakings and joint ventures are taken directly to reserves and are reported in the statement of total recognised gains and losses. All other exchange movements are dealt with through the profit and loss account.

Intangible fixed assets

Goodwill arising on the acquisition of a business acquired after 1 January 1998 is included in the balance sheet at cost, less accumulated amortisation and any provisions for impairment. On the acquisition of a subsidiary undertaking (including unincorporated businesses), joint venture or associate, fair values are attributed to the assets and liabilities acquired. Goodwill, which represents the difference between the purchase consideration and the fair values of those net assets, is capitalised and amortised on a straight-line basis over a period which represents the directors’ estimate of its useful economic life. Goodwill which arose on acquisitions after 1 January 1998 is being amortised over periods ranging from 5 to 20 years. Goodwill which arose prior to 1998 was written off directly to the profit and loss reserve. If an undertaking is subsequently disposed, the appropriate unamortised goodwill or goodwill written off to reserves is dealt with through the profit and loss account in the period of disposal as part of the gain or loss on disposal.

Tangible fixed assets

Tangible fixed assets are included in the balance sheet at cost, less accumulated depreciation and any provisions for impairment.

In the case of investments in customer relationship management (CRM) and other technology infrastructure, cost includes contractors’ charges, payments on account, materials, direct labour and directly attributable overheads. Capitalisation begins when expenditures for the asset are being incurred and activities that are 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. Depreciation commences at the point of commercial deployment.

Freehold land is not depreciated. Other tangible fixed assets, except exploration and 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 buildingsup to 50 years Plant 5 to 20 years Power stations20 years Equipment and vehicles 3 to 10 years Storage up to 30 years

Assets held under finance leases are depreciated over the shorter of the lease term or their useful economic life.

Exploration and production assets are capitalised using the successful efforts method and depreciated from the commencement of production in the fields concerned, using the unit of production method, based on all of the proven and probable developed reserves of those fields. Changes in these estimates are dealt with prospectively. The net carrying value of fields in production is compared on a field-by-field basis with the likely future net revenues to be derived from the estimated remaining commercial reserves. A provision is made where it is considered that recorded amounts are unlikely to be fully recovered from the net present value of future net revenues.

Leases

Assets held under finance leases are capitalised and included in tangible fixed assets at cost. The obligations relating to finance leases, net of finance charges in respect of future periods, are included within borrowings. The interest element of the rental obligation is allocated to accounting periods during the lease term to reflect the constant rate of interest on the remaining balance of the obligation for each accounting period. Rentals under operating leases are charged to the profit and loss account as incurred.

Asset impairments

Intangible and tangible fixed assets are reviewed for impairments if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount is assessed by reference to the net present value of expected future cash flows of the relevant income generating unit or disposal value, if higher. If an asset is impaired, a provision is made to reduce the carrying amount to its estimated recoverable amount.

Investments

Other fixed asset investments are included in the balance sheet at cost, less accumulated provisions for amortisation and any impairment.

Current asset investments are stated at the lower of cost and net realisable value.

Stocks

Stocks are valued at the lower of cost or 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 are included within debtors.

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 decommissioning storage facilities at the end of the useful life of storage facilities based on price levels and technology at the balance sheet date. Changes in these estimates are dealt with prospectively.

When this provision gives access to future economic benefits, an asset is recognised. Decommissioning assets are amortised using the unit of production method, based on proven and probable reserves, except for decommissioning assets relating to storage facilities, which are amortised on a straight-line basis over the useful economic life of the storage facilities. The unwinding of the discount on the provision is included in the profit and loss account within the net interest charge.

Pensions and other post retirement benefits

Pensions and other post retirement benefits are accounted for in accordance with SSAP 24 Pension Costs. Additional disclosures are also made in the notes to the financial statements as required under the transitional arrangements set out in FRS 17 Retirement Benefits. The cost of providing retirement pensions and other benefits is charged to the profit and loss account over the periods benefiting from employees’ service. The difference between the charge to the profit and loss account and the contributions paid to the pension schemes is shown as a provision in the balance sheet. The regular pension cost, variations from the regular pension cost and interest are all charged within employee costs, and the straight-line method is applied for amortising surpluses and interest.

Long term sales contracts

Provision is made for the net present cost, using a risk free discount rate, of any expected losses on long term sales contracts. The provision is based on the difference between the contracted sales price and the expected weighted average cost of gas.

Taxation

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

Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the group’s taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements.

A deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits in the foreseeable future from which the reversal of the underlying timing differences can be deducted.

Deferred tax is not recognised when fixed assets are revalued unless by the balance sheet date there is a binding agreement to sell the revalued assets and the gain or loss expected to arise on sale has been recognised in the financial statements. Neither is deferred tax recognised when fixed assets are sold and it is more likely than not that the taxable gain will be rolled over, being charged to tax only if and when the replacement assets are sold.

Deferred tax is recognised in respect of the retained earnings of overseas subsidiaries and associates only to the extent that, at the balance sheet date, dividends have been accrued as receivable or a binding agreement to distribute past earnings in the future has been entered into by the subsidiary or associate.

Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date.

Deferred tax is measured on a non-discounted basis.

Financial instruments

a) Debt instruments

Debt instruments are stated at the amount of net proceeds received after deduction of issue costs, adjusted to amortise any discount or premium evenly over the term of the debt.

b) Derivative financial instruments

The group uses a range of derivative financial instruments for both trading purposes and to manage (hedge) exposures to financial risks, such as interest rate, foreign exchange and energy price risks arising in the normal course of business. The accounting treatment for these instruments is dependent on whether they are entered into for trading or non-trading (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. In addition, there must be a demonstrable link to an underlying transaction, pool of transactions or specified future transaction or transactions. Specified future transactions must be reasonably certain to arise for the derivative to be accounted for as a hedge.

A discussion on how the group manages its financial risks is included in the group financial review.

Derivative financial instruments are accounted for as follows:

Energy trading activities

The group engages in swaps, futures, forwards and options in gas, electricity and weather, for trading purposes. Open financial and physical trading positions are marked to market using externally derived market prices. Marked to market gains and losses are recognised immediately in the profit and loss account, within cost of sales. This is a departure from the Companies Act 1985 as disclosed within note 2. The corresponding fair value debtors or creditors are included within the balance sheet.

Energy hedging activities

The group engages in gas, electricity, oil and weather derivatives to hedge against price exposures arising within the energy supply, procurement and retail operations. The derivatives are matched to the specific exposures they are designed to reduce, with gains and losses recognised in the profit and loss account in the same period as the income and costs of the underlying hedged transactions.

Treasury hedging activities

The group uses interest rate swaps, forward rate agreements, foreign currency swaps and forward exchange contracts to manage exposures to interest rates arising on underlying debt and cash positions or probable future commitments and foreign exchange risks arising on foreign currency assets and borrowings, foreign currency forecasted transactions and the retranslation of overseas net investments. All instruments are used for hedging purposes to alter the risk profile on existing underlying exposures and probable future commitments in line with the group’s risk management policies.

Amounts payable or receivable in respect of interest rate swaps and forward rate agreements are recognised as adjustments to the net interest charge over the term of the contracts.

Currency swap agreements and forward exchange contracts are retranslated at the rates ruling in the agreements and contracts. Resulting gains or losses are offset against foreign exchange gains or losses on the related borrowings or, where the instrument is used to hedge a committed future transaction, are deferred until the transaction occurs. Where used to hedge overseas net investments, gains or losses are recorded in the statement of total recognised gains and losses, with interest recorded in the profit and loss account.

Where derivatives used to manage interest rate risk or to hedge other anticipated cash flows are terminated before the underlying debt matures or the hedged transaction occurs, the resulting gain or loss is recognised on a basis that matches the timing and accounting treatment of the underlying debt or hedged transaction. When an anticipated transaction is no longer likely to occur or finance debt is terminated before maturity, any deferred gain or loss that has arisen on the related derivative is recognised in the profit and loss account, together with any gain or loss on the terminated item.

2 Accounting policy for energy trading activities

Energy trading financial derivatives and open positions on physical energy trading contracts are marked to market using externally derived market prices. This is not in accordance with the general provisions of Schedule 4 of the Companies Act 1985, which requires that these contracts be stated at the lower of cost and net realisable value or that, if revalued, any revaluation difference be taken to a revaluation reserve. However, the directors consider that these requirements would fail to provide a true and fair view of the profit for the year since the marketability of energy trading contracts enables decisions to be taken continually whether to hold or sell them. Accordingly the measure of profit in any period is properly made by reference to market values. The effect of the departure on the financial statements is an increase in profit for the year amounting to £7 million (2001: £2 million) and an increase in net assets at 31 December 2002 amounting to £9 million (2001: £2 million).

3 Segmental analysis

The segmental analysis reflects, in the opinion of the directors, how the group’s activities were managed during the year. The segmental analysis has changed from last year in order to reflect the brand unit divisions that are now utilised in the day-to-day management of the business. These have been structured to mirror the brand focused customer relationships that are at the core of the Centrica business model(iv). All activities were continuing.

	2002	2001	2002	2001	2002	2001	2002	2001
a) By business segment	Turnover year ended 31 December		Operating profit/(loss) before exceptional charges and goodwill amortisation, including share of results of joint ventures and associates year ended 31 December		Operating profit/(loss) after exceptional charges and goodwill amortisation, including share of results of joint ventures and associates year ended 31 December		Net assets/(liabilities) 31 December
	£m	£m	£m	£m	£m	£m	£m	£m
British Gas residential:
Continuing operations	6,047	5,909	244	(46)	243	(81)	347	257
Acquisitions(ii)	–		–		–		–
	6,047	5,909	244	(46)	243	(81)	347	257
Centrica Business Services:
Continuing operations	883	581	64	44	60	37	267	235
Acquisitions(ii)	88		1		(1)		86
	971	581	65	44	59	37	353	235
Centrica energy management group (CEMG):
Continuing operations(i)(v)	5,160	4,571	522	573	522	543	265	25
Acquisitions(ii)	11		(2)		(2)		439
	5,171	4,571	520	573	520	543	704	25
The AA:
Continuing operations	758	689	74	72	24	8	682	746
Acquisitions(ii)	2		(1)		(1)		3
	760	689	73	72	23	8	685	746
Goldfish Bank:
Continuing operations	93	22	(40)	(32)	(54)	(37)	181	112
Acquisitions(ii)	–		–		–		–
	93	22	(40)	(32)	(54)	(37)	181	112
One.Tel:
Continuing operations	151	65	5	4	1	5	54	59
Acquisitions(ii)	2		(3)		(5)		(1)
	153	65	2	4	(4)	5	53	59
Centrica North America:
Continuing operations	909	768	36	68	5	39	611	652
Acquisitions(ii)	209		27		19		581
	1,118	768	63	68	24	39	1,192	652
Other operations:	2	6	5	(4)	(2)	(3)	49	53
Unallocated net liabilities(iii)							(1,162)	(603)
Group	14,315	12,611	932	679	809	511	2,402	1,536

b) By geographical area of operation
UK:
Continuing operations	13,079	11,831	879	609	805	472	1,794	1,436
Acquisitions(ii)	103		(5)		(9)		527
	13,182	11,831	874	609	796	472	2,321	1,436
Rest of Europe:
Continuing operations	15	12	(5)	2	(11)	–	51	51
North America:
Continuing operations	909	768	36	68	5	39	611	652
Acquisitions(ii)	209		27		19		581
	1,118	768	63	68	24	39	1,192	652
Unallocated net liabilities(iii)							(1,162)	(603)
Group	14,315	12,611	932	679	809	511	2,402	1,536

	2002	2001
		Turnover
c) By geographical destination	£m	£m
UK:
Continuing operations	12,598	11,226
Acquisitions(ii)	103
	12,701	11,226
Rest of Europe:
Continuing operations	496	607
North America:
Continuing operations	909	776
Acquisitions(ii)	209
	1,118	776
Rest of world:
Continuing operations	–	2
Group	14,315	12,611
(i) Turnover includes energy trading turnover of £4,304 million (2001: £3,570 million). (ii) Acquisitions are explained in note 24. (iii) Unallocated net liabilities comprised:

	2002	2001
	£m	£m
Fixed asset investments	26	52
Accrued interest payable	(7)	(2)
Dividends payable	(110)	(76)
Taxation	(346)	(144)
Debt, net of cash and money market investments
(except for the Goldfish Bank working capital facility)	(725)	(433)
	(1,162)	(603)
The group’s share of operating losses of associates before exceptional charges and goodwill amortisation for the year ended 31 December 2002 was £1 million (2001: £nil) and after exceptional charges and goodwill amortisation for the year ended 31 December 2002 was a loss of £2 million (2001: loss of £1 million).

The group’s share of turnover and operating profits of joint ventures for the year ended 31 December 2002 was:

	2002	2001	2002	2001	2002	2001
	Turnover		Operating profit/(loss) before exceptional charges and goodwill amortisation		Operating profit/(loss) after exceptional charges and goodwill amortisation
	£m	£m	£m	£m	£m	£m
British Gas residential	25	24	2	2	2	2
Centrica energy management group (CEMG)	77	142	40	28	40	28
The AA	63	51	16	17	16	17
Goldfish Bank	–	11	–	–	–	–
Other operations	42	1	(4)	–	(10)	(1)
	207	229	54	47	48	46
(iv) The effect of this change on the 2001 segmental analysis of turnover was to split the turnover of the previously reported UK Energy Supply segment of £10,302 million into British Gas residential, Centrica Business Services and Centrica energy management group, to include British Gas home services turnover of £722 million and Telecommunications turnover (excluding One.Tel) of £37 million within British Gas residential, to combine AA road services and AA personal finance to form the AA segment and to reallocate turnover previously reported in other businesses of £62 million to the AA. The effect on the 2001 segmental analysis of operating profit before exceptional charges and goodwill amortisation was to split the operating profit of the previously reported UK Energy Supply segment of £652 million into British Gas residential, Centrica Business Services and Centrica energy management group, to include British Gas home services operating profit of £36 million and Telecommunications operating loss (excluding One.Tel) of £101 million within British Gas residential, to combine AA road services and AA personal finance to form the AA segment and to reallocate operating losses previously reported in other businesses to British Gas residential of £16 million and to the AA of £2 million. The effect on the 2001 segmental analysis of operating profit after exceptional charges and goodwill amortisation was to split the operating profit of the previously reported UK Energy Supply segment of £601 million into British Gas residential, Centrica Business Services and Centrica energy management group, to include British Gas home services operating profit of £30 million and Telecommunications operating loss (excluding One.Tel) of £116 million within British Gas residential, to combine AA road services and AA personal finance to form the AA segment, and to reallocate operating losses previously reported in other businesses to British Gas residential of £16 million and to the AA of £2 million. The effect on the 2001 segmental analysis of net assets was to split the net assets of the previously reported UK Energy Supply segment of £678 million into British Gas residential, Centrica Business Services and Centrica energy management group, to include British Gas home services net liabilities of £162 million within British Gas residential, to combine AA road services and AA personal finance to form the AA segment, and to reallocate net assets of £1 million previously reported in other businesses to British Gas residential, and to reallocate net liabilities of £4 million previously reported in other businesses to the AA. (v) Inter-segment transfers from Centrica energy management group to British Gas residential and Centrica Business Services totalled £4,142 million (2001: £4,363 million).

4 Costs

	2002			2001
	Goodwill amortisation & exceptional charges £m	Other costs £m	Total £m	Goodwill amortisation & exceptional charges £m	Other costs £m	Total £m
Cost of sales(i):
Continuing operations
before acquisitions	–	11,141	11,141	–	10,224	10,224
Acquisitions	–	187	187
Continuing operations	–	11,328	11,328	–	10,224	10,224

Operating costs(i):
Continuing operations
before acquisitions	104	2,005	2,109	166	1,755	1,921
Acquisitions	12	103	115
Continuing operations	116	2,108	2,224	166	1,755	1,921
Total costs recognised in arriving at group operating profit	116	13,436	13,552	166	11,979	12,145
Gross profit attributable to acquisitions amounted to £125 million, and to continuing operations before acquisitions £2,862 million.


	2002	2001
	£m	£m
Group operating profit is stated after charging:
Amortisation of goodwill	116	86
Amortisation of fixed asset investments	7	14
Depreciation:
Owned assets(ii)	357	331
Leased assets	33	26
	390	357

Profit on disposal of fixed assets (iii)	18	13

Operating lease rentals:
Plant and machinery	31	7
Other	42	22
	73	29
Auditors’ remuneration:
Statutory audit
Company	0.2	0.2
Subsidiary undertakings	1.5	1.4
Other audit	1.2	0.9
Other non-audit (iv)	6.3	7.1
	9.2	9.6
(i) Gas transportation costs of £1,459 million (2001: £1,759 million) and electricity transportation and distribution charges of £647 million (2001: £395 million) were included within cost of sales. Operating costs were all considered to be administrative expenses. (ii) Depreciation and amortisation of owned assets for the year ended 31 December 2002 included £nil (2001: £25 million) of asset impairment. Of this impairment charge, £nil (2001: £20 million) has been treated as exceptional. (iii) The profit on disposal of tangible fixed assets was £6 million (2001: £7 million) and profit on sale of fixed asset investments (against the previously impaired cost of the investment) was £12 million (2001: £6 million). (iv) It is the group’s policy to seek competitive tenders for all major consultancy and advisory projects. Appointments are made taking into account other factors including expertise and experience. 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. Other charges comprised due diligence of £0.5 million (2001: £2.1 million), taxation advice of £0.6 million (2001: £1.2 million) and consulting projects of £5.2 million (2001: £3.8 million), including amounts of £5 million (2001: £3 million) paid to the consulting business of the auditors prior to its sale in October 2002.

5 Exceptional items

	2002	2001
a) Recognised in arriving at operating profit	£m	£m
Continuing operations:
Business integration costs	–	(35)
Energy trading costs	–	(37)
Other	–	(8)
Total recognised in arriving at operating profit	–	(80)

	2002	2001
b) Recognised after operating profit	£m	£m
Continuing operations:
Loss on disposal of business(i)	(14)	–
Loss on disposal of fixed assets(ii)	(14)	–
Total recognised after operating profit	(28)	–
(i) During the year the group recognised a £14 million loss on disposal of the LPG business. The loss included £11 million relating to the write-off of unamortised goodwill, further information of which is provided in note 24. (ii) The group decided to reduce the operations of Golf England Limited, a subsidiary undertaking, and recognised a £14 million provision in respect of losses on disposal of fixed assets.

6 Directors and employees

a) Employee costs	£m	£m
a) Employee costs	2002	2001
Wages and salaries	905	716
Social security costs	73	59
Other pension and retirement benefits costs (note 26)	68	54
Long term incentive scheme	11	14
Employee Profit Sharing Scheme	–	6
	1,057	849

Details of directors’ remuneration, share options, long term incentive scheme interests and pension entitlements in the remuneration report form part of these financial statements. Details of employee share schemes are given in the directors' report and note 20.

b) Average number of employees during the year	Number	Number
b) Average number of employees during the year	2002	2001
British Gas residential	19,584	17,546
Centrica Business Services	842	368
Centrica energy management group (CEMG)	585	450
The AA	11,640	9,911
Goldfish Bank	189	59
One.Tel	740	638
Centrica North America	2,187	438
Other operations	2,284	2,140
	38,051	31,550
Great Britain	35,563	30,832
North America	2,187	438
Rest of Europe	301	280
	38,051	31,550

7 Net interest

	Interest payable £m	Interest receivable £m	Total £m	Interest payable £m	Interest receivable £m	Total £m
	2002			2001
Cost of servicing net debt (excluding Goldfish Bank)
Interest receivable by the parent and subsidiary companies	–	16	16	–	23	23
Interest payable on bank loans and overdrafts	(40)	–	(40)	(24)	–	(24)
Finance lease charges	(11)	–	(11)	(14)	–	(14)
	(51)	16	(35)	(38)	23	(15)
Other interest
Share of joint ventures’ interest payable (i)	(15)	–	(15)	(11)	–	(11)
Notional interest arising on discounted items	(15)	–	(15)	(12)	–	(12)
Interest on supplier early payment arrangements (ii)	–	13	13	–	11	11
Interest on customer finance arrangements (iii)	(7)	–	(7)	(8)	–	(8)
Other	(3)	–	(3)	(8)	–	(8)
	(40)	13	(27)	(39)	11	(28)
Interest (payable)/receivable	(91)	29	(62)	(77)	34	(43)
Product income generated by AA personal finance and Goldfish financial services for the year ended 31 December 2002 was £100 million (2001: £23 million), £69 million of the increase related to the inclusion of Goldfish financial services as a subsidiary of the group for a full year. Financial services product charges were £33 million (2001: £nil). This related entirely to Goldfish financial services. Both financial services income and charges have been included within group operating profit.
(i) The share of associates’ interest (payable)/receivable is £nil (2001: £nil). (ii) Interest on supplier early payment arrangements arose on the prepayment of gas transportation charges. (iii) The interest cost relates to subsidised credit arrangements provided to customers purchasing central heating installation.

8 Tax

	2002	2001
	£m	£m
a) Analysis of tax charge for the year
The tax charge comprises:
Current tax
UK corporation tax	148	157
Tax on exceptional items(i)	(2)	(9)
Adjustments in respect of prior years	16	(43)
	162	105
Foreign tax
Foreign tax	17	6
Adjustments in respect of prior years	–	(2)
	17	4
Total current tax	179	109
Deferred tax
Origination and reversal of timing differences	(9)	(10)
Deferred petroleum revenue tax relief	55	49
Exceptional deferred tax charge(ii)	9	–
Total deferred tax	55	39
Share of joint ventures’ tax	16	7
Total tax on profit on ordinary activities	250	155
(i) The tax credit arising on exceptional items related to those costs identified as exceptional in note 5. (ii) The exceptional tax charge in 2002 comprised an increase in deferred tax provisions arising from the supplementary charge applicable to profits on ‘ring-fenced’ offshore gas production.

	£m	£m
b) Factors affecting the tax charge for the year The differences between the total current tax shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax is as follows:
	2002	2001
Profit on ordinary activities before tax	719	468
Less: share of joint ventures’ and associates’ profit before tax	(31)	(34)
Group profit on ordinary activities before tax	688	434
Tax on group profit on ordinary activities at standard UK corporation tax rate of 30% (2001: 30%)	207	130
Effects of:
Expenses not deductible for tax purposes, including goodwill amortisation	51	61
Depreciation in excess of capital allowances	7	50
Utilisation of tax losses and other short term timing differences	(82)	(40)
Deferred petroleum revenue tax relief	(55)	(49)
Higher tax rates on overseas earnings	6	2
Adjustments to tax charge in respect of prior years	16	(45)
Supplementary charge applicable to upstream profits	12	–
Overseas losses or taxation not available for credit	17	–
Group current tax charge for the year	179	109
c) Factors that may affect future tax charges 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, currently 30%. Fair values are attributed to fixed assets on acquisition of businesses and companies and amortisation or depreciation is subsequently provided based upon those amounts.Were the assets to be sold at the book values at the balance sheet date without the benefit of tax planning arrangements, the amount of tax that would be payable is estimated in aggregate to be £168 million of which £146 million is provided in the balance sheet as deferred tax. There is, however, no intention to sell any of these assets in the foreseeable future and therefore the crystallisation of the above tax charge is considered to be remote.

9 Dividends

	£m	£m
	2002	2001
2001 final dividend in respect of share issues after the balance sheet date	3	–
Interim dividend of 1.4p (2001: 1.2p) per ordinary share	59	48
Proposed final dividend of 2.6p (2001: 1.9p) per ordinary share	110	76
	172	124

The interim dividend was paid on 27 November 2002 and the proposed final dividend is payable on 18 June 2003 to shareholders on the register at the close of business on 2 May 2003.

10 Earnings per ordinary share

Earnings per ordinary share has been calculated by dividing the earnings for the financial year of £478 million (2001: £323 million) by the weighted average number of ordinary shares in issue during the year of 4,181 million (2001: 3,984 million). The number of shares excluded 27 million ordinary shares (2001: 34 million), being the weighted average number of the company’s own shares recorded on the group balance sheet during the year in accordance with UITF Abstract 13 ESOP Trusts.

The directors believe that the presentation of an adjusted basic earnings per ordinary share, being the basic earnings per ordinary share adjusted for exceptional charges and goodwill amortisation, assists with understanding the underlying performance of the group. The reconciliation of basic to adjusted basic earnings per ordinary share is as follows:

	£m	Pence per ordinary share	£m	Pence per ordinary share
	2002		2001
Earnings – basic	478	11.4	323	8.1
Exceptional items net of tax	35	0.9	71	1.8
Goodwill amortisation	123	2.9	88	2.2
Earnings – adjusted basic	636	15.2	482	12.1
Earnings – diluted	478	11.3	323	8.0

In addition to basic and adjusted basic earnings per ordinary share, information is presented for diluted earnings per ordinary share. Under this presentation, there are no adjustments to the reported earnings for either 2002 or 2001, but the weighted average number of shares used as the denominator is adjusted. The adjustments relate mainly to notional share awards made to employees under the long term incentive scheme and the share options granted to employees under the savings-related share option scheme, as follows:

	2002 million shares	2001 million shares
Weighted average number of shares in issue	4,181	3,984
Estimated vesting of long term incentive scheme shares	35	34
Dilutive effect of shares to be issued at a discount to market value
under the savings-related share option scheme	10	43
Potentially dilutive shares issuable under the executive share option scheme	1	1
Weighted average number of shares used in the calculation of diluted earnings per ordinary share	4,227	4,062

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Annual Report 2002