Equity minority interests at 31 December 2002 related to a 30% economic interest held by Lloyds TSB Bank plc in the Goldfish Bank Limited. Non-equity minority interests at 31 December 2002 related to the 58.1% of units in the Consumers’ Waterheater Income Fund (note 32), listed on the Toronto Stock Exchange.

24 Acquisitions and disposals

(i) Acquisitions

During the year the group acquired controlling interests in Enbridge Services Inc, Regional Power Generators Ltd (Regional Power), Electricity Direct (UK) Limited (Electricity Direct), Dynegy Storage Limited, Dynegy Offshore Processing UK Limited, and Dynegy Onshore Processing UK Limited (collectively known as Rough gas storage facilities), WTU Retail Energy LP (WTU) and CPL Retail Energy LP (CPL) and selected assets from NewPower Holdings Inc (NewPower). The group also made a number of smaller acquisitions which are aggregated in section h. The acquisition method of accounting was adopted in all cases. The analysis of assets and liabilities acquired, and the fair value of these acquisitions, were as shown below. In addition the group acquired interests in a number of gas fields, in exchange for its interest in the Liverpool Bay gas fields. The fair values at 31 December 2002 are provisional because the directors have not yet reached a final determination on all aspects of the fair value exercise.

(ii) Disposals

The group disposed of its liquid petroleum gas business, British Gas LPG on 30 November 2002. The analysis of the assets and liabilities sold and consideration received is given below:

26 Pensions

Substantially all of the group’s UK employees at 31 December 2002 were members of one of the four main schemes in the group: the Centrica Staff Pension Scheme, the Centrica Engineers’ Pension Scheme, the Centrica Management Pension Scheme and the AA Staff Pension Scheme. They are subject to independent valuations at least every three years, on the basis of which the qualified actuary certifies the rate of employers’ 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’.

Independent actuarial valuations for Statement of Standard Accounting Practice (SSAP) 24 purposes at 31 March 2001 showed aggregate actuarial asset values and those values relative to benefits due to members (calculated on the basis of pensionable earnings and services on an ongoing basis using the projected unit method) as follows:

Additional disclosures regarding the group’s defined benefit pension schemes, the unapproved pension arrangement and the post retirement medical plan are required under the transitional provisions of FRS 17 Retirement Benefits. The disclosures provide information which will be necessary for the full implementation of FRS 17 in due course.

The latest full actuarial valuations were carried out as at the following dates: the approved pension schemes at 31 March 2001, the unapproved pension scheme at 6 April 2002, the Direct Energy Marketing Limited pension plan at 7 May 2002 and the post retirement medical liability at 31 December 2001. These have been updated to 31 December 2002 for the purposes of meeting the requirements of FRS 17. Investments have been valued, for this purpose, at market value.

The market value of the assets in the schemes, the present value of the liabilities in the schemes and the expected rate of return at the balance sheet date were:

27 Commitments and contingencies

a) Acquisitions

On 10 December 2002 the group reached agreement to acquire the retail gas and electricity supply businesses of the ATCO Group in Alberta, Canada for consideration of approximately £52 million, payable over two years.

The transaction is subject to the satisfaction of certain conditions, including the receipt of required regulatory approvals and the promulgation of legislation that reflects the market refinements announced by the Minister of Energy in August 2002. It is expected that the Alberta Legislature will consider these legislative changes in the spring of 2003. Completion is expected by mid to late 2003.

b) Capital expenditure

At 31 December 2002, the group had placed contracts for capital expenditure amounting to £106 million (2001: £31 million) of which £72 million relates to the investment in customer relationship management (CRM) infrastructure (2001: £nil).

c) Decommissioning costs

The company and its wholly-owned subsidiary, Hydrocarbon Resources Limited, have agreed to provide security 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 unless and until the costs of such decommissioning have been irrevocably discharged and the relevant Department of Trade and Industry decommissioning notice in respect of the Morecambe gas fields has been revoked.

d) Lease commitments

e) Litigation

The group has a number of outstanding disputes arising out of its normal activities, for which appropriate provisions have been made, in accordance with FRS12.

f) Guarantees and indemnities

The company has £1 billion of bilateral credit facilities (2001: £935 million). Hydrocarbon Resources Limited and British Gas Trading Limited have guaranteed, jointly and severally, to pay on demand any sum which the company does not pay in accordance with the facility agreements.

The group and BG Group plc have agreed, subject to certain limitations, to indemnify each other against certain actual and contingent liabilities associated with their respective businesses.

In relation to the sale and leaseback of the Morecambe gas field tangible fixed assets recorded in these financial statements, the group has given guarantees amounting to £92 million (2001: £116 million).

The group has given guarantees in connection with the finance lease obligations relating to Humber Power Limited referred to in note 13. A fixed collateral payment amounting to £225 million (2001: £225 million) is required in the event of Centrica plc failing to retain at least one credit rating which is not on credit watch above the BBB+/Baa1 level, and further collateral of £75 million is required if the credit rating falls further.

The group has given guarantees and indemnities to various counterparties in relation to wholesale energy trading and procurement activities, and to third parties in respect of gas production and energy transportation liabilities.

In connection with their 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 credit worthiness. The extent of credit support is contingent upon the balance owing to the third party at the point of deterioration.

Following the closure of the British Gas Energy Centres Limited (Energy Centres) operations in July 1999, guarantees have been signed on certain former Energy Centres’ properties as a result of reassignment of leases.

g) Gas purchase contracts

The group is contracted to purchase 65 billion therms of gas (2001: 46 billion therms) in Great Britain under long term contracts. The significant increase on last year is largely due to a number of contracts that have recently been entered into where the price is linked to the market price for gas. A proportion of this gas (37 billion therms) however relates to legacy contracts at prices, mainly determined by various baskets of indices including oil prices and general inflation, which may exceed market gas prices from time to time. Whilst there remains uncertainty regarding future prices and market share, in the opinion of the directors, no general provision for onerous contract losses is required.

The total volume of gas to be taken under these long term contracts depends upon a number of factors, including the actual reserves of gas that are eventually determined to be extractable on an economic basis. Based upon the minimum volume of gas that the group is contracted to pay for in any year, the profile of the contract commitments is estimated as follows:

The directors do not consider it feasible to estimate reliably the actual future cost of committed gas purchase as the group’s weighted average cost of gas from these contracts is subject to a variety of indexation bases. The group’s average cost of gas from its long term contracts for the year ended 31 December 2002 was 19.6 pence per therm (for the year ended 31 December 2001: 19.9 pence per therm. This compares to 20.8 pence per therm being the weighted average cost for the three month period ending 31 December 2001 which was used to estimate the financial commitment in 2001). Applying this value would imply a group financial commitment of approximately £12.7 billion (2001: £9.5 billion as previously stated).

In addition, the group has entered into two new contracts to purchase significant additional volumes of gas at market prices from Statoil (17 billion therms over 10 years from 1 July 2005) and Gasunie (27 billion therms over 10 years from 1 April 2005). Both of these contracts remain conditional at this stage and so are excluded from the numbers above.

h) Other

The group’s use of financial instruments is explained in the group financial review and in note 29.

b) Pension schemes

In 2002 the group incurred £2 million (2001: £1 million) of administrative costs relating to group pension schemes.

c) Transactions with directors

The aggregate amount outstanding at 31 December 2002 in respect of credit cards made available by Goldfish Bank Limited to directors of the company was £47,000, and the number of directors concerned was five.

d) Other

Lloyds TSB Bank plc who have a 30% economic interest in Goldfish Bank Limited have made available an £850 million working capital facility to Goldfish Bank Limited, of which £430 million had been drawn down at 31 December 2002 (2001: £610 million).

The group has also entered into several derivative transactions with Lloyds TSB Bank plc to hedge against interest rate fluctuations. Other activity with Lloyds TSB Bank plc included interest receivable of £nil, interest payable of £27 million and charges of £17 million, of which £6 million has been capitalised (2001: £1 million, £1 million and £14 million respectively). Creditors at 31 December 2002 included £19 million due to Lloyds TSB Bank plc (2001: £26 million).

29 Financial instruments

The group’s use of financial instruments is explained under the heading Financial risk management in the group financial review. The related accounting policies are explained in note 1. As permitted within FRS 13, the disclosures set out below in 29a and 29c through 29g exclude short term debtors and creditors. Additional information on Goldfish Bank interest rate sensitivities is provided in note 29h below.

a) Interest rate risk profile of financial instruments

b) Currency risk

Sterling, Canadian and US dollars were the functional currencies for all material operations in 2002 and 2001. There were no material monetary assets and liabilities in currencies other than these functional currencies, except for £9 million of monetary assets denominated in euros (2001: £16 million) and £7 million (2001: £69 million) of monetary assets denominated in US dollars. The euro assets represent short term cash flow timing differences on European gas trading. The US assets represent margin deposits placed in respect of energy trading positions. In the UK the cost of gas under long term purchase contracts is dependent upon indices, which in part are influenced by US dollar denominated oil prices. An element of the foreign (US$) exchange risk so arising was hedged using forward foreign currency contracts (note 29g).

d) Borrowing facilities

At 31 December 2002, the group had undrawn committed borrowing facilities, in which all conditions precedent had been met at that date, of £1 billion (2001: £935 million). Of these facilities, 50% mature during 2003, whilst the remainder do not mature until 2006. In addition the group has access to a number of uncommitted facilities.

The principal debt facilities in use by the group at 31 December 2002 were a US commercial paper programme of US$2 billion (2001: US$2 billion) and a euro medium term note (EMTN) programme of US$2 billion (2001: US$2 billion). At 31 December 2002, US$374 million (£237 million) had been issued under the commercial paper programme (2001: US$446 million) and bonds totalling £525 million (2001: £500 million) had been issued under the EMTN programme. Of the commercial paper issued, US$299 million had been swapped into sterling, and the remainder was held in US dollars. In relation to the bonds, 24% mature between two and five years and 76% mature after five years.

Goldfish Bank also has a £850 million (2001: £850 million) borrowing facility from Lloyds TSB Bank plc, from which £430 million (2001: £610 million) was drawn down at 31 December 2002.

f) Gains and losses on financial instruments held for trading

There was no net gain or loss from trading in energy derivatives included in the group profit and loss account for the year ended 31 December 2002 (2001: gain of £6 million). Energy derivatives used for this purpose comprised energy swaps, futures, forwards and options. As permitted by FRS 13, physical contracts are not cash-settled commodity contracts and have accordingly been excluded. The average fair value of instruments held during the year ended 31 December 2002 did not materially differ from the year end position. The fair value of financial assets and financial liabilities held for trading at 31 December 2002 amounted to £14 million and £9 million respectively.

g) Gains and losses on hedges

The group uses financial instruments to hedge its currency, interest, energy price and weather exposures. Changes in the fair value of these derivatives used are not recognised in the financial statements until the hedged position itself is recorded therein. Unrecognised and deferred gains and losses on hedges arose as analysed below:

h) Additional disclosures for Goldfish Bank

Credit card balances and customer deposits constitute the core element of the bank’s operations.

Derivatives

All derivatives held are used to hedge interest rate risk. The bank does not hold any derivatives for trading. At 31 December 2002 and 31 December 2001 the maturity of the notional principal amounts and replacement cost of non-trading financial instruments, all entered into with Lloyds TSB Bank plc were as follows:

Interest rate sensitivity gap analysis

The tables below summarise the repricing mismatches of the bank’s non-trading assets and liabilities. Items are allocated to time bands by reference to the earlier of the next contractual interest rate repricing date and the maturity date.

Fair value of non-trading instruments

At 31 December 2002 and 31 December 2001 the notional principal amounts, fair values and book values of non-trading instruments entered into with third parties were as follows:

30 Post balance sheet events

As part of the arrangements to launch the Consumers’ Waterheater Income Fund in Canada in December 2002, the Fund issued C$500 million of Floating Rate Notes. On 22 January 2003 these Notes were refinanced through the issuance of two series of senior notes, pursuant to a prospectus filed with the Canadian securities regulatory authorities. The series A-1 Notes have an expected final payment date of five years and legal maturity of 11 years, and were issued at par with a coupon of 4.700%. The series A-2 Notes have an expected final payment date of seven years and legal maturity of 13 years and were issued at par with a coupon of 5.245%. Both series are non-recourse to the Centrica group, and are rated AAA by Standard & Poors and the Dominion Bond Rating Service.

On 7 February 2003 the group announced a series of four year electricity purchase contracts entered into by its wholly-owned subsidiary British Gas Trading Limited with British Energy Power and Energy Trading Limited, a subsidiary of British Energy plc, for the purchase of 38TWh of power, amounting to 20% of the group’s electricity requirements over the period. More than half of the electricity purchased will be at a fixed price the remainder being linked to future electricity market prices.

On 11 February 2003 the group confirmed that it had acquired the full legal title to the King’s Lynn power station for a consideration of £1, previously held under a finance lease (note 12(ii)). This followed the acquisition of the legal title to the Peterborough Power Station for a consideration of £1 announced on 23 December 2002.

32 Summary financial information for the Consumers’ Waterheater Income Fund (the Fund)