EX-15 20 b822635ex15-2.htm BG Group plc - Form 20-F for the year ended December 31, 2005 - Prepared and filed by St Ives Financial

EXHIBIT 15.2

 

The Company’s responses to the requirements of Form 20-F (except for Item 16E “Purchases of Equity Securities by the Issuer and Affiliated Purchasers” and the US Audit Report of Independent Accountants, which is included under Item 18 “Financial Statements”) have been incorporated into this annual report by reference to the Company’s Report on Form 6-K dated March 22, 2006 which contains the Company’s Annual Report and Accounts 2005. Pursuant to Rule 12b-23(a) of the Securities Exchange Act of 1934, as amended, the information incorporated into this annual report by reference to such Form 6-K is attached as an exhibit hereto.

 


 


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  Our 2005 highlights          
             
  Business Performance*       Total Results  
 
 
  £ 5 664 m 
2004 £4 063m 
  Revenue and other
operating income
  £ 5 424 m
2004 £4 063m
 
 
 
  £ 2 138 m
2004 £1 320m
  Operating profit
before share of results from joint  ventures and associates
  £ 2 344 m
2004 £1 407m
 
 
 
 

£ 2 380 m
2004 £1 513m

  Total operating profit
including share of pre-tax operating  results from joint ventures  and associates
  £ 2 586 m
2004 £1 600m
 
 
 
  £ 1 357 m
2004 £829m
  Earnings   £ 1 528 m
2004 £886m 
 
 
 
  38.3 p 
2004 23.5
p
  Earnings per share   43.2 p 
2004 25.1
p
 
 
 
      Dividend per share   6.00 p 
2004 3.81
p
 
 
 
  * Business Performance excludes disposals and certain re-measurements and is presented as exclusion of these items provides readers with a clear and consistent presentation of the underlying operating performance of the Group’s ongoing business. Unless otherwise stated, financial operating information for the Group and its business segments presented in the statements of the Chairman and Chief Executive and in the Operating and financial review is based on BG Group’s Business Performance. See presentation of non-GAAP measures, page 152. See, also, Segmental analysis and results presentation, note 2, page 71, and Earnings per ordinary share, note 10, page 85, for a reconciliation of the differences between Business Performance and BG Group’s Total Results.  
 
 

Contents            
  2 [This section has intentionally been removed]   51 Remuneration report      
  4 [This section has intentionally been removed]   62 [This section has intentionally been removed]      
  6 Operating and financial review   63 Principal accounting policies      
  6     BG Group’s global operations   66 Primary statements      
  8     Strategy review   71 Notes to the accounts      
  12     Future prospects   128 Supplementary information   From 1 January 2005, BG Group was required to prepare its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) endorsed by the European Union. The adoption of IFRS has resulted in the comparative information for 2003 and 2004 being restated. Further details on the restatement of the results previously reported under UK GAAP are given in Note 33, page 118.  
  13     Operating review   134 Three year financial summary  
  21     Financial review   138 Shareholder information  
  31     Corporate Responsibility   146 Notice of Annual General Meeting  
  35     Risk factors   150 Cross reference to Form 20-F  
  38 Corporate governance   151 Index  
  38     Governance framework   152 Presentation of non-GAAP measures  
  44     Board of Directors   153 Definitions  
  46     Executive Committee        
  49 Directors’ report        
                 
                 

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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

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Our vision


Natural gas is our business.
We are a rapidly growing company,
with expertise across the gas chain.
Our vision is to be the leading natural
gas company in the global energy
market – operating responsibly
and delivering outstanding value
to our shareholders.

 

 

Key events

   
Egyptian LNG Trains 1 and 2 and matching upstream supply onstream early
   
Record production of 183.8 mmboe, up 10%
   
Atlantic LNG Train 4 completed, further increasing Liquefied Natural Gas (LNG) supply
   
Awarded or acquired new licences in Brazil, Canada, Egypt, India, Libya, Nigeria, Norway,
the UK and the USA, increasing gross exploration acreage by over 45 000 km2
   
Discoveries in Canada, Egypt, Mauritania, Trinidad and Tobago and the UK
   
Phase 1 expansion of Lake Charles LNG regasification facility completed
   
Sale of our interest in the North Caspian Sea PSA
   
Secured future additional LNG regasification capacity at Elba Island

 

 

  www.bg-group.com  

BG Group is a public limited company listed on the London and New York Stock Exchanges and registered in England & Wales. This is the report and accounts for the year ended 31 December 2005. It complies with UK regulations and incorporates the annual report on Form 20-F (except for the US Report of Independent Accountants, which is included in the Group’s Form 20-F filing with the US Securities and Exchange Commission) to meet US regulations.


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Operating and financial review
BG Group’s global operations(a)

 


For more information: www.bg-group.com  
     

 

BG Group’s main activities

BG Group has skills across the gas chain, in the upstream, midstream and downstream.

Exploration and Production (E&P)    

BG Group explores, develops, produces and markets gas and oil around the world. Around 73% of 2005 production was gas. The Group uses its technical, commercial and gas chain skills to deliver projects at low cost, whilst maximising the sales value of its hydrocarbons.

Liquefied Natural Gas (LNG)       

BG Group’s LNG activities combine the development of LNG liquefaction and regasification facilities with the purchasing, shipping and sale of LNG. The Group uses its expertise in LNG to connect its own and other producers’ gas reserves to markets.


 


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Transmission and Distribution (T&D)

BG Group’s T&D expertise and activities develop markets for natural gas and provide them with supply from its own and others’ reserves through transmission and distribution networks and complementary businesses.

Power

A large proportion of the worldwide demand for gas is attributable to power stations. BG Group develops, owns and operates gas-fired power generation plants.

Other activities

BG Group leverages its distribution customer base to develop complementary businesses that stimulate gas demand. These include compressed natural gas for vehicles and co-generation.



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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Operating and financial review
Strategy review

 

   
  “We are unique in our industry
because we specialise in gas and
have the skills to compete right
across the gas chain.”
 
     
     
     
     
William Friedrich  Frank Chapman 
Deputy Chief Executive  Chief Executive 
   
   

STRATEGY
BG Group is an integrated gas company that aims to achieve strong growth and competitive returns through a strategy focused on securing competitively priced gas and bringing that gas to high value markets.

BG Group’s competitive advantage stems from a deep understanding of gas markets combined with industry-leading skills in finding and commercialising gas. This capability allows BG Group to capture opportunities and develop projects that deliver value across the entire chain.

The strategy has remained fundamentally unchanged for some years because it continues to deliver value to shareholders and has proved robust in the face of developments in the business environment.

FUTURE GROWTH
BG Group’s ability to achieve strong growth is underpinned by existing assets that have a distinctive, low cost, long-life base with substantial growth potential. In addition, other drivers of long-term growth are:

incremental investments around existing assets;
   
the ability to connect assets to enhance value; and
   
new opportunities, building on core competencies.

BG Group’s cost competitive, flexible LNG portfolio is of particular importance. Core US market access positions at Lake Charles and Elba Island anchor value from the upstream business – both from equity and contracted gas supplies. Over the next two years an important transition will occur as


 

         
     

Group-wide activities

BG Group is a rapidly growing business with operations in over 20 countries and across five continents. BG Group is principally engaged in exploration and production and the development and supply of existing and emerging gas markets around the world. Gas discoveries often require complex chains of physical infrastructure and commercial agreements to deliver the gas to markets and BG Group has proven skills and experience in creating value from these chains.

           

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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

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material long-term contracts come onstream to provide the major share of the LNG supply portfolio. It is anticipated that spot and short-term supply opportunities will continue to be available to the Group. BG Group expects to capture further value by taking arbitrage opportunities in response to short-term market conditions.

In addition to supplying high value markets in the USA and Europe, BG Group is also developing valuable positions in other markets including Brazil and India. These markets have material long-term growth potential driven by underlying economic growth. BG Group continues to grow its businesses along the gas chain and to play an active part in contributing to market development.

Exploration success will be an important determinant of long-term growth. At a time when accessing resources has become one of the central challenges for the industry, BG Group has substantially increased gross exploration acreage in the last year. This is expected to contribute to sustaining the Group’s growth in the next decade.

BUSINESS ENVIRONMENT
The advantages of natural gas relative to other fossil fuels are well established. Natural gas is relatively clean and can be supplied at a competitive cost from a geographically diverse range of sources.

The energy industry continues to experience significant change. Oil and gas prices have risen over the year and continue to be at levels well above historical averages. The global gas business has seen an increase in inter-regional gas trade, driven by fundamental changes to supply and demand patterns. This is driving rapid growth in the LNG industry.

Competition and security of supply have become increasingly important factors. Sustained higher oil and gas prices and heightened geopolitical tensions have added to the concerns of major consumer countries, and raised doubts about the reliability of hydrocarbon imports.

In the context of the more demanding business environment, BG Group is highly competitive. This is primarily due to the following factors:

BG Group has a distinctive, long-life, low cost asset base;
   
as LNG markets grow rapidly, BG Group has already established a cost competitive, flexible portfolio in theAtlantic Basin and is building on this position;
   
in the face of increasing competition, the Group continues to expand its portfolio of opportunities for continued growth; and
   
           
  Positive outlook for gas   Energy consumption (%)
Compound annual growth rate 2000-2025

 

Gas is predicted to grow faster than other competing fuels. Two key factors of gas demand driving energy policies across the world are security of supply and climate change. Gas is more abundant than oil and has the lowest carbon dioxide emissions of all hydrocarbon fuels. Many countries are converting to gas-fired power production to sustain growth and meet Kyoto targets.  
       

        Natural gas
       

        Coal
       

        Renewables
       

        Oil
       

        Nuclear
       

        Source: EIA July 2005
         
  BG Group continues to make good progress in broadening and deepening its exploration portfolio to underpin long-term growth.      
       

CORPORATE RESPONSIBILITY
BG Group recognises that activities surrounding the extraction and supply of fossil fuels can have economic, environmental and social impacts and works to ensure that neighbouring communities benefit from its presence on a sustainable basis.

BG Group believes that it is good business to operate responsibly and that successful relationships with host governments and neighbouring communities contribute to good and sustainable returns for shareholders. The BG Group Statement of Business Principles sets out beliefs and behaviours which guide the way the Group and its employees conduct business. The Business Principles apply to all Directors, officers and employees.

The Corporate Responsibility section (page 31) summarises BG Group’s social and environmental performance. The 2005 Corporate Responsibility Report, a separate publication, contains more detail on this area.

     
           

 


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Operating and financial review
Strategy review continued

 

Strategy in action  

 

BG Group’s strategy is to secure competitively priced resource (oil and gas) – both equity and contracted supply – and bring that resource to customers in high value markets.

Gas is often more difficult to commercialise than oil because, unlike oil, there is no globally traded market for gas. In addition, gas is more difficult to store and transport. As a result, specialist skills are required to put together gas chains that link resources to markets.

BG Group maintains a deep understanding of current gas demand and market trends and has been successful in creating markets for its gas.

Securing competitive supplies is an essential part of BG Group’s strategy, and cost leadership is a pre-requisite for long-term success. Although industry costs have been rising, BG Group is maintaining its competitive advantage in key performance metrics. The Group’s supplies remain cost competitive against peer companies.

 

 

 

 

 

 

 

 

 

 

 

 

     
For more information: www.bg-group.com
Creating value across the gas chain

 

BG Group’s understanding of market trends and industry-leading skills across the gas chain have allowed the Group to identify high quality opportunities.

 

Exploration and Production
   
 

 

CASE STUDY: UK
     
Securing competitively priced supply for the UK
 
In the UK, BG Group is working to maintain its supply position from a range of piped and LNG sources. The Group’s production hubs and infrastructure in the UK North Sea are adding value to new prospects and exploration acreage across the median line in Norway. The Group is importing gas from Europe via its share in the expanded Interconnector pipeline and is developing a LNG import terminal in Wales.
     

 

 

 

 



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Liquefied Natural Gas
   
Transmission
   
CASE STUDY: USA
   
LNG is key to accessing high value US market
   
In the USA, the market access afforded by the Group’s regasification capacity at Lake Charles and Elba Island is adding value to the Group’s reserves in Trinidad and Tobago and Egypt and will underpin the Group’s continuing investment in Nigeria. It also allows the Group to purchase third-party LNG from sources such as Nigeria and Equatorial Guinea and to take advantage of LNG arbitrage opportunities.
Power
   
Distribution
   
CASE STUDY: EGYPT
   
Building on success in Egypt
Success in Egypt has been the result of first class project delivery combined with government alignment. The business started by supplying the domestic market but has rapidly developed into a LNG export scheme to target higher priced international markets. There is the potential for expansion at the liquefaction plant and through explorationof the Group’s new and existing acreage.

 


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Operating and financial review
Future prospects

Future prospects
Building on the Group’s distinctive
asset base, with new significant
projects and exploration acreage
driving the earnings trajectory out
to 2009 and beyond.
 
 
    Key plans and opportunities        
             
    North Sea: Buzzard field and UK production hubs      Brazil: Comgas network growth and improved margins  
             
     Tunisia: Miskar and Hasdrubal fields      Kazakhstan: Karachaganak field de-bottlenecking, stabilisation and gas development  
             
     India: Panna/Mukta and Tapti fields plus new Krishna Godavari basin acreage      Nigeria: OKLNG and upstream position  
             
     Trinidad and Tobago: uncontracted reserves and additional liquefaction      USA: increases in LNG regasification capacity at Elba Island and Lake Charles  
             
     Egypt: Egyptian LNG Train 3 and new exploration plays       Further long-term LNG supply from Nigeria, Egypt and Trinidad and Tobago   
             
  Long-term growth – exploration and appraisal wells planned in 2006  
   
             

GROWTH FROM EXISTING ASSETS
BG Group’s asset base is distinctive because of its low cost, long-life nature and the potential it has for substantial embedded growth. Assets that were onstream in 2003 are expected to produce almost as much in 2012, highlighting the strength of the existing asset base. Examples of such assets include UK North Sea production hubs, Tunisia, Karachaganak and Trinidad and Tobago.

In the LNG segment, BG Group has emerged as a leading LNG player in the Atlantic Basin. Embedded within the existing business, the Group has options to expand its regasification capacity to underpin new trains of liquefaction and new LNG purchase agreements.

MAJOR NEW PROJECTS
BG Group has a number of significant projects and further opportunities. These include Buzzard, further development of Karachaganak, Hasdrubal, Comgas growth and new LNG supplies from Nigeria, Trinidad and Tobago and Egypt.

As the majority of these opportunities are already within the Group’s portfolio, the risk to delivery is significantly lower than if the Group was to rely solely on accessing new exploration opportunities.

EXPLORATION SUCCESS
BG Group has also made progress in securing new gross exploration acreage, adding over 45 000 km2 in 2005. This is expected to contribute towards sustaining the Group’s growth well into the next decade from existing areas such as Brazil, Norway and Canada and new areas including Alaska, Libya and Nigeria.


 


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Operating review

Exploration and Production
 
BG Group’s high performing
E&P business had another
strong year in 2005. The 2006
production target has been
increased to 600 000 boed.
 
  Highlights        
             
  Total operating profit increased by 63% to £1 942 million   Acquired exploration acreage in Canada, India, Nigeria, Norway and the USA and successful in licensing rounds in Brazil, Egypt, Libya, Norway and the UK, increasing gross acreage by over 45 000 km2  
             
  29 exploration and appraisal wells drilled with 14 successful        
             
  Successful exploration and appraisal wells in Canada (8), Egypt (1), Mauritania (2), Trinidad and Tobago (1) and the UK (2)        
             
  Early start-up of Simian Sienna and Sapphire fields to supply Egyptian LNG Trains 1 and 2        
             
   
  The countries are listed in order of production volume  
  (a), (b) and (c) See Definitions, page 153 for an explanation of how these figures are calculated.  

2005 PERFORMANCE†
Production increased by 10% to 183.8 mmboe in 2005. The main contributors to this increase were Kazakhstan (4.4 mmboe) and Egypt (21.1 mmboe). 2004 production volumes rose by 7% (11 mmboe), due mainly to contributions from Kazakhstan and Egypt.

In 2005, proved reserves increased to 2 184 mmboe (2004 2 147 mmboe) after net additions and revisions to proved reserves of 219 mmboe. Full details can be found on page 128.

Of the 29 exploration and appraisal wells completed in 2005, 14 were successful. Successful wells were drilled in Canada (8), Egypt (1), Mauritania (2), Trinidad and Tobago (1) and the UK (2). At the beginning of 2006, there were two further discoveries in the UK and one in India.

UK and Norway
The UK accounted for around 30% of BG Group’s production in 2005. The principal operating assets are the Armada and Seymour fields, the Blake Field, the Easington Catchment Area (ECA fields), the Everest and Lomond fields, the J-Block (Joanne and Judy) and Jade fields, and the Elgin/Franklin fields. BG Group also has a 51.18% interest in the Central Area Transmission System (CATS).

The NW Seymour, Atlantic/Cromarty and Glenelg fields are due onstream in the first half 2006. Substantial progress was made on the Buzzard field, which is expected to begin production at the end of 2006.

BG Group announced discoveries in the Courageous, Jackdaw, Calloway and Banks fields at the turn of the year 2005-2006.

In the UK’s 23rd licensing round, held during 2005, BG Group was awarded four blocks and their operatorship, consolidating BG Group’s position in the Outer Moray Firth and central North Sea.

Since entry in early 2004, BG Group has secured 15 exploration licences offshore Norway, which include four licences awarded in the pre-defined licensing round in December 2005. Eight of these licences lie adjacent to the UK/Norway median line and close to the Group’s UK central North Sea core producing area and offshore infrastructure. Exploration drilling is expected to continue in 2006. In September 2005, BG Group farmed-in to production licence (PL) 251, taking a 20% interest. An exploration well discovered hydrocarbons but not in economic quantities. The Group also took an 80% interest in, and operatorship of, PL 274BS, which is adjacent to BG Group-operated PL 297 in the southern North Sea.


 


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

 

Operating and financial review
Operating review continued

 

   
  Production (‘000 boed)
  Production volumes have grown at a
  compound average growth rate of 9%
  between 2003 and 2005
   
 
       
 
 
  Actual gas  
 
 
  Actual oil and liquids  
 
 
  Target  
 
 
   
  Exploration and appraisal wells
  BG Group’s success rate has averaged
  61% over the last three years
       
 
       
 
 
 
Total number of wells completed  
 
 
  Number of successful wells  
 
 

Egypt
BG Group is operator of two gas-producing areas offshore the Nile Delta – the Rosetta concession and the West Delta Deep Marine (WDDM) concession (comprising the producing Scarab Saffron, Simian Sienna and Sapphire fields and the Serpent, Saurus, Sequoia and Solar discoveries). Total production from Egypt was 35 mmboe in 2005 (2004 14 mmboe).

2005 was a year of considerable progress for BG Group’s activities in Egypt. BG Group continues to be a key supplier to the domestic market through its Rosetta and Scarab Saffron fields and began supplying the Egyptian LNG export project in the second quarter 2005. Simian Sienna came onstream to supply Egyptian LNG Train 1 from April 2005, around the time that Rosetta Phase 2 began delivering to the domestic market. The Sapphire field came onstream in September 2005 to supply Train 2. Development of the Simian Sienna and Sapphire fields was accelerated in tandem with Egyptian LNG to come onstream three and nine months ahead of schedule, respectively.

In July 2005, the concession agreements for the El Manzala and El Burg offshore blocks were signed. Drilling on these new concessions is planned for 2007. In January 2006, BG Group also finalised terms for the North Sidi Kerir Deep concession, subject to ratification by the People’s Assembly.

The development of the Scarab Saffron fields provides an example of world class project delivery, producing first gas in March 2003, following discovery in May 1998. The Scarab Saffron development is one of the longest sub-sea tie backs in the world and the first deep water development in Egypt. Like Rosetta, Scarab Saffron has proved to be highly reliable and able to produce above its Daily Contracted Quantity (DCQ). The fields supply the domestic market (626 mmscfd rising to 726 mmscfd DCQ since October 2005). From the first quarter 2005, BG Group and partners began tolling 225 mmscfd of gas from Scarab Saffron through the SEGAS LNG plant located at Damietta. BG Group has agreed to purchase 0.7 mtpa of the related LNG output for markets in the Atlantic Basin (see LNG section page 16).

Kazakhstan
BG Group is joint operator of the giant Karachaganak oil and gas condensate field (BG Group 32.5%) in north-west Kazakhstan, one of the largest in the world. BG Group produced around 35 mmboe net in Kazakhstan in 2005. Following the completion of the Phase II

facilities in 2004, production in 2005 has increased, reaching a gross 2005 peak rate of over 402 000 boed. In 2005, in excess of 51 mmbbl (approximately 70%) of total field liquids were shipped through the Caspian Pipeline Consortium (CPC) pipeline (BG Group 2%) and sold at international prices. De-bottlenecking of the facility, which is expected to take western exports up to 7.7 mtpa, is expected to be onstream by the end of 2006. The remaining untreated production continues to be sold to Russian markets. In excess of 600 mmscfd of gas is re-injected into the reservoir during liquids production.

There was continued success with the Phase IIM drilling programme during 2005, which has seen individual well rates of up to 13 000 bopd, more than double the previous average.

BG Group plans to further increase production and export to western markets with a fourth stabilisation train in 2009, that will take western exports to over 10 mtpa, and Phase III expansion that is planned to further increase liquids and gas production in the next decade.

BG Group completed the disposal of its share in the North Caspian Sea PSA (BG Group 16.67%) in April 2005 for a pre-tax cash consideration of US$1.8 billion.

Trinidad and Tobago
BG Group produced 18 mmboe of gas in Trinidad and Tobago during 2005. The BG Group-operated Dolphin field in the East Coast Marine Area (ECMA) supplies gas into the domestic market whilst the BG Group-operated North Coast Marine Area (NCMA) supplies gas into Atlantic LNG Trains 2, 3 and 4 for export to North America. Sub-sea technology was introduced to Trinidad and Tobago for the first time with the drilling of two wells on BG Group’s Dolphin Deep field, which are expected onstream in the first half 2006 to supply Atlantic LNG Trains 3 and 4. BG Group also expects to supply Atlantic LNG Train 4 from the Central Block field from mid-2006.

In February 2005, BG Group and partners announced a major gas discovery in the offshore Manatee 1 exploration well in Block 6d, ECMA.

Tunisia
BG Group produced around 13 mmboe of gas and condensate in Tunisia during 2005. BG Tunisia continues to supply approximately 50% of gas demand in the Tunisian market from its Miskar field (BG Group 100%). Miskar gas is processed at the Group’s onshore Hannibal terminal and sold under long-term contract to the Tunisian state electricity and gas company. Offshore compression was commissioned

 

 

 



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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

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in May 2005 to maintain the production plateau of the field. Infill drilling to extend Miskar is scheduled to commence in 2006.

Progress has been made on the development of the Hasdrubal field (BG Group 50%) and gross production of around 30 000 boed is expected onstream from 2009.

India
In 2005, BG Group’s expanded Panna/Mukta and Tapti (PMT) fields produced over 9 mmboe net. Currently, less than 9% of the power generated within India is fuelled by natural gas, compared to an average of around 20% worldwide. BG Group believes that this, together with potential for increasing gas penetration in the industrial, commercial and residential market segments, offers growth opportunities.

Gas production at the PMT fields has increased by around 43% on a net basis since their acquisition in 2001. The Group is working with partners and the government to progress expansion projects that are planned to almost double PMT’s oil and gas production rate in the next four years. As part of this, BG Group and its partners are working towards bringing the mid Tapti field onstream in late 2007. Government approval for the US$492 million compression and processing platform was granted in 2005. The fourth wellhead platform on the south Tapti field is scheduled to come onstream in 2006 to help maintain a 250 mmscfd production rate.

In October 2004, the Government approved a US$200 million (gross) development plan for the Panna field and the EPC contract in respect of this development was awarded in 2004. The investment is expected to recover an additional 18 mmbbl of oil and 74 bcf of gas from the field. In addition, the Panna infill programme involves drilling 18 wells, expected to increase recovery by around 35 mmbbl and 130 bcf gas.

In December 2005, BG Group and ONGC agreed to jointly operate three offshore deep water exploration blocks in the Krishna Godavari Basin, on the east coast of India. Subject to agreeing farm-in arrangements and government approval, BG Group will hold a 50% interest in these blocks.

Thailand
BG Group continues to invest in the Bongkot field, which accounts for over 20% of Thailand’s domestic gas production. The successful commissioning of the Sour Processing Platform and further development phases are designed to

extend the life of the field into the next decade. In 2005, agreement was reached with gas buyer, the Petroleum Authority of Thailand, for the sale of additional gas averaging approximately 50 mmscfd over the next three years. This is over and above the DCQ (550 mmscfd). Record daily production levels for Bongkot were achieved during 2005.

Bolivia
BG Group holds a number of E&P interests in Bolivia. Following the July 2004 referendum, a new Hydrocarbons Law has been passed that marks a significant departure from the principles that previously governed the hydrocarbon sector. A new administration was elected in December 2005. BG Group continues to monitor the situation.

Gas continues to be delivered into the Bolivian and Brazilian markets from BG Group’s producing fields in Bolivia, including from the Margarita Early Production Facilities (BG Group 37.5%), which came onstream at the end of 2004.

Canada
In 2004, BG Group acquired significant oil and gas acreage in Canada, of which a large proportion was undeveloped, offering considerable exploration potential close to existing infrastructure.

The current producing assets are located in four core areas: Bubbles and Ojay (north-east part of British Columbia); Copton (western Alberta); and Waterton (south-western Alberta).

In May 2005, BG Group was awarded 110 196 net hectares in Blocks CMV 4 and CMV 7 (BG Group 70% and operator) in the North West Territories, extending BG Group’s activities into the Central Mackenzie Valley. A further 2 176 net hectares were acquired in Alberta and 6 150 net hectares in British Columbia, taking BG Group’s current total to around 346 000 hectares.

BG Group is continuing to explore the existing acreage and acquire additional land for its portfolio. Of 12 wells drilled in 2005, eight were successful.

Mauritania
BG Group has a 13.084% interest in PSC A, and 11.630% in PSC B, other than the Chinguetti field in which BG Group has 10.23% following the government exercising its back-in right. Three other oil discoveries (Tiof, Tevet and Labeidna) have been made in PSC B and a gas field (Banda) has been discovered in PSC A. The four-well drilling campaign in 2005 resulted in one oil discovery (Labeidna) and also the discovery of oil in Tevet Deep, although not in economic quantities. The Tiof discovery is still under evaluation.

Associated gas has been found in all discoveries. Further exploration drilling is planned for 2006.

The Chinguetti field began production in February 2006 and is anticipated to have a peak production rate of 75 000 boed.

Brazil
In 2005, drilling commenced on BM-S-10 block (BG Group 25%), BM-S-11 (BG Group 25%) and on BG Group-operated BM-S-13 (BG Group 60%), all offshore São Paulo city.

In October 2005, BG Group was awarded ten blocks in the 7th licensing round, including six onshore blocks in the São Francisco Basin, two BG Group-operated blocks in shallow water and two deep water blocks in the Santos Basin, offshore São Paulo.

Libya
BG Group was awarded three onshore exploration licences in the 2nd Libyan licensing round in October 2005. Two licences are in the Sirte basin (BG Group 100% and operator) and one licence in the frontier Kufra basin (BG Group 50%).

Nigeria
BG Group is developing an E&P and LNG position in Nigeria, one of the most prolific hydrocarbon provinces in the Atlantic Basin. In January 2006, BG Group signed a Production Sharing Contract (PSC) for Block 332 with the Nigerian National Petroleum Corporation, which resulted in BG Group acquiring 45% and operatorship in the deep water block, located in depths of 100 to 1 000 metres, around 100 km south-east of the commercial capital Lagos. The first phase of the two-part work programme is expected to begin in 2006 with the acquisition of 3D seismic, followed by the drilling of an exploration well in 2007.

USA
In January 2006, BG Group signed a participation agreement for a 33.33% equity share in 2.1 million acres of land in the Foothills area of the Alaskan North Slope.



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16

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

 

Operating and financial review
Operating review continued

 

Liquefied Natural Gas 
 
During 2005, BG Group doubled 
its number of operating 
liquefaction trains from three 
to six and doubled its capacity 
at Lake Charles. 
 
 
 
  Highlights        
             
  Egyptian LNG Train 1 onstream three months early   Agreed to expand the storage and throughput capacity at Elba Island and option to participate in a new interstate pipeline  
             
  Egyptian LNG Train 2 onstream nine months early   PDA signed for OKLNG liquefaction plant  
             
  Atlantic LNG Train 4 onstream   MOU with Brass LNG for 2.0 mtpa for 20 years from 2010  
             
  Supplied around 37% of US LNG imports   Letter of Agreement signed for sale and supply of LNG and construction of a LNG import terminal in Chile  
             
  Phase 1 expansion of Lake Charles regasification terminal onstream        
             
   
             

2005 PERFORMANCE
Three new trains of LNG came onstream – Trains 1 and 2 in Egypt and Train 4 in Trinidad and Tobago. The first expansion phase of Lake Charles was completed in the third quarter 2005, with the second phase on schedule for mid-2006. Construction work commenced at the Brindisi and Milford Haven regasification projects. In 2005, 4.1 million tonnes of LNG was produced and the 2006 production target has been increased by 3% to 7.1 mtpa.

LIQUEFACTION
Egypt

The first cargo from Egyptian LNG Train 1 was despatched in May 2005, three months ahead of schedule and in a record time of under six years from discovery of gas to first cargo of LNG. Train 2 also came onstream in record time and despatched its first cargo in September 2005.

Since the first quarter 2005, BG Group and partners have been tolling gas through SEGAS’ Damietta LNG plant under a five year contract. BG Gas Marketing Limited is also purchasing 0.7 mtpa of the related LNG for five years.

Trinidad and Tobago
The first three trains of Atlantic LNG continued to perform well, and the fourth train, one of the world’s largest operating trains of LNG (5.2 mtpa), came onstream in December 2005.

Nigeria
BG Group is jointly planning a liquefaction plant in Olokola (OKLNG) on the southwestern coast of Nigeria. In February 2006, BG Group entered into a project development agreement (PDA) with its partners, which provides the framework for the Front End Engineering Design (FEED) phase. The project is planned to comprise four trains of LNG of approximately 5.5 mtpa each. The LNG will be lifted by the project sponsors.

REGASIFICATION
USA

Lake Charles
During 2005, BG Group was responsible for meeting just over 1% of the US daily gas demand and importing around 37% of LNG delivered into the USA.

The Phase 1 expansion of the Lake Charles plant by the operator Trunkline LNG came onstream in 2005. The increased capacity is contractually committed to BG Group, taking the Group’s total capacity rights from 0.63 bcfd up to 1.2 bcfd, with 1.5 bcfd peak send out.

Phase 2, which is expected to expand capacity further to 1.8 bcfd with 2.1 bcfd peaking capacity, is underway and is



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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

17
   

 

scheduled for completion in mid-2006. Under the Phase 2 project, BG Group has further diversified its market destinations through firm capacity in the new 36" loop gas pipeline, completed in July 2005 by Trunkline Gas.

During the fourth quarter, Lake Charles received its first LNG cargoes from Egyptian LNG Train 2. From 2006, contracted supply will rise to 10 mtpa, with new long-term supply contracts from Trinidad and Tobago (Atlantic LNG Train 4) and Nigeria, and increase further from 2007 with supply from Equatorial Guinea. In addition, in February 2006, BG Group signed a Memorandum of Understanding (MOU) with Nigeria’s Brass LNG for the acquisition of 2.0 mtpa of LNG for 20 years, with initial deliveries expected to start during 2010. It is planned that cargoes will be delivered on an ex-ship basis to Lake Charles and Elba Island but BG Group will retain destination flexibility. During 2005, BG Group continued to source cargoes on the short-term market.

Gas Marketing
Since acquiring capacity rights at Lake Charles in 2001 and Elba Island in 2004, BG Group has put together an integrated gas marketing and distribution portfolio consisting of access to over 15 intra-state pipelines, salt storage capacity and over 130 customers, providing BG Group with market and volume certainty. In a more competitive market, BG Group secured 86 actual cargoes for delivery to the USA (36 cargoes to Lake Charles and 50 cargoes to Elba Island) and remarketed a further 31 to other higher value markets.

Elba Island
BG Group and upstream partners’ LNG from Atlantic LNG Trains 2 and 3 is regasified and marketed at Elba Island where the Group has had capacity and associated LNG purchase and gas sales agreements since the end of 2003. In December 2005, BG Group entered into agreements with El Paso Corporation to further expand the storage and throughput capacity at the Elba Island terminal.

The expansion of Elba Island is planned to increase BG Group’s storage capacity at this terminal from 4 bcf to 8.2 bcf and increase vaporisation capacity from 675 mmscfd to 1.17 bcfd.

The expansion is expected to be completed by 2012. As part of the expansion project, BG Group also has rights to transportation capacity in the Elba Express Pipeline. This new 191 mile interstate pipeline is planned to deliver gas from Elba Island to additional markets in Georgia and, through interconnections

 

with other pipelines, to south-eastern and eastern USA. Both projects are expected to be filed for approval with the Federal Energy Regulatory Commission (FERC) in 2006.

Providence
Following FERC’s rejection of their initial plans, BG LNG Services and KeySpan Corporation continue to evaluate alternatives to address the issues raised by FERC regarding the proposed upgrade to KeySpan’s LNG peak-shaving storage facility in Providence, Rhode Island.

Italy
The EPC contract for the 6.0 mtpa Brindisi regasification terminal was awarded at the end of 2004. During 2005, BG Group acquired Enel’s share of equity rights and capacity, taking its share to 4.8 mtpa priority capacity at the terminal. The remaining 20% is set aside for third-party access, in compliance with Italian regulatory requirements. In September 2005, in accordance with the provisions of the second EU Gas Directive, agreement was reached between the Italian authorities and the European Commission confirming these arrangements. Brindisi is now expected to receive its first LNG deliveries during the fourth quarter 2009.

UK
Good progress was made on the Dragon LNG regasification terminal at Milford Haven, in Wales, during 2005. Completion is targeted for the fourth quarter 2007. During 2005, Ofgem and the European Commission granted the project exemption from the regulated third-party access provisions imposed by the second EU Gas Directive.

Other areas
In February 2006, BG Group signed a Letter of Agreement with a group of Chilean gas buyers for the supply of LNG and the development of a 2.5 mtpa LNG import terminal in Quintero Bay, Chile.

LNG SHIPPING
BG Group’s shipping position remains a key enabler for the LNG business to ensure delivery and flexibility under long-term contracts and to acquire short-term cargoes and benefit from arbitrage opportunities.

BG Group expects to take delivery of three 145 000 cubic metre new-build ships in 2006 and four new-build ships in 2007, and has options for further ships beyond 2007.

 

Production (mtpa)
LNG production has grown 21% per annum on a compound basis since 2003



Actual
 
Target


LNG: Long-term firm supply 
  Firm supply   Commercial 
  (mtpa)   start-up




Atlantic LNG T2/3 2.1   2003




Nigeria LNG 2.3   Q1 2006




Egyptian LNG T2(a) 3.5   Q2 2006




Atlantic LNG T4(b) 1.5   Q3 2006




Equatorial Guinea 3.3   Q3 2007




Total Firm Supply(c)  12.7    Q3 2007 




(a) First cargo lifted in September 2005
(b) First cargo lifted in February 2006
(c) Excludes up to 1 mtpa of expected excess/de-bottlenecking volumes
 



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18

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

 

Operating and financial review

Operating review continued

 

Transmission and Distribution 
The downstream business 
continues to grow strongly, 
with double-digit volume 
growth from Comgas in 2005. 

 

 

 

Highlights

Comgas continued to grow, with volumes up 14%
   
Strong volume growth at Mahanagar Gas
   
Additional compressed natural gas stations developed by Gujarat Gas
   
MetroGAS deconsolidated
   
   

 

2005 PERFORMANCE
BG Group’s transmission and distribution businesses had another strong year during 2005, with increased customers and profitability.

Argentina
MetroGAS (BG Group 26%) results were deconsolidated from the end of 2005 as a result of financial restructuring. (See Financial review, page 23.)

Brazil
Comgas (BG Group 60.1%) is Brazil’s largest gas distribution company. At the end of 2005, it was serving around 485 000 customers in the São Paulo concession area (2004 450 000; 2003 416 000).

Growth in the Brazilian economy coupled with higher demand from industrial, power and compressed natural gas (CNG) vehicle users resulted in an increase in Comgas sales volumes of 14% during 2005. Comgas operating profit increased by 53% to £147 million in 2005 (2004 £96 million), reflecting volume increases and margin improvements. The Comgas network was extended by 594 km during the year. This expansion is part of an ongoing five year expansion plan, which commenced in 2004. The expansion plan also involves the capture of higher margin residential customers, together with the simultaneous development of the industrial, natural gas vehicle (NGV) and co-generation markets.

India
Gujarat Gas Company Limited (GGCL) (BG Group 65.1%) is India’s largest private gas distribution company. In 2005, its sales volume increased by 17% to 811 mmcm (2004 691 mmcm; 2003 771 mmcm). A better sales mix, including more industrial customers, and cost savings improved margins to achieve a 42% increase in operating profits in 2005 compared to 2004.

During 2005, GGCL signed over 500 mcmd of new gas supply contracts (2004 377 mcmd). Under its CNG for vehicles expansion programme, GGCL added five new stations in Surat, Gujarat, taking GGCL’s total number of stations to 12.

GGCL has completed its network expansion into the towns of Kim and Karanj, while expansion into the industrial area of Vapi is underway and is scheduled for completion in 2006. Ten new CNG stations are planned for Surat by mid-2006.

Mahanagar Gas Limited (MGL) (BG Group 49.75%), which owns a gas distribution business in Mumbai, saw its 2005 volumes rise 14% to 446 mmcm (2004 392 mmcm; 2003 297 mmcm).



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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

19
   

 

Some of the increased volume at MGL in 2005 was stimulated by the growth of CNG through the installation of 21 new refuelling stations, taking the total number of stations to 117 at the end of 2005.

MGL has also expanded its network into the town of Thane and other areas in and around the city of Mumbai.

UK
The Interconnector pipeline (BG Group 25%) has 20 bcma capacity to transport gas from Bacton into the Continental European grid. The pipeline can also flow in reverse. In December 2005, its reverse flow capacity was increased from 8.5 bcma to 16.5 bcma. Reverse flow capacity is scheduled to be further expanded to 23.5 bcma by December 2006. With a growing UK requirement for imports and the UK becoming a net gas importer in 2004, imports via the Interconnector continued to increase in 2005.

In the first quarter 2005, BG Group and its partners completed the sale of Premier Transmission Limited (PTL) to Premier Transmission Financing Company.

 

Throughput (bcma)

   
 

Volume throughput has increased by 3% per annum on a compound basis since 2003

   
 


Actual


Target


(a) Reduction due to sale of PTL
 
(b) Previous target of 14 bcma has been amended to allow for disposal of PTL and reduced holding in MetroGAS
 
Comgas (bcma)
 
Comgas achieved double-digit volume growth year-on-year from 2003 to 2005
 
 


Industrial


Residential


Commercial


NGV


Co-generation


Power



Source: Comgas 



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20

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Operating and financial review
Operating review continued

 

Power & Other activities 
 
BG Group has a profitable portfolio 
of modern, fully contracted, 
combined cycle gas power stations, 
and leverages its distribution 
customer base to develop 
complementary businesses. 
             
  Highlights  
             
  Co-generation contracts entered commercial operation in India   Microgen signed a co-operation agreement with Gasunie to develop an appliance for the Dutch market  
             
  Opened more than 30 new Natural Gas Vehicle (NGV) stations in the states of São Paulo and Rio de Janeiro, taking the total to over 60 in Brazil        
             
   

2005 PERFORMANCE
Performance in the Power segment was largely unchanged from 2004. Other businesses were broadly in line with last year.

Power
Premier Power Limited (BG Group 100%) owns and operates the 1 316 MW Ballylumford power station in Northern Ireland, which has supply agreements with Northern Ireland Electricity. BG Group also has a 50% interest in the 1 130 MW Seabank power station, near Bristol. In June 2005, the failure of a steam turbine reduced availability at Seabank. Remedial works were completed during the first quarter 2006.

In the Philippines, BG Group has a 40% stake in the Santa Rita (1 000 MW) and San Lorenzo (505 MW) power stations, which sell electricity under long-term agreements to Meralco, the Philippines’ largest power distribution company.

BG Group has a 20% interest in the Genting Sanyen 760 MW CCGT plant, located 70 km south of Kuala Lumpur, with long-term sales to Malaysia’s national power company.

In Italy, BG Group has a 33.68% share in Serene, which operates 400 MW of co-generation adjacent to Fiat Auto plants.

Other activities
In Brazil, the Group, through its Iqara subsidiaries, operates co-generation and related energy supply services and compressed natural gas stations supplying natural gas vehicles in São Paulo and Rio de Janeiro. BG Group disposed of its Brazil telecoms businesses in December 2005.

In 2004, BG India Energy Services Pvt Ltd (BGIESPL) was established to deliver co-generation to Indian customers, now at around 13 MW.

Microgen (BG Group 100%) is developing an innovative energy system for use in individual homes and small businesses. Generating electricity at the same time as water and space heating, it reduces consumption of externally generated power. The appliance is currently undergoing performance and reliability field trials.

In 2005, Microgen signed a co-operation agreement with Gasunie to develop an appliance for the Dutch market.



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21

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Operating and financial review
Financial review

 

         
    “Strong growth in volumes and
revenues was carried through
to the bottom line resulting in
a 64% increase in earnings.”*
 
    Ashley Almanza
Chief Financial Officer
 
         

 

                 
  Financial results – Business Performance*         
    Revenue and other operating income Total operating profit(a)
    2005   2004   2003 2005   2004   2003
  £m £m £m £m £m   £m













   
  Exploration and Production (b)  3 074   2 148   1 787   1 942   1 189   954    













   
  Liquefied Natural Gas(b)  1 631   1 098   945   172   92   77    













   
  Transmission and Distribution  808   644   678   211   148   154    













   
  Power Generation  227   187   168   113   116   124    













   
  Other activities  15   8   3   (58 )  (32 )  (30 )  













   
  Less: intra-group sales  (91 )  (22 )  (17 )               













   
  Total  5 664   4 063   3 564   2 380   1 513   1 279    













   
  (a) Total operating profit includes the Group’s share of pre-tax operating profits in joint ventures and associates.  
 
  (b) Includes other operating income of £7 million (2004 £nil; 2003 £nil) in the E&P segment and £45 million (2004 £10 million; 2003 £6 million) in the LNG segment.  
       

 

The operations of BG Group comprise Exploration and Production (E&P), Liquefied Natural Gas (LNG), Transmission and Distribution (T&D), Power Generation (Power) and Other activities.

SUMMARY*
Strong growth in volumes and revenues (see table above) was carried through to the bottom line, resulting in a 64% increase in earnings. The successful completion and start-up of a number of large integrated gas projects and the arrival of long-term LNG supplies have enhanced the Group’s earnings and cash flow capacity and this has been reflected in the proposed full year dividend of 6 pence per share, an increase of 57%. In November, the Group initiated a £1 billion share repurchase programme following the receipt of exceptional pre-tax proceeds (US$1.8 billion) on the sale of the Group’s interest in the North Caspian Sea PSA. The Group also announced an additional £900 million of investment in new projects. The Group remains strongly financed, retaining the flexibility to execute its growth programme and to pursue additional investment opportunities.

OPERATING RESULTS*
A strong operating performance and favourable oil and gas prices resulted in a 57% increase in total operating profit in 2005. Further detail of each segment’s operating result (based on Business Performance) is given in the separate sections below.

BG Group’s post-tax ROACE (see page 135) was 23.4% (2004 17.5%; 2003 16.8%) .

E&P
E&P’s revenue and other operating income increased by 43% to £3 074 million from £2 148 million in 2004 and £1 787 million in 2003. The 2005 increase was primarily driven by higher prices; higher production from West Delta Deep Marine in Egypt; increased liquids exports from the Karachaganak field through the CPC pipeline; and a full year’s contribution from assets acquired in 2004 in Canada, Trinidad and Tobago and Egypt. Higher prices and US Dollar exchange rate movements contributed £674 million to the increase in revenue in 2005. The 2004 increase in revenue and other operating income was driven principally by higher production volumes, whilst higher realised prices,

  *Business Performance excludes disposals and certain re-measurements and is presented as exclusion of these items provides readers with a clear and consistent presentation of the underlying operating performance of the Group’s ongoing business. Unless otherwise stated, financial operating information for the Group and its business segments presented in the Operating and financial review is based on BG Group’s Business Performance. See presentation of non-GAAP measures, page 152. See, also, Segmental analysis and results presentation, note 2, page 71, and Earnings per ordinary share, note 10, page 85, for a reconciliation of the differences between Business Performance and BG Group’s Total Results.  
     
  Total operating profit* (£m)  
   
     
     


<

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22

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Operating and financial review
Financial review continued

 

  Exploration and Production             
    2005    2004    2003   







 
  Production volumes (mmboe)(a)             







 
  – oil  19.3    21.4    23.7   







 
  – liquids  29.7    25.6    19.2   







 
  – gas  134.8    119.8    113.1   







 
    183.8    166.8    156.0   







 
  Average realised prices             







 
  – oil per barrel (UK£/US$)  30.60/55.96    21.53/39.24    17.89/29.18   







 
  – liquids per barrel (UK£/US$)  22.84/41.77    14.21/25.90    8.86/14.45   







 
  – UK gas per produced therm (pence)  27.30    19.64    16.92   







 
  – international gas per produced therm (pence)  17.27    13.95    13.67   







 
  – overall gas per produced therm (pence)  20.15    16.18    15.16   







 
  Development expenditure (£m)  683    620    486   







 
  Gross exploration expenditure (£m)             







 
  – capitalised exploration expenditure  225    262    156   







 
  – other exploration expenditure  111    74    36   







 
    336    336    192   







 
       
  (a) Production volumes exclude fuel gas.  
       

partially offset by adverse US Dollar exchange rate movements contributed a net £161 million to the 2004 increase in revenue.

Approximately 30% of the Group’s gas production in 2005 was in the UK, of which 70% was sold under various contracts. The remaining UK gas volumes are sold on a short-term basis. BG Group’s realised UK gas price per produced therm was 27.3 pence in 2005 compared to 19.6 pence in 2004 and 16.9 pence in 2003.

In 2005, the Group’s average realised international gas prices increased by 24% compared to the previous year. The increase in price reflects indexation to oil prices and is also a result of increased volumes from Canada, Tunisia, Egypt and India. In 2004, average realised international gas prices increased by 2% over the previous year.

Unit lifting costs were £1.19 per boe in 2005 compared with £1.03 per boe in 2004 and £0.91 per boe in 2003. Unit operating expenditure was £2.21 per boe in 2005 against £2.01 per boe in 2004 and £1.85 per boe in 2003. The increases in lifting and unit operating costs in 2005 were predominantly due to the impact of higher upstream prices on input costs, tariffs and royalties. The increase in costs in 2004 compared with 2003 was primarily due to the impact of higher oil prices on royalties and tariffs and start-up costs of the Karachaganak export facilities, all partially offset by the favourable effects of a weaker US Dollar.

Total E&P operating profit in 2005 increased by 63% to £1 942 million (2004 £1 189 million; 2003 £954 million). The increase reflected the 10% increase in

production volumes and higher prices, partially offset by a higher exploration charge. At constant UK£/US$ exchange rates and upstream prices, total operating profit for the segment in 2005 increased by 9%. The 25% increase in operating profit in 2004 reflected production growth from the Karachaganak field, new production from the Scarab Saffron and Canadian fields and higher prices, offset by the unfavourable effect of a weaker US Dollar exchange rate. At constant UK£/US$ exchange rates and upstream prices, total operating profit in 2004 increased by 5%.

Gross exploration expenditure in 2005 was £336 million (2004 £336 million; 2003 £192 million) including £225 million (2004 £262 million; 2003 £156 million) of expenditure that was capitalised. Well write-off costs were £70 million (2004 £52 million; 2003 £46 million).

LNG
Revenue and other operating income increased to £1 631 million in 2005 (2004 £1 098 million; 2003 £945 million), reflecting BG Group’s increased activity in the global LNG market. LNG shipping and marketing activity accounted for the entire revenue and other operating income in all three years.

Total operating profit was £172 million in 2005 compared to £92 million in 2004 and £77 million in 2003. The increase in 2005 reflected higher profits from liquefaction (see below) and increased realisations achieved in the shipping and marketing business, including the benefit of re-directing 31 cargoes (2004 18 cargoes)

to higher value markets. Operating profit for the shipping and marketing business was £111 million in 2005 (2004 £51 million; 2003 £44 million).

Business development and other costs also increased in 2005 to £50 million (2004 £24 million; 2003 £23 million), reflecting higher levels of activity on new projects across the segment including the development of the OKLNG project in Nigeria. The increase in 2004 total operating profit reflected improved marketing margins and a strong performance at Atlantic LNG, partially offset by a weaker US Dollar. Contracts for the purchase of LNG and sale of natural gas via the Group’s shipping and marketing business are both linked primarily to the US Henry Hub reference price.

BG Group’s share of operating profits from its interests in liquefaction businesses in Trinidad and Tobago and Egypt was up £46 million to £111 million (2004 £65 million; 2003 £56 million). The increase in 2005 reflected the start-up of two liquefaction trains in Egypt and higher net-back margins to Atlantic LNG Train 1 in Trinidad and Tobago. The increase in 2004 compared to 2003 reflected the full year contribution from Atlantic LNG Train 3 together with higher prices at Atlantic LNG Train 1, partially offset by adverse exchange rate movements.

Atlantic LNG Train 4 commenced production in December 2005.



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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

23
   

 

T&D
T&D’s revenue in 2005 was £808 million (2004 £644 million; 2003 £678 million). Total operating profit in 2005, including the Group’s share of operating profit in joint ventures and associates, was £211 million (2004 £148 million; 2003 £154 million). The increase in revenue in 2005 was principally due to higher volumes at Comgas and the strengthening of the Brazilian Real and Argentine Peso exchange rates.

In 2005, Comgas’ revenue increased by 34% to £532 million, with a 14% increase in volumes and improved tariffs following the five year regulatory review. In 2004, there was a 2% increase in Comgas’ revenue to £397 million, with an 11% increase in volumes and higher prices being partially offset by a weaker Brazilian Real.

Comgas’ operating profit in 2005 rose 53% to £147 million (2004 £96 million; 2003 £95 million) due to volume growth, stronger exchange rates and lower gas costs. The operating profit in 2005 reflected a net benefit from lower gas costs of £13 million that will be passed back to customers through lower tariffs in the future. The increase in 2004 reflected an 11% increase in volumes and lower costs, largely offset by a weaker exchange rate.

MetroGAS’ revenue in 2005 was £164 million (2004 £150 million; 2003 £135 million). The £14 million increase in 2005 reflected higher prices and a stronger Argentine Peso. The £15 million increase in 2004 reflected 20% volume growth offset by a weaker Argentine Peso.

The £6 million increase in operating profit from MetroGAS in 2005 to £26 million (2004 £20 million; 2003 £18 million) reflected the price and volume growth referred to above.

In December 2005, BG Group announced that Gas Argentino S.A. (GASA), the parent company of MetroGAS, had reached agreement with its creditors for a comprehensive restructuring that converts financial indebtedness owed to those creditors into a 30% interest in GASA and a 19% interest in MetroGAS. The agreement, which is subject to regulatory approvals, reduces BG Group’s combined interest in MetroGAS to 26%. As a result, BG Group no longer controls GASA and MetroGAS and these companies have been deconsolidated from the date of the agreement. From the date of the agreement these companies are accounted for under the equity method and, as at 31 December 2005, are recognised at nil value in the Group’s Financial Statements.

BG Group’s share of operating profits in joint ventures and associates was

£42 million (2004 £40 million; 2003 £43 million). The 2005 result reflected increased volumes at Mahanagar Gas offset by the impact of the sale of Premier Transmission in March 2005.

Power
Power’s revenue was £227 million in 2005 (2004 £187 million; 2003 £168 million). Revenue in all three years was attributable to Premier Power in the UK and has risen in line with the terms of its power sales agreement with Northern Ireland Electricity, which entitles changes in gas cost to form the basis of the charge to be passed through to the customer.

Total operating profit of £113 million (2004 £116 million; 2003 £124 million) included the Group’s share of operating profits in joint ventures and associates of £89 million (2004 £88 million; 2003 £96 million) – attributable to the power plants at Seabank (UK), Santa Rita and San Lorenzo (the Philippines), Serene (Italy) and Genting Sanyen Power (Malaysia).

Total operating profit in 2005 included insurance income relating to operating income lost following the failure of one steam turbine at Seabank Power in June 2005. The 6% decrease in total operating profit in 2004 reflected weaker US Dollar exchange rates, which adversely affected the translation of results from the Philippine associate businesses.

Other activities
Revenue for Other activities in 2005 was £15 million (2004 £8 million; 2003 £3 million).

The total operating loss in 2005 was £58 million compared with £32 million in 2004 and £30 million in 2003. The loss in all three years related mainly to corporate costs and business development expense. The increase in operating loss in 2005 was primarily attributable to additional industry insurance premiums.

DISPOSALS AND RE-MEASUREMENTS*
The following items, described as ‘disposals and re-measurements’ are excluded from Business Performance as exclusion of these items provides a clearer presentation of the underlying performance of the Group. Disposals and re-measurements amounted, in aggregate, to a profit of £206 million before tax and interest (2004 £87 million; 2003 £116 million). For a full reconciliation between BG Group’s Total Results and Business Performance, see note 2, page 71. For further details of amounts comprising disposals and re-measurements, see note 6, page 81.

Re-measurements included within other operating income amounted to a non-cash charge of £240 million, of which £239 million was recognised in the E&P

E&P lifting costs


£ per boe


$ per boe


 

E&P operating expenditure


£ per boe


$ per boe


 

E&P production volumes(a)
(mmboe)
Annual production has increased by 18% since 2003
(a) Production volumes exclude fuel gas

* See presentation of non-GAAP measures, page 152.



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24

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

 

Operating and financial review
Financial review continued

Profit for the year

  Business   2005   Total   Business   2004   Total   Business   2003   Total  
Disposals and Disposals and Disposals and
Performance remeasurements Performance remeasurements Performance remeasurements
£m £m £m £m £m £m £m £m £m


















 
Total operating profit(a)  2 380   206   2 586   1 513   87   1 600   1 279   116   1 395  


















 
Net finance costs(b)  (51 )  15   (36 )  (67 )    (67 )  (71 )    (71 ) 


















 
Tax(b)  (941 )  (41 )  (982 )  (589 )  (30 )  (619 )  (490 )  (32 )  (522 ) 


















 
Profit for the year  1 388   180   1 568   857   57   914   718   84   802  


















 
Minority interest  (31 )  (9 )  (40 )  (28 )    (28 )  (28 )    (28 ) 


















 
Earnings  1 357   171   1 528   829   57   886   690   84   774  


















 
Earnings per share (pence)  38.3   4.9   43.2   23.5   1.6   25.1   19.6   2.3   21.9  


















 
                                     
(a) Total operating profit includes the Group’s share of pre-tax operating profits in joint ventures and associates.
(b) Includes the Group’s share in joint ventures and associates.

 

segment and £1 million was recognised in the LNG segment. The charge primarily consisted of £224 million of mark-to-market movements on certain long-term UK gas contracts that fall within the scope of International Accounting Standard (IAS) 39, ‘Financial Instruments: Recognition and Measurement’. The charge in 2005 arises as a result of higher UK gas prices at the end of the year.

Re-measurements presented within finance costs include the gain on retranslation of MetroGAS’ US Dollar and Euro borrowings, which cannot be designated as hedges under IAS 39 (£14 million). In addition, there is a re-measurement charge of £13 million in respect of certain derivatives used to hedge foreign exchange and interest rate risk and foreign exchange gains on certain other borrowings in subsidiaries of £16 million that represent effective economic hedging activities but do not qualify for hedge accounting under IAS 39.

In 2005, the profit on disposal of non-current assets of £446 million (2004 £87 million profit; 2003 £116 million profit) included a pre-tax profit of £416 million on the disposal of BG Group’s 16.67% interest in the North Caspian Sea PSA (recognised in the E&P segment) and a pre- and post-tax profit on disposal of the Group’s 50% interest in Premier Transmission Limited of £13 million (recognised in the T&D segment).

During 2005, management committed to a plan to dispose of BG Group’s telecoms businesses in Brazil and India. The telecoms businesses in Brazil had been sold by 31 December 2005. The overall disposal programme resulted in a pre- and post-tax charge to the

* See presentation of non-GAAP measures, page 152.

2005 income statement of £32 million (recognised in the Other activities segment), comprising losses on disposals of £18 million and an impairment charge of £14 million.

GASA and its subsidiary MetroGAS have been deconsolidated (see note 6, page 81) resulting in a pre- and post-tax gain of £56 million. As the Group no longer controls MetroGAS, the value in use of Gasoducto Cruz del Sur has fallen below its carrying value, resulting in a pre-tax impairment charge of £8 million. Both amounts were recognised in the T&D segment.

In addition, £1 million of pre- and post-tax profit was recognised in the E&P segment following the disposal of the Group’s interest in a North Sea asset.

In 2004, the pre-tax profit on disposal of non-current assets included £66 million on the sale of BG Group’s interests in the Muturi Production Sharing Contract (Muturi PSC) and Tangguh LNG in Indonesia (£47 million recognised in the E&P segment and £19 million recognised in the LNG segment).

In 2003, profits on disposals included £76 million pre-tax and £44 million post-tax profits on the sale and swap of UK North Sea assets (recognised in the E&P segment); a £32 million pre- and post-tax profit on the sale of BG Group's interest in Phoenix Natural Gas Limited (recognised in the T&D segment); a £6 million pre- and post-tax profit on the partial sale of Brindisi LNG SpA (recognised in the LNG segment); and a £2 million pre- and post-tax profit on the release of costs relating to a prior year disposal (recognised in the Other activities segment).

FINANCE COSTS*
In 2005, BG Group’s net finance costs, including BG Group’s share of finance

costs for joint ventures and associates was £51 million (2004 £67 million; 2003 £71 million). The lower finance costs in 2005 reflected the reduction in net borrowings following the disposal of the Group’s interest in the North Caspian Sea PSA. Total net finance costs including re-measurements amounted to £36 million. There were no re-measurement finance items in 2004 and 2003.

TAXATION*
BG Group’s tax charge in 2005 before disposals and re-measurements and including BG Group’s share of taxation from joint ventures and associates was £941 million (2004 £589 million; 2003 £490 million). Excluding disposals and re-measurements, BG Group’s effective tax rate for 2005 was 40.4% (2004 40.7%; 2003 40.6%) .

Including disposals and re-measurements, and BG Group’s share of taxation from joint ventures and associates, the Group’s tax charge for 2005 was £982 million (2004 £619 million; 2003 £522 million), representing an effective tax rate of 38.5% (2004 40.4%; 2003 39.4%) . In 2005, the tax charge on disposals and remeasurements comprised a charge of £137 million that arose on the sale of BG Group’s interest in the North Caspian Sea PSA offset by a credit of £96 million that arose on the mark-to-market of certain commodity contracts.

In 2004, the tax charge on disposals and re-measurements of £30 million arose on the sale of BG Group’s interest in the Muturi PSC (£28 million) and shares in a listed company, GAIL (India) Limited (previously Gas Authority of India Limited) (£2 million).

The proposed increase in North Sea taxation to 50% is expected to add



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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

25
   

Capital investment

  2005    2004    2003   
  £m    £m    £m   






 
Intangible assets(a)  235    294    201   






 
Property, plant and equipment  1 160    1 061    607   






 
  1 395    1 355    808   






 
Non-current asset investments and acquisitions  121    539    246   






 
Total  1 516    1 894    1 054   






 
             
(a) Includes £60 million (2004 £150 million; 2003 £104 million) in respect of the Group’s interest in the North Caspian Sea PSA, which was classified as held for sale until its disposal in 2005.

 

approximately 4% to the Group’s effective rate in 2006. The impact of the North Sea tax on the Group’s tax rate will vary according to the prices realised on North Sea production but is expected to diminish over time as more of the Group’s profits come from outside the UK. In addition there will be a one-off adjustment in 2006 to reflect the increased North Sea tax on opening deferred tax balances (not included in the 4% above), reflecting a credit of £61 million to restate the deferred tax asset associated with mark-to-market balances and a charge of £38 million for other deferred tax balances

EARNINGS AND EARNINGS PER SHARE*
Excluding disposals and re-measurements, earnings (and earnings per share) were £1 357 million (38.3 pence) in 2005, £829 million (23.5 pence) in 2004 and £690 million (19.6 pence) in 2003.

The growth in earnings and earnings per share is illustrated opposite.

Earnings (and earnings per share) including disposals and re-measurements were £1 528 million (43.2 pence) in 2005, £886 million (25.1 pence) in 2004 and £774 million (21.9 pence) in 2003.

A three year summary from 2003 to 2005 of the financial results of BG Group’s operations is set out on page 21.

CAPITAL INVESTMENT
Capital investment in 2005 was £1 516 million (2004 £1 894 million; 2003 £1 054 million) including £29 million for the acquisition of the remaining 50% interest in Brindisi LNG SpA in Italy.

Capital investment in E&P (including capitalised exploration expenditure) was £935 million (2004 £1 380 million; 2003 £654 million). In 2005, this included expenditure in the UK, Egypt, Kazakhstan and Mauritania. E&P investment in 2004 included £355 million on the acquisition of subsidiary undertakings in Canada, Mauritania and Trinidad and Tobago and £120 million to acquire a further 40% interest in the Rosetta gas field in Egypt.

In 2003, capital investment included £104 million relating to the Group’s interest in the North Caspian Sea PSA.

Development expenditure (on proved properties) totalled £683 million compared with £620 million in 2004 and £486 million in 2003. Development expenditure in 2005 was primarily in respect of the West Delta Deep Marine field in Egypt, Buzzard and Atlantic/Cromarty fields in the UK, Panna/Mukta field in India and Chinguetti field in Mauritania. Development expenditure in 2004 was primarily in respect of the West Delta Deep Marine, Karachaganak, Buzzard, Atlantic/Cromarty and Miskar fields.

Capital investment in LNG in 2005 was £422 million compared with £417 million in 2004 and £301 million in 2003. Investment in 2005 included expenditure on LNG vessels under construction and due for delivery in 2006 and 2007 (financed through leases), £29 million on the acquisition of the remaining 50% of Brindisi LNG SpA and expenditure on the Atlantic LNG Train 4 liquefaction plant and the Dragon LNG terminal at Milford Haven. Investment in 2004 primarily related to the delivery of two LNG vessels and development of the Egyptian LNG Trains 1 and 2 and Atlantic LNG Train 4 liquefaction plants.

Capital investment in T&D in 2005 amounted to £136 million (2004 £66 million; 2003 £76 million). Expenditure in all three years was incurred mainly on the expansion of the Comgas network.

Capital investment in Power during 2005 was £3 million (2004 £3 million; 2003 £3 million).

CASH FLOW
Cash flow from operating activities in 2005 was £1 606 million – an increase of £411 million compared with 2004 (2004 £1 195 million; 2003 £1 112 million), principally reflecting increased operating profit partially offset by increased working capital associated with higher volumes and commodity prices.

  Earnings per share (pence)
 


Including disposals and re-measurements


Excluding disposals and re-measurements


   
earnings excluding disposals and re-measurements increased by 64% in 2005;
   
earnings per share excluding disposals and re-measurements increased by 63% in 2005; and
   
underlying earnings growth excluding the impact of upstream prices and US Dollar exchange movements increased by 17% in 2005.

 

 

 

 

* See presentation of non-GAAP measures, page 152.



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26

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Operating and financial review
Financial review continued

Cash flow before financing       
  2005   2004   2003  
  £m £m £m






 
Cash generated by operations  2 489   1 582   1 444  






 
Income taxes paid  (883 ) (387 )  (332 ) 






 
Cash flows from investing activities  (62 ) (1 135 )  (811 ) 






 
Cash flow before financing  1 544   60   301  






 
             
             
  2005 capital investment by geographical area (£m)(a)      
             
       
             
 



   
    Europe  447     
 



   
    South America  160     
 



   
    Asia and Middle East  194     
 



   
    North America and the Caribbean    403    
 



   
    Mediterranean Basin and Africa  312     
 



   
      Total  1 516     
 



   
             
  (a)   As of March 2006, the regions in which the Group manages its operations were reorganised. The information shown isaligned with the way in which the operations were managed in 2005. For further information see note 2, page 71      
             
  2005 capital investment by business segment (£m)      
         
       
 
 
 
             
 



   
    E&P 935    
 



   
    LNG 422    
 



   
    T&D 136    
 



   
    Power 3    
 



   
    Other 20     
 



   
      Total 1 516    
 



   
             
             

Cash flow before financing included tax paid of £883 million in 2005 compared with £387 million in 2004 and £332 million in 2003. The increase in 2005 reflected higher taxable profit and includes tax paid in respect of the sale of BG Group’s interest in the North Caspian Sea PSA and timing differences relating to the claiming of capital allowances. The increase in 2004 reflected the Group’s higher taxable profit.

Dividends from joint ventures and associates amounted to £93 million in 2005 (2004 £81 million; 2003 £88 million) In all three years, dividends were received from Atlantic LNG, Interconnector, Santa Rita, San Lorenzo and Seabank.

Pre-tax proceeds from disposal of subsidiary undertakings and non-current assets amounted to £883 million in 2005 (2004 £174 million; 2003 £191 million), primarily representing the disposal of the Group’s interest in the North Caspian Sea PSA offset by the reduction in cash balances arising from the deconsolidation of GASA and MetroGAS. Receipts in 2004 included £142 million from the disposal of BG Group’s interests in the Muturi PSC and Tangguh LNG project and £32 million for the disposal of the Group holding in a listed company, GAIL (India) Limited (previously Gas Authority of India Limited).

Payments to acquire property, plant and equipment and intangible assets amounted to £1 064 million in 2005 (2004 £1 022 million; 2003 £855 million). Expenditure to purchase subsidiary undertakings and investments amounted to £39 million in 2005 (2004 £364 million; 2003 £3 million). In 2004, the Group paid £189 million to purchase the entire share capital of El Paso Oil and Gas Canada, Inc. £92 million for the entire share capital of Aventura Energy, Inc. in Trinidad and Tobago, £74 million for the entire share capital of Mauritania Holdings BV and £120 million to increase the Group’s share of the Rosetta concession in Egypt from 40% to 80%. There were no significant acquisitions in 2003.

Cash flows from financing activities accounted for a net cash outflow of £400 million in 2005 (2004 £27 million;

2003 £255 million). This included a £29 million outflow (2004 £3 million; 2003 £6 million) in respect of dividends paid to minority shareholders. Net interest paid amounted to £11 million in 2005 (2004 £12 million; 2003 £24 million).

FINANCING
Net funds (comprising cash, current asset investments, finance leases, currency and interest rate derivative financial instruments and short- and long-term borrowings) were £253 million compared to net borrowings of £999 million as at 31 December 2004 (£721 million as at 31 December 2003). The movement to funds in 2005 is mainly due to the significant increase in operating cash flow, proceeds from the disposal of the Group’s interest in the North Caspian Sea PSA and the deconsolidation of GASA and MetroGAS. The increase in net borrowings in 2004 is mainly attributable to capital investment including the acquisition of two LNG vessels under finance leases.

As at 31 December 2005, the Group’s share of third-party net borrowings in joint ventures and associates amounted to approximately £600 million (2004 approximately £500 million) of which £437 million is guaranteed by the Group (2004 £258 million). Including BG Group shareholder loans of £543 million (2004 £605 million), the total Group share of these net borrowings was approximately £1.2 billion (2004 £1.1 billion). These net borrowings are taken into account in the Group’s share of the net assets in joint ventures and associates, which are accounted for using the equity method.

BG Group shareholders’ funds as at 31 December 2005 were £6 182 million compared with £4 567 million at the beginning of the year.

Details of the maturity, currency and interest rate profile of the Group’s borrowings as at 31 December 2005 are shown in note 20, page 91, and details of the Group’s cash and cash equivalents as at 31 December 2005 are shown in note 18, page 90.

BG Group’s principal borrowing entities are: BG Energy Holdings Limited (BGEH), including wholly owned subsidiary undertakings, the majority of whose



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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

27
   

 

Contractual obligations – payments due by period(a)                    
  Total    Within 1 year    1-3 years    3-5 years    After 5 years   
  £m    £m    £m    £m    £m   










 
Gross borrowings  1295    71    309    109    806   










 
Other long-term liabilities reflected on the balance sheet  304        44        260   










 
  1 599    71    353    109    1 066   










 
Future finance lease obligations  217                217   










 
Operating leases  318    57    93    56    112   










 
Purchase obligations(b) 37 057    2 717    4 691    4 046    25 603   










 
Total 39 191    2 845    5 137    4 211    26 998   










 
(a)  These amounts do not include associated future interest payments (see page 28).
 
(b)  Excludes commitments for capital expenditure as at 31 December 2005 of £1 053 million.
 

borrowings are guaranteed by BGEH (collectively BGEH Borrowers); and Comgas and Gujarat Gas, which conduct their borrowing activities on a stand-alone basis and whose borrowings are non-recourse to other members of the Group.

BGEH is the Group’s principal credit rated entity, with long-term credit ratings of A from Fitch Ratings Limited, A2 from Moody’s Investors Service Ltd and A– from Standard & Poor’s. BGEH has short-term credit ratings of F1 from Fitch Ratings Limited, P-1 from Moody’s Investors Service Ltd and A-2 from Standard & Poor’s as at 8 March 2006.

As at 31 December 2005, BGEH Borrowers had a US$1 billion US Commercial Paper Programme, which was unutilised, and a US$1 billion Eurocommercial Paper Programme, of which US$965 million was unutilised. BGEH Borrowers also had a US$2 billion Euro Medium Term Note Programme, of which US$1 452 million was unutilised, and aggregate committed multicurrency revolving borrowing facilities of US$1 105 million, of which US$552 million matures in 2006 and US$553 million matures in 2009. There are no restrictions on the application of funds under these facilities, which were undrawn as at 31 December 2005. In addition, at 31 December 2005, BGEH had uncommitted multicurrency borrowing facilities of £621 million of which £601 million was unutilised.

BGEH Borrowers are also lessees under a number of LNG ship charters that constitute finance leases. As at 31 December 2005, the total unutilised facility amounts under these finance leases total US$433 million, such amounts being available exclusively to fund the construction of certain LNG vessels.

As at 31 December 2005, Gujarat Gas had committed borrowing facilities of Indian Rupees (INR) 1 500 million (£19 million) of which INR 780 million (£10 million) was unutilised.

As at 31 December 2005, Comgas had committed borrowing facilities of Brazilian Reals (BRL) 1 243 million (£308 million), of which BRL 441 million (£109 million) was unutilised, and uncommitted borrowing facilities of BRL 575 million (£143 million), of which BRL 382 million (£95 million) was unutilised. Some of the borrowings of Comgas have restrictions on their use, being linked to capital projects.

The distribution of the profits of Comgas is restricted under local legislation. Details of these restrictions are shown in note 32, page 116. Distribution of the profits of BG Group’s other subsidiary undertakings is not materially restricted.

It is considered that the Group has sufficient liquidity facilities to meet current working capital requirements.

RETURN OF CAPITAL TO SHAREHOLDERS
In November 2005, BG Group announced its intention to return up to £1 billion to shareholders through a share repurchase programme, dependent on market and economic conditions. Shares repurchased under the share repurchase programme are held as Treasury shares. As at 31 December 2005, BG Group had repurchased 7 million ordinary shares, which are held as Treasury shares at a cost of £39 million.

DIVIDEND
In considering the dividend level, the Board takes account of the outlook for earnings growth, cash flow generation and financial gearing. The Group’s cash flows are becoming more substantial and durable as a number of material, longer life assets come into operation. Given this strong financial position and outlook, the Board believes it is now appropriate to rebase the dividend. The Board recommends a final dividend of 4.09 pence per share bringing the full year dividend to 6.00 pence per share, an increase of 57% compared with last year.

Following the rebasing of the dividend,

           
  Cash generated by operations
(£m)
   
           
           
   
           
      Maturity of 2005 gross     
      borrowings (£m)     
           
   
           
 



 
    Within 1 year 71  
 



 
    1-2 years 72  
 



 
    2-3 years 237  
 



 
    3-4 years 82  
 



 
    4-5 years 27  
 



 
    Over 5 years 806  
 



 
      Total 1 295  
 



 


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28

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Operating and financial review
Financial review continued

it is the intention of the Board to continue to increase the dividend in line with underlying growth in earnings.

The final dividend will be paid on 12 May 2006 (19 May 2006 in respect of American Depositary Shares (ADSs)).

CONTRACTUAL OBLIGATIONS AND OTHER OFF-BALANCE SHEET ARRANGEMENTS
The table on page 27 shows the Group’s contractual obligation payments by period. The table includes the Group’s borrowings, future finance lease obligations, operating leases, purchase obligations and other long-term liabilities reflected on the balance sheet; these are principally provisions for future decommissioning activities.

Details of the interest rate composition of the Group’s borrowings are provided in note 20, page 91. The effective post-swap interest rates on these borrowings were between 4% and 19% as at 31 December 2005.

BG Group’s purchase obligations largely relate to gas purchases in the Group’s LNG business. These contracts are of a long-term nature, providing assured supply to its portfolio of regasification capacity rights. As at 31 December 2005, these commitments were calculated using a gas price of US$6.00 per mmbtu. Other obligations relate to BG Group’s power plants and pipelines around the world. Obligations in respect of these agreements are also included in the table on page 27.

BG Group also has commitments associated with its pension and post-retirement benefit plans. Expected future benefit payments to 2014 as at 31 December 2005 were £157 million. Aggregate expected contributions for the year ended 31 December 2006 are expected to be £48 million, including one-off payments of £22 million. Further details of pension and post-retirement benefit plan obligations are set out in note 29, page 102.

The Group proposes to meet its commitments from both the operating cash flows of the business and from use of the money and capital markets, including existing committed lines of credit.

Other contingencies (see note 27, page 99) mainly include the provision of guarantees and indemnities to third parties in respect of the Company and its subsidiary undertakings, in the normal course of business.

CRITICAL ACCOUNTING POLICIES
BG Group’s Principal Accounting Policies are set out on pages 63 to 65. To apply certain of these policies, management is required to make estimates and assumptions that affect reported profit, assets and liabilities. Actual outcomes could differ from those calculated based on estimates or assumptions.

BG Group believes that the accounting policies associated with exploration expenditure, depreciation, decommissioning, impairments, financial instruments including commodity contracts and revenue recognition are the critical policies where changes in the estimates and assumptions made could have a significant impact on the consolidated Financial Statements.

One particular estimate that affects most of the International Financial Reporting Standards (IFRS) policies discussed in this section is the estimation of hydrocarbon reserves. The Group’s estimates of reserves of gas and oil are reviewed and, where appropriate, updated quarterly. They are also subject to periodic review by external advisers. A number of factors impact on the amount of gas and oil reserves, including the available reservoir data, commodity prices and future costs, and the amount is subject to periodic revision as these factors change.

Exploration expenditure
In December 2004, the International Accounting Standards Board (IASB) issued IFRS 6, ‘Exploration for and Evaluation of Mineral Resources’, which covers the accounting treatment of expenditure incurred on the exploration and evaluation of mineral resources. The standard is mandatory for periods beginning on or after 1 January 2006, although early adoption is encouraged. BG Group has adopted this standard from 1 January 2005.

BG Group accounts for exploration expenditure under the ‘successful efforts’ method. The success or failure of each exploration effort is judged on a well-by-well basis as each potential hydrocarbon structure is identified and tested. Certain expenditure, such as licence acquisition and drilling costs, is capitalised within intangible assets pending determination of whether or not proved reserves have been discovered. A review is carried out at least annually and any unsuccessful expenditure is written off to the income statement. Costs that relate directly to the discovery and development of specific gas and oil reserves are capitalised and depreciated over the useful economic lives of those reserves. Certain expenditure that is general in nature, such as geological and geophysical exploration costs, is written off directly to the income statement.

An alternative policy would be the ‘full cost’ method under which all costs associated with exploring for and developing gas and oil reserves within a cost pool are capitalised and written off against income from subsequent production. While the

reported profit under each method will be the same over the total life of the entity, profit is generally recognised earlier under the full cost method.

As at 31 December 2005, BG Group held a balance of £532 million relating to expenditure on unproved gas and oil reserves within intangible assets. Capitalised exploratory well costs included within this total amounted to £157 million. Exploration expenditure written off to the income statement in 2005 was £70 million (2004 £52 million; 2003 £46 million).

Capitalised exploratory well costs held for more than one year relate to offshore and frontier areas where further work is being undertaken on geological and geophysical assessment, development design and commercial arrangements. For additional information on capitalised exploration expenditure within intangible assets see note 12, page 86.

Depreciation
Exploration and production assets are depreciated using the unit of production method based on estimates of proved developed reserves of those fields, except that a basis of total proved reserves is used for acquired interests and for facilities.

Management estimates that a 1% change throughout 2005 in the estimation of proved and proved developed reserves associated with producing fields would have changed the 2005 depreciation charge by £4 million. Changes in the estimation of reserves relating to non-producing fields would not have impacted the 2005 depreciation charge.

Decommissioning
Where a legal or constructive obligation has been incurred, decommissioning provisions are recognised in the Financial Statements at the net present value of the future expenditure estimated to be required to settle the Group’s decommissioning obligations. The discount implicit in recognising the decommissioning liability is unwound over the life of the provision and is included in the income statement as a financial item within finance costs. Where a provision gives access to future economic benefits, an asset is recognised and depreciated in accordance with the Group’s depreciation policy. Any changes to estimated costs are dealt with prospectively.

The measurement of decommissioning provisions involves the use of estimates and assumptions such as the discount rate used to determine the net present value of the liability. The estimated cost of decommissioning is based on engineering estimates and reports from independent



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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

29
   

 

 

advisers. In addition, the payment dates of expected decommissioning costs are uncertain and are based on economic assumptions surrounding the useful economic lives of the fields concerned.

On the basis that all other assumptions in the calculation remain the same, a 10% change in the cost estimates used to assess the final decommissioning obligations would result in a change to the decommissioning provision of £26 million as at 31 December 2005. This change would be offset by a change in the value of the associated asset, resulting in no change to the consolidated net assets. The impact on 2005 profit of such a change is estimated to be £5 million, comprising a £4 million change in the depreciation charge and a £1 million change in the unwinding of the provision charge.

Impairments
The Group reviews its assets for impairment if there is an indication that the carrying amount may not be recoverable. Goodwill is subject to an impairment review at least annually or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Impairment reviews compare the carrying value of a cash generating unit (including associated goodwill) with its recoverable amount. The recoverable amount is the higher of the estimated value in use and fair value less costs to sell. Value in use is based on the net present value of estimated future pre-tax cash flows. Impairment reviews may cover all operating segments.

For the purposes of impairment testing, E&P assets may be aggregated into appropriate cash generating units based on considerations including geographical location, the use of common facilities and marketing arrangements.

BG Group uses long-term assumptions to determine the net present value of future cash flows for use in impairment reviews unless, by exception, short-term market assumptions are more appropriate to the asset under review. Particular assumptions that impact the calculations are commodity prices, exchange rates and discount rates. Page 35 includes further detail in relation to commodity prices and exchange rates.

E&P activities form BG Group’s largest business segment, the results of which are sensitive to a number of factors, but particularly to commodity prices.

BG Group performs impairment testing for gas and oil reserves using its proved plus probable reserves estimates, which are based on the Society of Petroleum Engineers definition.

Financial Instruments
The Group is exposed to credit risk, interest rate risk, foreign exchange risk and liquidity risk. As part of its business operations, the Group uses derivative financial instruments (derivatives) in order to manage exposure to fluctuations in interest rates and exchange rates. The Group enters into interest rate swaps or forward rate agreements to manage the composition of floating and fixed rate debt. The Group enters into forward exchange and currency swaps to hedge certain foreign currency cash flows and to adjust the currency composition of its assets and liabilities. Certain agreements are combined foreign currency and interest swap transactions, described as cross currency interest rate swaps. The Group’s policy is not to use interest rate and exchange rate derivatives for speculative purposes.

Derivatives are recognised at fair value on the balance sheet.

Certain derivatives are designated as hedges under IAS 39, in line with the Group’s risk management policies. Derivatives used for hedging are measured at fair value. Gains and losses arising from the re-measurement of these derivatives are either recognised in the income statement or deferred in equity, depending on the type of hedge. Any hedge ineffectiveness is recognised immediately in the income statement. Movements in fair value of derivatives not formally included in hedging relationships are recognised in the income statement.

The Group calculates the fair value of medium- and long-term debt and derivatives by using market valuations where available or, where not available, by discounting all future cash flows by the market yield curve at the balance sheet date.

The Group utilises a sensitivity analysis technique to evaluate the effect that changes in relevant rates or prices will have on the market value of debt and derivative instruments. As at 31 December 2005, the potential change in the fair value of the aggregation of medium- and long-term debt and exchange rate and interest rate derivative instruments, assuming a 10% change in exchange rates, was £162 million (2004 £115 million). The potential change in the fair value of the above, assuming a 10% change in the level of interest rates was £9 million (2004 £8 million), of which £7 million related to finance leases and derivative instruments related to them.

Loans held by the Group are measured at amortised cost except where they form the underlying transaction in an effective fair value hedge relationship when the carrying amount is adjusted to reflect the

fair value movements associated with the hedged risks. Other financial instruments such as receivables balances are measured at amortised cost less any provisions for impairment.

The hedge accounting requirements under IAS 39 and US GAAP Financial Accounting Standard (FAS) 133, ‘Accounting for Derivative Instruments and Hedging Activities’, are not identical. Certain hedges utilised by the Group’s treasury operations would not qualify as effective hedges under FAS 133 without additional designations and documentation.Accordingly, the Group does not designate any treasury derivatives as hedges under FAS 133 with all movements in fair value of these instruments being recognised in the income statement. The impact on the income statement under US GAAP as a result of this policy is a charge to income of £76 million in 2005.

Commodity Instruments
On adoption of IAS 39, BG Group assessed all commodity contracts to determine whether they fell within the scope of the standard at the inception of each contract. Within the ordinary course of business the Group routinely enters into sale and purchase transactions for commodities. The majority 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 commodity in accordance with the Group’s expected sale, purchase or usage requirements. Such contracts are not within the scope of IAS 39 and accordingly are not recognised in the Financial Statements.

Certain short-term contracts for the purchase and subsequent resale of third-party commodities are within the scope of IAS 39 and are recognised on the balance sheet at fair value with movements in fair value recognised in the income statement.

Certain long-term gas contracts operating in the UK gas market have terms within the contract that constitute written options and accordingly they fall within the scope of IAS 39. They are recognised on the balance sheet at fair value with movements in fair value recognised in the income statement. These contracts are also considered derivatives under FAS 133, along with certain other contracts that do not qualify for the ‘normal sale’ exception under US GAAP as their terms were assessed at the date of adoption of FAS 133 rather than the date of inception of the contract. The inclusion of these contracts increased the charge to income under US GAAP by £380 million.

The Group uses various commodity based derivative instruments to manage some of the risks arising from fluctuations in


 


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30

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Operating and financial review
Financial review continued

 

commodity prices. Such contracts include physical and net-settled forwards, futures, swaps and options. Where these derivatives have been designated under IAS 39 as cash flow hedges of underlying commodity price exposures, certain gains and losses attributable to these instruments are deferred in equity and recognised in the income statement when the underlying hedge transaction occurs. The pre-tax loss recognised in equity in respect of these contracts as at 31 December 2005 was £25 million.

All other net-settled commodity contracts are measured at fair value with gains and losses taken to the income statement.

The Group applies hedge accounting to commodity instruments under FAS 133, when the documentation and effectiveness testing used under IAS 39 satisfies the requirements of FAS 133.

Gas contracts and related derivatives associated with the physical purchase, storage and resale of third-party gas are presented on a net basis within other operating income.

Revenue recognition
BG Group recognises revenue when the significant risks and rewards of ownership of any goods and services have been transferred.

Revenue associated with exploration and production sales (natural gas, crude oil, and petroleum products) is recorded when title passes to the customer. Revenue from the production of natural gas and oil in which the Group has an interest with other producers is recognised on the basis of the Group’s working interest and the terms of the relevant production sharing contracts (entitlement method). Differences between production sold and the Group’s share of production are not significant.

Sales of LNG and associated products are recognised when title passes to the customer as the product passes the delivery point at the loading port or the tailgate of the regasification terminal. LNG shipping revenue is recognised over the period of the relevant contract.

Revenue from gas transmission and distribution activities is recognised in the same period in which the related volumes are delivered to the customer.

Power generation revenues are recognised based on the availability status of the power station to produce at a given point in time. Revenue associated with the costs of actual production is recognised whenever power is generated.

All other revenue is recognised when title passes to the customer.

 

RELATED PARTY TRANSACTIONS
BG Group provides goods and services to and receives goods and services from its joint ventures and associates.

In the year ended 31 December 2005, the Group incurred charges of £564 million (2004 £428 million; 2003 £249 million) and, in turn, received income of £122 million (2004 £94 million; 2003 £113 million) under these arrangements. In addition, the Group provides financing to some of these parties by way of loans. As at 31 December 2005, loans of £543 million (2004 £605 million) were due from joint ventures and associates. These loans are accounted for as part of the Group’s investment in joint ventures and associates and disclosed in note 14, page 88. Interest of £21 million (2004 £16 million; 2003 £17 million) was charged on these loans during the year at interest rates of between 0% and 9.95% (2004 0% and 9.95%) . The maximum debt outstanding during the year was £624 million (2004 £683 million).

During 2005, MetroGAS incurred charges relating to trading transactions of £18 million (2004 £18 million; 2003 £17 million) from another shareholder. As at 31 December 2005, MetroGAS owed £1 million to this party (2004 £2 million).

During 2005, Comgas received charges relating to trading transactions of £1 million (2004 £1 million; 2003 £1 million) from another shareholder. As at 31 December 2005, £nil was outstanding with this party (2004 £nil).

During the year, there were also a number of transactions between the Company and its subsidiary undertakings that are eliminated on consolidation and therefore not disclosed.

US GAAP RECONCILIATION
The differences between IFRS and US GAAP are set out and described in full in note 31, page 108.

The most substantial difference identified in the US GAAP reconciliation is in respect of certain commodity contracts that are considered derivatives under US GAAP (as described in Commodity Instruments on page 29) and the related deferred tax adjustment.

Other differences include accounting for pension costs, share-based payments, liquidated damages, decommissioning costs, hedge accounting, regulatory balances, goodwill and deferred tax.



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Operating and financial review
Corporate Responsibility

Corporate Responsibility  
             
Corporate Responsibility  
strengthens the Group’s ability  
to deliver its business strategy.  
             
2005 in Review        
  Established the Board CR Committee to provide greater oversight and governance of CR   Revised the Business Principles to incorporate values appropriate to BG Group today and into the future  
             
  Launched the STEP UP safety initiative to reinforce the focus on safe behaviours after six contractors died as a result of three separate incidents   Conducted a community relations baseline review  
             
             
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   

BG Group’s search for natural gas can take the Company to countries with challenging business climates and varied economic, environmental and social conditions. A significant amount of the industry’s reserves are found in countries outside the Organisation for Economic Co-operation and Development (OECD). The Group believes that Corporate Responsibility (CR) strengthens its ability to deliver its business strategy and, accordingly, BG Group incorporates CR in its business decision-making process.

This section summarises BG Group’s performance in the four areas of CR: conduct, our people, society and environment. More detail can be found in the 2005 Corporate Responsibility Report, which is published separately.

The Group’s reputation for high standards in all its activities contributes to its business success. The BG Group Statement of Business Principles has been in place since 1998 and is published on the Group’s website. It is the code of ethics for all employees and forms the foundation for CR across the Group. The Business Principles are reviewed annually.

In 2005, the review involved consultation with employees and external organisations to make sure that the Business Principles remain fit for purpose with regard to the Group’s operations and reflect how civil society expects an international gas company to behave. In December 2005, the Board approved revised Business Principles, which comprise 15 statements of beliefs and behaviours.

The revised Business Principles will be supported by two documents: Corporate Commitments fill in the detail of how BG Group will deliver the Business Principles and a code of conduct will set out the Group’s expectations for all employees in relation to the Business Principles. The revised Business Principles, Corporate Commitments and code of conduct will be launched in 2006.

CONDUCT
Guiding behaviour
The Board established a CR Committee in February 2005 to provide greater oversight and governance of CR as the business grows. Membership of the CR Committee is shown on page 42 and its terms of reference are available on the BG Group website.

In 2005, the activities of the CR Committee included:

assurance that the Group will be able to conduct business in accordance with its Business Principles in new areas of activity;
   

 


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Operating and financial review
Corporate Responsibility continued

 

review of CR issues in Nigeria and Libya to understand the risks and to gain assurance that the Group could effectively manage these risks; 
   
approval of the revised Business Principles;
   
consideration of an independent report on community relations; 
   
agreement to the Group climate change strategy; and
   
receiving regular reports on Health, Safety, Security and the Environment (HSSE).

CR workshops took place during the last year to guide employees on how to think through ethical concerns and apply the Business Principles. Since August 2005, CR has been included in the induction courses attended by new UK-based employees. The workshops provide an environment for employees to raise concerns. Participants requested more guidance on CR and ethics and sought reassurance that they were expected to comply with the Business Principles even in cases where compliance might impact short-term performance or profit. The Group will address this in the launch of the revised Business Principles.

In 2005, the Group investigated seven allegations in accordance with its Whistleblowing policy, relating to malpractice, HSSE and general employee concerns. The Group also investigated six allegations of fraud. One employment contract was terminated and two incidents were reported to the police for further investigation. We found evidence of fraud in one case and took remedial action. No evidence of fraud emerged from the remaining two cases. None of these cases involved allegations against management or employees who had a significant role in the Group’s internal control over financial reporting.

Adding value to economies
BG Group helps sustain and develop the economies of the countries in which it works by improving access to energy supplies and paying taxes and royalties. The Group also offers business to local suppliers, provides employment and training to national staff and invests in community projects.

BG Group recognises the link between business success and thriving local economies. In late 2005, BG Group retained Lord Holme to advise on sustainable development. The Group’s approach to sustainable development will be presented to the CR Committee in 2006.

BG Group supports the Extractive Industries Transparency Initiative (EITI), an initiative to promote transparent reporting by governments of the

aggregate revenues resulting from mineral resource extraction. In 2005, BG Group and other energy companies, working in partnership with the Kazakhstan Government, agreed a way forward to implement this initiative in Kazakhstan. In Nigeria, the Group supports the Nigerian Government’s implementation of the EITI under the Nigerian Extractive Industries Transparency Initiative. In Trinidad and Tobago, BG Group is working with the Government, which is piloting the initiative.

Investor dialogue
An active programme of engagement on CR issues with major shareholders and analysts is in place. In 2005, this included face-to-face meetings with analysts, written responses to surveys and a presentation and discussion session led by the Chief Financial Officer. Shareholders can also access reports and presentations on the BG Group website.

In 2005, Goldman Sachs ranked BG Group in the top 10% of the oil and gas sector for managing environmental, social and governance issues. The Group also continues to be a member of the FTSE4Good index and Dow Jones Sustainability indices.

OUR PEOPLE
During 2005, BG Group employed an average of 5 363 people, of whom 4 000 were employed outside the UK. In 2005, BG Group recruited 1 053 people worldwide, increasing the workforce by 12% compared to 2004. International opportunities increased, with 443 employees taking up assignments outside their home country, enabling them to develop greater cross-cultural experience and share knowledge.

The BG International Management Programme (introduced in 2002 and accredited by the UK’s Chartered Institute of Management) is a popular and successful way of training employees who have the potential to be managers in the future. The first 42 students graduated in April 2005 with ten nationalities represented. A further 69 people are currently on the programme with 50 nominations for 2006.

Safety
BG Group has always focused on safety: operational and occupational. BG Group’s safety performance has improved significantly since 1998 due to the introduction of safety management systems in the 1990s and behaviour-based safety processes in 2003. Behaviour-based safety implementation stems from understanding what people do in practice in the workplace and eliminating unsafe behaviours. The rate of lost time injuries

for employees and contractors in 2005 was 0.5 per million hours worked, compared to 0.6 in 2004 and a starting position of 6.7 in 1998.

As reported in the Chairman’s and Chief Executive’s statements, there were six contractor fatalities during 2005. Five were in Egypt, in two separate incidents, and one in Kazakhstan. These fatalities reinforced the focus on behaviour-based safety across the Group and acted as a trigger for a major review of the way that the Group manages HSSE. The outcome of this review was a statement by the BG Group Executive that it believes that all injuries are preventable, a Group safety goal of zero injuries and a revised Health, Safety and the Environment (HSE) Policy. The statement was incorporated into the revised Business Principles.

A comprehensive programme is in place to strengthen the safety culture further. The Chief Executive launched the STEP UP safety initiative in October 2005 with a webcast across BG Group.

To complement this programme, the Group issued BG Safety Behaviours and BG Life Savers standards. These set out what behaviours are expected of employees and contractors and provide clear safety rules to prevent unsafe acts that may trigger an incident. Over 6 000 staff and contractors around the world took part in safety workshops to discuss what the new standards mean to them and to commit to ways in which they could improve the safety of their operations.

Around 900 UK-based employees had been trained in safety intervention by the end of 2005. The Group aims to train all employees and long-term contractors worldwide in safety intervention by the end of 2006.

Health
BG Group strives to provide healthy working conditions for its employees and to avoid health risks to the public. The Group manages how work can affect health (for example, the use of computer display screens, exposure to infectious disease or the effect of noise on hearing) and how the health of employees can affect their ability to work.

In 2005, all of BG Group’s major operated facilities (such as offshore platforms, power stations, gas distribution networks or onshore production networks controlled by the Group) and offices used the Group health assurance framework to identify local issues, understand gaps in health provision and monitor policy compliance.

The Group monitors and responds to global health issues that may affect its workforce. In 2005, these issues included the threat of pandemic flu, stress and



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location-specific risks linked to the growing BG Group country portfolio.

The Group has an employee assistance programme that employees can contact for support and advice in confidence or anonymously if required. In 2005, 3% of UK-based employees used this service.

Security
BG Group seeks to protect employees and contractors, physical assets, information and reputation from harm. The personal security of employees remains its most important security objective.

An increasing number of employees are travelling to, living in, or working in countries where customs and security threats can be unfamiliar. These security challenges include high levels of violent crime, kidnapping, illegal detention, fraud, corruption, political instability and the compromise of information. The threat of local and international terrorism remains a reality in many countries and is regularly reassessed. Any employee posted or travelling overseas has access to security information relating to travel, local business operations and working practices and, where necessary, in-country protection.

BG Group has frameworks in place to limit fraudulent activities and threats to electronic systems and information.

SOCIETY
Community relations

BG Group recognises that maintaining positive relationships with neighbouring communities is key for its reputation and future commercial success.

The Group conducts Social Impact Assessments to help understand and mitigate potential impacts of proposed activities on local communities. BG Group works to enhance the positive impacts (such as local employment and contracting opportunities) and minimise potential negative impacts (such as increased road traffic or disruptions to economic activities) where practicable by changing project design, utilising new technologies or targeting social investment projects.

In 2005, BG Group commissioned Richard Sandbrook, an expert in development and extractive industries, to survey community relations at six locations across the Group. Overall, the quality of relationships with local communities was found to be good and there were no examples of activities or procedures that would be considered contrary to international good practice. The independent survey concluded that BG Group is implementing its Business Principles as these apply to community relations, but could be more proactive.

A series of recommendations were made and progress has been made in implementing these.

Human rights
BG Group applies the principles of the UN Universal Declaration of Human Rights and the core International Labour Organisation standards within its spheres of influence. To do this, the Group protects the human rights of its employees (through policies on equal opportunity and non-discriminatory treatment, security and labour standards) and respects the protection of the human rights of its contractors and people affected by its operations.

BG Group supports the Voluntary Principles on Security and Human Rights, developed by the governments of the USA and UK in collaboration with business and human rights organisations. The Voluntary Principles concern the assessment, training and reporting of human rights risks, related to the use of private and state security forces.

Guidance on human rights has been produced and will be made available to staff in 2006. A training package is being developed and will be delivered to those working in countries that present particular human rights challenges.

Social investment
BG Group works directly with local communities that are affected by its operations as well as contributing to appropriate national initiatives. These social investments focus on projects that add to long-term sustainability within the Group’s theme of opportunity and skills for development. Projects are chosen that reflect stakeholder concerns and also help BG Group meet business objectives where possible.

In 2005, BG Group spent a total of £3.6 million on voluntary social investment (2004 £3.5 million).

Employee involvement
BG Group supports the involvement of employees in local charity and community organisations. This includes donations of time and money.

BG Group operates a matched funding scheme that recognises efforts by employees to raise money for charities worldwide.

The Group contributed around £0.5 million to local relief efforts following the Asian tsunami; this figure includes matching employee donations of around £46 000. Later in 2005, the Group also matched employee donations following the earthquake in Pakistan (£13 000) and Hurricane Katrina in the USA (£4 700).

         
  Employees by location
Average in 2005
   
         
     
         
 


 
  UK 1 363  
 


 
  Non UK 4 000  
 


 
         
         
         
  Employees by region(a)
Average in 2005
   
         
     
         
 


 
  South America 39%  
 


 
  Asia Middle East 24%  
 


 
  Mediterranean Basin and Africa 11%  
 


 
  NorthAmerica and the Caribbean 8% 8%  
 


 
  Europe 18%  
 


 
         
  (a) As of March 2006, the regions in which the Group manages its operations were reorganised. The information shown is aligned with the way in which the operationswere managed in 2005.    
         
         
         
  Lost time injuries frequency
per million hours worked
   
         
     
         
         

 


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Operating and financial review
Corporate Responsibility continued

 

     
  Voluntary contributions to
social and educational projects
(£m)
 
   
     
     
  Greenhouse gas emissions from
BG Group operated facilities

(million tonnes carbon dioxide equivalent)
 
   
     
     
     

BG Group operations in Egypt, Trinidad and Tobago and the UK ran BG Group Energy Challenges (fundraising events involving physical and mental challenges over 24 hours), which raised a total of around £0.4 million for local charities.

ENVIRONMENT
BG Group’s core business is enabling the use of gas as an energy source. The Group specialises in assembling the components of the gas chain that bring gas to markets from remote locations. It also promotes technologies that enable gas to be substituted for higher carbon content fuels or to be used with much greater energy efficiency. The introduction of these technologies to the markets supplied by BG Group has the effect of helping to control carbon dioxide emissions in those markets. BG Group operates a Group-wide environmental management system to minimise the negative effects of its activities and to ensure compliance with applicable environmental regulations.

The BG Group environmental philosophy of operating beyond compliance with local regulation to meet internationally accepted good practice was reinforced in 2005 through its specific incorporation in the Group’s HSE Policy. As part of this commitment, BG Group’s major operated facilities are required to achieve external certification of their environmental management systems to the international standard ISO 14001. Recently acquired and developed operations in Canada and onshore Trinidad and Tobago expect to achieve certification in 2006 and 2007 respectively. The ISO standard was upgraded in November 2004. By the end of 2005, 60% of assets had been certified to the new standard.

BG Group has been working to position itself to respond to governmental climate change policies and international measures such as the Kyoto Protocol, which came into force in February 2005. Constraints on carbon dioxide emissions favour low carbon content fuels, such as natural gas.

In January 2005, BG Group assets within the UK and Italy entered the EU Emissions Trading System. Carbon dioxide emission allowances in the years 2005-2007 have been established for BG Group offshore platforms and power stations. The Group is currently acting to ensure that installations comply with the scheme.

The introduction of the Kyoto Protocol also encourages the use of the Clean Development Mechanism to incentivise emission reduction projects implemented in developing countries. The Group is assessing business opportunities for the

introduction of gas technologies that demonstrably reduce emissions.

In 2005, in recognition of the increasing financial implications of emissions, BG Group successfully implemented a Group-wide environmental emissions database accessible directly by major operated facilities. This database is designed to record and analyse emissions to air, land and water.

In 2005, operations under BG Group’s control emitted 6.4 million tonnes of carbon dioxide equivalent (comprising carbon dioxide and methane). This is an increase of 22% on absolute emissions compared to 2004. The increase was associated with increased electricity demand from customers in Northern Ireland, increased energy demand to support gas production and higher than forecast gas flaring in India and Kazakhstan. Total operated emissions per unit of throughput of oil and gas increased by 7% as the rise in emissions was greater than the rise in energy throughput.

Equity share emissions from BG Group operated and non-operated activities rose by 22% to 10.8 million tonnes of carbon dioxide equivalent. The main reasons for the increase were increased electricity demand in the Philippines, and LNG business growth in Trinidad and Tobago and Egypt, as well as the reasons given above for operated emissions. Total equity share emissions per unit of throughput rose by 2%.



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Operating and financial review
Risk factors

 

Outlined below is a description of the principal risk factors that may affect BG Group’s business. Not all these factors are within the Group’s control. Other factors besides those listed below may also adversely affect the Group. Actions being taken by management to mitigate some of these risks are identified where appropriate. The risk factors should be considered in conjunction with the cautionary note to shareholders in relation to forward-looking statements set out on page 153.

EXPLORATION AND NEW VENTURES
BG Group’s future gas and oil production is highly dependent upon finding, acquiring and developing new reserves. In general, the rate of production from natural gas and oil reservoirs declines as reserves are depleted. The Group needs to replace these depleted reserves with new proved reserves cost-effectively and on a consistent basis. This could be affected by a number of factors including: barriers to gaining access to new exploration acreage; inaccurate interpretation of geological and engineering data; unexpected drilling conditions or equipment failure; and disruptions to the successful implementation of the drilling programme.

LNG is an increasingly important element of the Group’s business and growth in this area is dependent upon the level of success it achieves in connecting competitively priced gas to high value markets. This could be affected by: barriers to the purchase or development of LNG volumes; availability of shipping capacity to transport LNG; adverse weather conditions affecting LNG import or production facilities; and unexpected shipping downtime or equipment failure.

PORTFOLIO
BG Group has a wide portfolio of assets, spread across business segments and a wide geographical area. Failure to manage these assets could have a material impact on the Group’s business. The Group carries out regular reviews to re-balance its portfolio as appropriate, looking at numerous factors including segmental weighting, geographical weighting, political risk weighting and gas/oil mix. Nevertheless, the Group may still be exposed to risk factors such as a decline in the demand for gas and LNG as sources of energy, adverse changes in the business environment, increased taxes and governmental regulation.

POLITICAL CLIMATE
As a global business, BG Group has assets in many diverse economies around the world. The overall success of the Group depends in part upon recognising and managing the differing political, economic

and market conditions in which it does business. Specific country risks that could have an effect on BG Group’s business and reputation include: volatility of national currencies; unexpected changes in local laws, regulations and standards; aggressive or changing interpretation of existing tax laws; regional and government instability; government intervention in licence awards; increased royalty payments or taxes mandated by governments; expropriation of assets; cancellation, variation or breach of contractual rights; and political roadblocks to key project delivery.

In addition, some of the countries where the Group has a presence may be subject to certain international sanctions. The Group does not believe that the enforcement of such sanctions would have a material effect on its financial performance in respect of its current operations in these countries. However, the Group cannot predict the interpretation or the implementation policy of governments with respect to such sanctions and the consequential impact on the Group’s reputation, operations and financial performance.

PROJECT PRE-SANCTION AND COMMERCIALISATION
Certain activities are performed before a decision or ‘sanction’ is made by management to invest in a project or a new venture. These activities include opportunity creation, feasibility studies, concept selection and definition. There are a number of risks during the pre-sanction phases, including engineering, commercial and regulatory risks.

The principal engineering related risk is failure to undertake adequate front-end-engineering-design work during the pre-sanction phase to enable a sufficiently accurate assessment of the project schedule and cost. Failure to consider the full range of potential development options and select the most suitable concept based on full ‘life cycle’ understanding of the project can expose projects to additional risk and cost.

If the Group is not successful in securing appropriate long-term commercial agreements or, where required, applicable governmental or regulatory consents, permits, licences or approvals, it may be unable to commercialise its reserves and this may have a material effect on the Group’s medium- to long-term cash flow and income.

PROJECT DELIVERY
Project delivery is subject to HSSE, technical, commercial, contractor, and economic risks. Development projects may be delayed or unsuccessful for many reasons, including: cost and time overruns

of projects under construction; equipment shortages; availability, competence and capability of human resources and contractors; unscheduled outages; mechanical and technical difficulties; and gas pipeline system constraints.

Projects may also require the use of new and advanced technologies, which can be expensive to develop, purchase and implement and may not function as expected. In addition, some development projects will be located in deepwater or other hostile environments or produce hydrocarbons from challenging reservoirs, which can exacerbate such problems.

OPERATIONS
BG Group’s revenues are dependent on the continued performance of its operating facilities. Operational risks include:

asset integrity – the integrity of the Group’s assets can be affected by a number of factors including improper maintenance regimes, inadequate planning of inspections and not operating equipment within design parameters;
   
plant availability – production volumes can be significantly impacted by unplanned shutdowns and equipment failure;
   
performance of joint venture (JV) partners – the volume and/or financial targets of the Group’s assets may depend on the performance of the Group’s JV partners. Business activities conducted by the Group tend to be conducted with partners and some assets are under the day-to-day management of these partners and may therefore be subject to risks which are outside the control of the Group; and
   
the location of some of the Group’s operations may expose them to natural hazards such as hurricanes, flooding and earthquakes, each of which could materially impact the Group’s ability to deliver its products or services.

If these risks materialise, the Group may not meet its planned HSSE standards, output levels or unit operating costs. These factors may have an effect on cost control, or a potentially material impact on the Group’s reputation and the results of the Group’s operations.

COMMODITY PRICES
BG Group’s results are sensitive to crude oil and natural gas prices, which are volatile, dependent on shifts in world supply and demand, policies of the Organization of the Petroleum Exporting Countries (OPEC) and the general economic and political climate. In 2005, a significant part of the Group’s upstream


 


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Operating and financial review
Risk factors continued

 

revenues were partially indexed to international oil prices. The Group’s exposure to short-term changes in commodity prices is mitigated by the predominance of gas in its portfolio and the use of long-term gas contracts, not directly or immediately linked to short-term changes in commodity prices.

The Group’s exposure to commodity prices also varies according to a number of factors including the mix of production and sales. Management estimates that, other factors being constant, a US$1.00 rise (or fall) in the Brent oil price would increase (or decrease) operating profit in 2006 by around £40 million to £50 million.

Over the medium term, the Group’s financial position could also be affected by more indirect effects of commodity prices. Commodity price increases can cause supply or capacity constraints in areas such as specialist staff, construction or operations. This in turn can create cost pressure on BG Group’s operating and capital costs, which affect ongoing financial performance.

The Group does not, as a matter of course, hedge all commodity prices, but may hedge certain gas and oil revenue streams from time to time. The Group uses forward commodity contracts, including forward derivative and option contracts, to offset partially the exposure of certain of its forecast oil and gas revenues to commodity price variations. As part of marketing its gas supply portfolio, the Group undertakes commodity hedging and trading activities. The fair value of the Group’s commodity derivative contracts is calculated using forward price curves for the relevant commodity. The potential change in exposure to fluctuations in natural gas sales prices is mitigated within certain LNG purchase contracts as the gas suppliers share price risk with BG Group. The exposure is further managed using a combination of natural gas futures contracts, financial and physical forward-based contracts and swap contracts.

EXCHANGE RATE
The Group’s cash flow, income statement and balance sheet are reported in pounds Sterling and may be significantly affected by fluctuations in exchange rates. A substantial proportion of the Group’s business activity is conducted in US Dollars and the Group holds substantial US Dollar-denominated assets. The Group mitigates its exposure to its holding of US Dollar-denominated assets by borrowing in, or swapping the majority of its borrowing into, US Dollars. In general, the Group does not hedge US Dollar-denominated transactions, although it may do so for specific

transactions, as authorised by the Finance Committee. BG Group estimates that in 2006, other factors being constant, a 10 cent strengthening (or weakening) in the US Dollar would increase (or decrease) operating profit by approximately £120 million to £140 million. The Group’s net balance sheet exposure to currencies other than the US Dollar or pound Sterling principally comprise exposure to the Brazilian Real and the Indian Rupee. These net exposures are managed on a case-by-case basis. The Group mitigates its exposure to transactions in currencies other than pounds Sterling or US Dollars by hedging certain expected cash flows into pounds Sterling or US Dollars. Subsidiary undertakings which borrow without recourse to the Group are generally required to borrow in, or swap borrowing into, their respective functional currency.

FINANCING
The Group’s financing costs may be significantly affected by interest rate volatility. The Group is also exposed to liquidity risks, including risks associated with refinancing borrowings as they mature, the risk that borrowing facilities are not available to meet cash requirements and the risk that financial assets cannot readily be converted to cash without loss of value. Failure to manage financing risks could have a material impact on the Group’s cashflow, balance sheet and financial position.

The Group’s interest rate management policy requires that the interest rate obligations of BGEH Borrowers (as defined on page 153) be substantially floating, and sets limits on the maximum amount of fixed rate exposure from time to time.

The Group manages liquidity risk by maintaining adequate committed borrowing facilities and holding its financial assets primarily in short-term, highly liquid investments that are readily convertible to known amounts of cash. Refinancing risk is managed by limiting the amount of borrowing that matures within any specific period.

CREDIT
BG Group is exposed to credit risks, being the loss that would be recognised if counterparties failed to or are unable to meet their payment obligations. These risks may arise in certain agreements in relation to amounts owed for physical product sales, the use of derivative instruments and the investment of surplus cash balances.

The Group’s credit risks are managed under policies approved by: the Finance Committee in relation to Treasury transactions; the Energy Trading Risk

Committee for trading transactions; and under authorities approved by the Board for specific investment decisions.

The Group analyses each counterparty’s financial condition prior to entering into trading sales agreements, swaps, futures and options contracts. Credit exposures are monitored for individual transaction and concentration risk. Where multiple transactions are undertaken with a single counterparty, or group of related counterparties, the Group may enter into a netting arrangement to reduce the Group’s exposure to credit risk. Currently the Group makes wide use of standard International Swaps and Derivative Association (ISDA) documentation. This provides netting of transactions covered by the specific ISDA documentation. For commodity trading, the Group seeks to put in place bespoke master netting agreements.

REGULATION
BG Group’s business activities are conducted in many different countries and are therefore subject to a broad range of legislation and regulation.

BG Group faces value erosion if the conditions attached to licences, which govern operations, are not properly managed or delivered. In addition, future growth of assets may be affected if required regulatory authorisations are not obtained.

The Group’s T&D companies mainly operate under a form of licence or concession agreement awarded by state or national government. Normally, the tariff that gas customers are charged is determined by the regulator and reviewed periodically in line with licence terms and conditions. The Group may be at risk of unfavourable tariff reviews which may have an impact on T&D income and growth.

Many of the countries in which the Group conducts and expects to conduct business have recently developed, or are in the process of developing, new regulatory and legal structures. These regulatory and legal structures and their interpretation and application by administrative agencies may be specific to a given market and untested. BG Group may be offered the opportunity to help shape suitable regulations but with no guarantee that its voice will be heard. Regulatory frameworks will continue to evolve as markets mature and this will also affect the Group.

Any changes in the regulatory climate in which the Group operates may potentially have a material impact on the Group’s business. Failure to meet regulatory requirements may have a material effect on the Group’s reputation and expose the Group to financial penalties.


 


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COMMERCIAL
E&P operations are typically conducted under licences granted to BG Group and its JV partners (collectively the Contractors) by the state or national government or by entry into a Production Sharing Contract (PSC) between the Contractors and the state or national government (generally represented by a state-owned company). The terms and conditions of the licences and PSCs vary from country to country.

Licences give the Contractors the right to explore for, and exploit a discovery of, hydrocarbon resources whilst bearing the risk of, and financing, the exploration, development and production activities. The Contractors are in principle entitled to all production and agree to remit to the state (which remains the owner of the subsoil hydrocarbon resources) a production based royalty and income tax and possibly other taxes that may apply under local tax legislation. In addition, Contractors will enter into an operating agreement between the JV partners that normally provides for the rights and liabilities of each Contractor to be borne in proportion to their participating interest in the E&P operation. However, licences granted by a state generally require Contractors to be jointly and severally liable, which means that the Group may be at risk for liabilities to host states if JV partners fail to perform their contractual obligations or deliver their share of the E&P operation.

A PSC will set out the rules governing the co-operation between the Contractors and the host state. The Contractors usually bear the risk of funding the E&P operations, although the state company often participates in the funding of the development. Under the terms set out in the PSC, the Contractors recover their costs from the future production revenues and, in exchange for the risk of the investment, enjoy a share of the excess production revenues.

Gas related projects usually require a chain of commercial agreements, frequently amongst different parties. Failure to complete this chain or to apportion risks appropriately prior to project sanction can leave projects exposed to commercial risks which could affect the profitability of the project.

HEALTH, SAFETY, SECURITY & ENVIRONMENT (HSSE)
A major HSSE incident could result in injury or loss of life, damage to the environment or destruction of facilities, each of which could have a material impact on BG Group.

BG Group recognises that the protection of the health and safety of its employees and others affected by its operations is an

essential element in delivering business performance, as are the security of physical and intellectual assets and the protection of the natural environment.

Policies and measures at international and national level to tackle climate change will increasingly affect business conditions, presenting environmental and regulatory risks. Similarly, international and national measures to tackle loss of biodiversity will start to present risks to gaining access to oil and gas resources in areas deemed to be biologically sensitive.

The increased threats from international terrorism and violent crime could also interrupt the Group’s operations to a material extent.

For further information on HSSE see page 32.

INSURANCE
A comprehensive insurance programme is maintained to mitigate significant losses which, as is consistent with good industry practice, includes cover for physical damage, removal of debris, control of wells, redrill, pollution and employer’s and third-party liabilities. Nevertheless, some of the major consequences of the risks involved in BG Group’s activities cannot, or may not, reasonably and economically be insured.

The programme is subject to certain limits, deductibles, terms and conditions. In addition, insurance premium costs are subject to changes based on the overall loss experience of the insurance markets accessed.

STAKEHOLDER ENGAGEMENT
A number of stakeholders (including employees, investors, governments, civil society groups, non-governmental organisations and those living in local communities affected by BG Group’s operations) have legitimate interests in the Group’s business. The Group’s reputation and/or share price could suffer due to inappropriate or inadequate engagement with stakeholders including, for example: failure to communicate consistent or co-ordinated messages to key stakeholders; failure to provide adequate explanations if performance targets are not met or if performance is perceived as poor against competitors; and inadequate responses to any crisis.

The Group has controls in place to make sure that all Group communication – corporate, regional and local – is consistent and co-ordinated for all stakeholders.

CORPORATE RESPONSIBILITY (CR)
BG Group defines CR as the practical application of the BG Group Statement of Business Principles (see page 31 for further information). CR risk occurs when any part of the business fails to implement the Business Principles. Each of the following risks could affect the Group’s ability to deliver projects on time and within budget: failure to consider economic returns, environmental impacts, social consequences and human rights in investment decisions and project planning; failure to identify stakeholder expectations; and the ineffective implementation of anti-corruption policies.

HUMAN RESOURCES
BG Group’s performance and its ability to mitigate those risk factors within its control depends on the skills and efforts of its employees and management teams across the Group. Future success will depend to a large extent on the Group’s continued ability to attract, retain and motivate highly skilled and qualified personnel.

If the Group loses the services of key people or is unable to attract and retain employees with the right capabilities and experience, it could have a material effect on the Group’s business and operations.


 


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Corporate governance
Governance framework

Governance framework 
 
Effective governance is at the 
core of BG Group’s ability to 
operate successfully in the 
global business environment. 

 

 

 


  Overview        
  BG Group has an established
Governance framework that is overseen
by the Board of Directors, which is
ultimately responsible to BG Group
shareholders. The framework is made
up of three core elements:
  Organisation and Structure;  
    Internal Control Framework; and  
    Independent Assurance processes.  
           
           
           
           
           
  BG Group Governance framework        
   
           

The Board of Directors of BG Group is committed to the highest standards of corporate governance, which it considers are critical to maintaining investor confidence and for the integrity of the Group.

BG Group’s Governance framework complements the Group’s beliefs and behaviours as set out in the Statement of Business Principles, details of which can be found on page 31.

The Company’s shares are listed on both the London and New York stock exchanges. This report explains how the Governance framework is implemented across the Group and, accordingly, the rationale for the statement by the Board of Directors that the Group complies with the applicable UK and US corporate governance requirements.

STATEMENTS OF COMPLIANCE
Statement of compliance with the
provisions of the
UK Combined Code

As a UK listed company, BG Group is required to state whether it has complied with the provisions set out in Section 1 of the UK Financial Reporting Council’s Combined Code on Corporate Governance (the Combined Code) throughout 2005 and, where the provisions have not been complied with, to provide an explanation. BG Group is also required to explain how it has applied the principles set out in Section 1 of the Combined Code relating to Directors, their remuneration, accountability and audit, and relations with shareholders.

The Directors consider that the Company has complied with the provisions set out in Section 1 of the Combined Code throughout the year ended 31 December 2005.

Statement of compliance with the
NYSE Corporate Governance Rules

The Company’s American Depositary Shares are listed on the New York Stock Exchange (NYSE) and the Company is, therefore, subject to the rules of the NYSE as well as US securities laws and the rules of the US Securities and Exchange Commission (SEC) as those rules and laws apply to non-US companies. The NYSE requires US companies listed on the exchange to comply with its corporate governance rules, but non-US companies, such as BG Group, are exempt from most of these rules. However, pursuant to NYSE Rule 303A.11, BG Group is required to disclose a summary of any significant ways in which the corporate governance practices it follows differ from those required by the NYSE for US domestic companies.

The Directors consider that there are no significant differences in the corporate governance practices followed by BG Group compared with those required by the NYSE for US domestic companies, except that, as permitted by the Combined



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Code, the Nominations Committee comprises a majority of independent non-executive Directors.

GOVERNANCE FRAMEWORK
The remainder of this report provides further information about BG Group’s Governance framework in support of the statements made above, including how BG Group has applied the relevant principles set out in Section 1 of the Combined Code.

Organisation and Structure
A key element of BG Group’s Governance framework is its organisation and structure, which is established by the Board and is designed to allow for effective and efficient decision-making.

This section sets out details of the organisation and structure and the underpinning mechanisms that ensure it is robust and effective in satisfying applicable corporate governance requirements.

Detailed on page 41 is the BG Group Board and committee structure. The membership of each of the principal Board committees is shown on page 42.

The Board has delegated authority to its committees on specific matters, which are set out in written terms of reference. These authorities are reviewed annually by the Board and the terms of reference of the Audit, Remuneration, Nominations and Corporate Responsibility committees are published on BG Group’s website. Copies are also available upon request. Minutes of committee meetings are circulated to all Directors.

Board of Directors
The Board is responsible to BG Group’s shareholders for creating and delivering sustainable shareholder value through the management of the Group’s businesses within the overall Governance framework. The Board sets the Group’s strategy and ensures that an appropriate level of financial and human resources is made available to management in the delivery of the agreed strategy.

As well as oversight responsibility for financial performance, internal controls and risk management of the Group, the Board has a formal schedule of matters specifically reserved to it for decision. These matters are set out on the right hand column of this page.

A statement of the Directors’responsibilities for preparing the Financial Statements, including a statement regarding the status of the Company as a going concern, is set out on page 50.

Board composition
The Board is made up of a non-executive Chairman, the Chief Executive, Deputy Chief Executive, Chief Financial Officer and six independent non-executive Directors.

A list of the individual Directors, their biographies and details of their committee membership is provided on page 45.

The posts of Chairman and Chief Executive are separated and their responsibilities are clearly established, set out in writing and agreed by the Board. The roles and responsibilities of the Chairman and Chief Executive have also been published on BG Group’s website.

The Chairman, Sir Robert Wilson, is responsible for the workings and leadership of the Board and for the balance of its membership, subject to Board and shareholder approval. The Chief Executive, Frank Chapman, is responsible for leading and managing the business within the authorities delegated by the Board.

The independent non-executive Directors provide a wealth of experience and skills from a number of industry and government backgrounds. They are key to the formulation and development of the Group’s strategy and also review and monitor the performance of management, the integrity of financial information and internal control and risk management.

Paul Collins is the Senior Independent Director (SID) nominated by the Board, and is available to shareholders as an alternative point of contact to the Chairman, Chief Executive and Chief Financial Officer. The role of the SID is clearly established, set out in writing and has been agreed by the Board. Details of the role are on BG Group’s website. The SID will chair the Nominations Committee when considering succession for the role of Chairman. The SID is expected to commit at least three to four days per year to the role, and significantly more in exceptional circumstances. This is in addition to the expected time commitment in his capacity as a non-executive Director.

All Directors are subject to election by shareholders at the first Annual General Meeting (AGM) following their appointment by the Board. Thereafter, in accordance with the Combined Code and the Company’s Articles of Association, they are subject to re-election every three years. Based on these criteria, the Nominations Committee has made recommendations to the Board in respect of the election and re-election of five Directors at the 2006 AGM. The Board considers that the performance of these individual Directors continues to be effective and that they demonstrate commitment to the role.

BG Group maintains liability insurance for its Directors and officers, and also provides certain indemnities for its Directors and the Company Secretary. Further details of the indemnities granted

   
  Matters reserved to the Board 
     
  1  Approval of the Group vision, values  and overall Governance framework.
     
  2      Approval of the Company’s Annual  Report and Accounts, Remuneration  report and Quarterly Financial  Statements. 
     
  3  Approval of any interim dividend  and recommendation of the final  dividend. 
     
  4  Approval of Group financial policy. 
     
  5  Approval of material capital projects,  investments, acquisitions and  disposals by any Group company. 
     
  6  Approval of the Company’s long-term  finance plan and annual capital and  revenue budget. 
     
     
  7  Approval of any significant change  in Group accounting policies or  practices. 
       
  8  Approval of all circulars, listing  particulars, resolutions and  corresponding documentation sent  to shareholders. 
       
     
  9  Approval of changes in the capital  structure of the Company or its status  as a plc and, in particular, the issue or  allotment of shares in the Company  otherwise than pursuant to  Company-approved employee share  schemes. 
     
  10 Approval of material changes to the  Company’s pension schemes rules,  any change of Trustee or material  changes to funding and management  arrangements. 
     
  11  Appointment, re-appointment  and removal of the Chairman and  Directors and the recommendation  to shareholders of their election or  re-election under the Articles of  Association; the appointment and  removal of the Company Secretary.
     
  12  Approval of the division of  responsibilities between the  Chairman and Chief Executive. 
     
  13  Establishing committees of the Board,  approving their terms of reference  (including membership and financial  authority), reviewing their activities  and, where appropriate, ratifying their  decisions. 
   
     
  14  Recommendation to shareholders for  the appointment, re-appointment or  removal of the Auditors.
   
     
  15  Approval of this schedule of Matters  reserved to the Board.
     
     

 


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Corporate governance
Governance framework continued

                   
  2005 Board and committee attendance                 
            Corporate      Group   
      Chairman’s  Audit  Remuneration  Responsibility  Nominations  Finance  Executive   
    Board  Committee  Committee  Committee  Committee  Committee  Committee  Committee   
 








 
  Number of meetings  9  16  5  6  4  3  3  15   
 








 
  Sir Robert Wilson  9  15      4  3  3     
 








 
  Frank Chapman(a)  9  14      3    3  14   
 








 
  William Friedrich  9  14      4    2  14   
 








 
  Ashley Almanza  9  14          3  15   
 








 
  Peter Backhouse(b)  9    5  6  1         
 








 
  Sir John Coles  9      6  4         
 








 
  Paul Collins(c)  9    4  6    3       
 








 
  Elwyn Eilledge(d)  3    2  2           
 








 
  Keith Mackrell(d)  3  5  2      2       
 








 
  Dame Stella Rimington(d)  2      1    1       
 








 
  Lord Sharman  9    5             
 








 
  Baroness Hogg(e)  9    5  6    2       
 








 
  Jürgen Dormann(f)  5      2  2         
 








 
  (a) Frank Chapman joined the Corporate Responsibility Committee on 16 June 2005.
  (b) Peter Backhouse joined the Corporate Responsibility Committee on 14 December 2005.
  (c) Paul Collins joined the Audit Committee on 15 March 2005.
  (d) Keith Mackrell, Dame Stella Rimington and Elwyn Eilledge retired on 4 May 2005.
  (e) Baroness Hogg joined the Board on 27 January 2005 and the Nominations Committee on 22 April 2005.
  (f) Jürgen Dormann joined the Board on 1 June 2005 and the Remuneration Committee and Corporate Responsibility Committee on 16 June 2005.
 

 

to Directors are set out in the Directors’ report on page 50.

Director independence
The Combined Code includes provisions for a company’s board to assess the independence of each non-executive Director. The outcome of this assessment should be presented to the Board. This assessment was applied in respect of the appointment of Baroness Hogg and Jürgen Dormann and, based upon that review, the Nominations Committee determined that they were independent at the time of their appointment. In the opinion of the Board and, following an annual review of the independence of its non-executive Directors, each of the non-executive Directors, with the exception of the Chairman, is independent in accordance with the criteria set out in the Combined Code. The Board has therefore determined that none of its non-executive Directors:

has been an employee of the Company or Group within the last five years;
   
has, or has had within the last three years, a material business relationship with the Company either directly or as a partner, shareholder, director or senior employee of a body that has such a relationship with the Company;
   
has received or receives additional remuneration from the Company apart from a director’s fee, participates in the
  Company’s share option or a performance- related pay scheme, or is a member of the Company’s pension scheme;
   
has close family ties with any of the Company’s advisers, Directors or senior employees;
   
holds cross-directorships or has significant links with other Directors through involvement in other companies or bodies;
   
represents a significant shareholder; or
   
has served on the Board for more than nine years from the date of his/her first election.

In making this determination, the Board has noted that Peter Backhouse is a member of the Supervisory Board of RIVR Acquisition B.V. (RIVR), the holding company of Petroplus International N.V. (Petroplus), for which he receives a fee of 40 000 Euro per annum. He also holds, directly and indirectly, shares in RIVR representing, in aggregate, 0.2% of the total issued share capital of RIVR. Petroplus has a 20% shareholding in Dragon LNG Group Limited, the joint venture holding company that owns the LNG importation terminal at Milford Haven, in Wales, and in which BG Group has a 50% shareholding.

At the time of his appointment, from 1 January 2004, the Chairman was also considered independent by the Board. In accordance with the Combined Code, the ongoing test of independence for the Chairman is not appropriate.

Company Secretary
The Company Secretary, Ben Mathews, is responsible for advising the Board through the Chairman on all governance matters. The Directors have full access to the advice and services of the Company Secretary, who is also responsible to the Board for: ensuring that correct Board procedures are followed; ensuring effective communication flows within the Board, its committees and between senior management and non-executive Directors; and facilitating induction and assisting with the professional development of Directors. In addition, any Director, who believes it may be required in the furtherance of his or her duties, may take independent professional advice at the cost of the Company.

Board meetings
Directors are expected, wherever possible, to attend all Board meetings, relevant committee meetings and the AGM.

The Board has regular scheduled meetings throughout the year. Additional meetings of the Board are held as and when necessary. During the year ended 31 December 2005, the Board met nine times. A table detailing the individual Director’s attendance at each of the Company’s Board and committee meetings is set out above. In addition to those meetings, the Board focuses on BG Group’s strategy at an annual two day planning conference.

Guidelines are in place concerning the content, timeliness and presentation of



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BG Group Board and committee structure

 
     
   
     

Board and committee papers from management to ensure that the Board is properly briefed.

Frequent opportunities are provided within the scheduled meeting programme for non-executive Directors to meet, without the Chairman or Executive Directors being present, and under the guidance of the SID.

Board effectiveness
Directors’ induction and professional development

All Directors appointed to the Board receive a full induction briefing tailored to their individual needs, taking into account their qualifications and experience.

Ongoing professional development is provided to Directors to meet their particular requirements. Directors received regular briefings during 2005 on key relevant and topical issues including legislative, corporate governance, financial reporting and operational matters.

Workshops, seminars and teach-ins on issues specifically relating to BG Group’s business, such as Well Engineering, Exploration and Petroleum Engineering, were also organised during the year.

Board evaluation
A comprehensive and rigorous evaluation of the performance of the Board, its principal committees, the individual non-executive Directors and the Chairman was conducted during the year. An evaluation of the Corporate Responsibility Committee will

take place in 2006 following its first full year of operation. The Board evaluations were led by the Chairman and supported by the Company Secretary and included a series of one-to-one interviews between the Chairman and each non-executive Director.

The Chairman’s questions were based upon a number of key areas covering Group strategy, succession planning, Board size and the relationship between the Board and its committees.

Similar evaluations were also conducted by the chairmen of the Audit, Remuneration and Nominations committees.

The results of the reviews were then considered during one-to-one discussions with the Chairman and collectively at a Board meeting or at the relevant committee meetings. This process led to a number of improvements, covering:

Board and senior management succession; and
regional and/or country strategy reviews.

The performance of individual non- executive Directors was evaluated by the Chairman, with input from the committee chairmen and the Executive Directors. The performance of the Chief Executive is evaluated by the Chairman and non- executive Directors. The performance of the two other Executive Directors is evaluated by the Chief Executive in consultation with the Chairman and other non-executive Directors.


The evaluation of the Chairman was led by Paul Collins, the SID, and involved individual meetings with each of the Executive Directors followed by a group review with the non-executive Directors, excluding the Chairman. The outcome of this review was then reported to the Chairman.

The Directors have concluded that, following this detailed review, the Board and its committees operate effectively and also consider that each Director is contributing to the overall effectiveness and success of the Group.

Relationship with shareholders and Annual General Meeting
The Board recognises the importance of maintaining an ongoing relationship based on frequent dialogue with the Company’s shareholders. The Board is accountable to shareholders for the performance and activities of the Group and, therefore, it is proactive in obtaining an understanding of shareholder views on a number of matters.

Regular meetings with institutional shareholders are held with the Chief Executive and Chief Financial Officer and, where appropriate, the Chairman, following the announcement of quarterly and annual results. This ensures that the investor community receives a balanced and comprehensive view of the Group’s performance and the issues faced by the Group. In addition, the Board regularly monitors the views of shareholders and considers reports from its investor relations advisers concerning institutional



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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

 
     

Corporate governance
Governance framework continued

Board committees

Reports for each of the principal committees for 2005 appear below

Audit Committee
The members of the Committee are Lord Sharman (Chairman), Peter Backhouse, Paul Collins and Baroness Hogg. The Secretary to the Committee is Ben Mathews. All members of the Committee are deemed independent and, specifically, the Committee has concluded that its membership meets the requirements of the Combined Code, the Sarbanes-Oxley Act 2002, and SEC and NYSE regulations. The Board has determined that Lord Sharman is the Audit Committee financial expert for the purposes of the Sarbanes-Oxley Act 2002. In addition, the Board considers that he has ‘recent and relevant financial experience’ as required by the Combined Code. He is a chartered accountant

The Committee assists the Board in fulfilling its responsibilities in respect of:

   
overseeing the Group’s financial reporting process, including the internal control structure and procedures for financial reporting and monitoring the integrity and appropriateness of the Group’s financial statements;
   
the manner in which the Group’s management ensures and monitors the adequacy of financial, operational and compliance internal controls and risk management processes designed to manage significant risk exposures;
   
the appointment, compensation, independence and performance of the Group’s external Auditors; and
   
the independence and performance of Group Audit.
   
Specifically, the Audit Committee:
   
regularly reviews the external and internal audit work plans;
   
oversees and reviews the procedures for the receipt, retention and treatment of complaints relating to financial matters, internal accounting controls and auditing, including the Group’s whistleblowing mechanism;
   
requests, receives and reviews reports from management on actions taken to address risk areas identified by management and/or the internal audit process;
   
reviews with management, and external and internal auditors the significant risk exposures and the processes established to identify, monitor, control and report such exposures;
   
annually evaluates, on behalf of the Board, the design and effectiveness of the internal control structure, the Group’s financial reporting procedures and the Group’s disclosure controls and procedures; and
   
   

 

annually evaluates the design and effectiveness of the processes established to estimate, aggregate and report the Group’s various categories of oil and gas reserves.
   
The Committee carried out a number of activities during the year ended 31 December 2005, including reviewing:
   
quarterly, interim and full year financial results;
   
the year end oil and gas reserves booking process;
   
the delivery of the 2005 internal audit plan and approving the 2006 plan;
   
quarterly and full year internal control and assurance reports from Group Audit;
   
the effectiveness of the internal audit function;
   
the 2005 external audit plan and associated audit fees;
   
the budget and framework for the supply of non-audit services by the external Auditors, the independence and objectivity of the external Auditors and the effectiveness of the external audit process;
   
the Group’s Internal Control Framework, including the risk management process;
   
updates on the processes to achieve compliance with Section 404 of the Sarbanes-Oxley Act 2002;
   
relevant disclosures in this Report; and
   
its Terms of Reference.
   
Nominations Committee
The members of the Committee are Sir Robert Wilson (Chairman), Paul Collins and Baroness Hogg. The Secretary to the Committee is Ben Mathews. The role of the Committee is to review the structure and composition of the Board, to identify candidates to fill Board vacancies, including their election and subsequent re-election by shareholders, and to review its own performance on an annual basis.
   
During the year ended 31 December 2005, the Committee:
   
evaluated the balance of skills, knowledge and experience on the Board;
   
identified, using external boardroom search consultants, potential new non-executive Director candidates;
   
following a review of candidates, recommended to the Board the appointment of Jürgen Dormann as an independent non-executive Director of the Company; and
   
reviewed its Terms of Reference.
   

 

Remuneration Committee
The members of the Committee are Baroness Hogg (Chairman), Peter Backhouse, Paul Collins, Sir John Coles and Jürgen Dormann. The Secretary to the Committee is Ben Mathews. The Committee is responsible for setting, reviewing and recommending to the Board for approval BG Group’s overall remuneration policy and strategy. Full details are set out in the Remuneration report on pages 51 to 61.
   
Corporate Responsibility Committee
The members of the Committee are Sir John Coles (Chairman), Sir Robert Wilson, Frank Chapman, William Friedrich, Jürgen Dormann and, since December 2005, Peter Backhouse. The Secretary to the Committee is Ben Mathews. Established in February 2005, the role of the Committee is to assist the Board in providing strategic leadership, direction and oversight, and setting the policy on Corporate Responsibility and Health, Safety, Security and Environment (HSSE) within the Group.
   
During the year ended 31 December 2005, the Committee considered a number of activities including:
   
a review of the Group’s Business Principles;
   
HSSE quarterly performance updates;
   
Corporate Responsibility risk issues; and
   
community relations.
   
The Board’s other committees are:
   
Chairman’s Committee
The members of the Committee are Sir Robert Wilson (Chairman), Frank Chapman, William Friedrich and Ashley Almanza. The Secretary to the Committee is Ben Mathews. The role of the Chairman’s Committee is to advise and assist the Chairman in the preparation for Board meetings. The Committee also acts on behalf of the Board between scheduled meetings.
   
Finance Committee
The members of the Committee are Sir Robert Wilson (Chairman), Frank Chapman, William Friedrich and Ashley Almanza. The Secretary to the Committee is Ben Mathews. The Committee is responsible for finance and treasury policy decisions.
   
Group Executive Committee
The members of the Committee are the Executive Directors and those senior managers whose details are set out on page 47. The Secretary to the Committee is Ben Mathews. The Committee has primary authority for the day-to-day management of the Group’s operations within agreed limits set by the Board.
   
   
   
   
   
   


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shareholder feedback. The Chairman and non-executive Directors are also given the opportunity to meet institutional shareholders and to discuss topical issues.

The Company, through its Investor Relations team, responds to a variety of enquiries from shareholders and an email communication facility is available on the Group’s website for this purpose.

The Company’s AGM will be held on 28 April 2006 at the International Convention Centre in Birmingham. The AGM provides attending shareholders with the opportunity to ask questions of the full Board of Directors including the chairmen of the Audit, Remuneration, Nominations and Corporate Responsibility committees and the Company Secretary. The Notice of AGM, which includes full details of this year’s AGM, is set out on pages 146 to 149.

Internal Control Framework
The second key element of BG Group’s Governance framework is the Internal Control Framework, which defines the way in which the Group operates, and comprises the Group’s Business Principles, policies, standards, guidelines and processes.

The Board is responsible for the Group’s system of internal controls and oversees the Group’s review and assurance processes. These responsibilities are undertaken in accordance with the guidance set out in the Combined Code and as set out in the US recognised control framework, Committee of Sponsoring Organisations of the Treadway Commission, Enterprise Risk Management (COSO ERM), which was adopted by the Audit Committee in 2004. This system of internal control provides reasonable, rather than absolute, assurance against material loss or misstatement and is designed to manage, rather than to eliminate, the risk of failure to achieve business objectives.

Each year, the Board seeks confirmation that all assets and functions within the Group have complied throughout the year with the Internal Control Framework. The Board, through the Chief Executive, asks each member of the Group Executive Committee (GEC) to complete and submit to the Chief Executive a Letter of Assurance (LOA), which provides this confirmation for the areas of the business for which they have responsibility.A Governance Self-Assessment (GSA) questionnaire and certificate are also completed by senior management in order to complement and support the LOA process. All issues raised by the GSA exercise are collated and analysed to determine the effectiveness of the Internal Control Framework during the year.

A Disclosure Committee, comprising senior management representatives,

through formal and systematic enquiries of, and interviews with, each member of the GEC and the Group Financial Controller, evaluated the individual LOAs submitted to the Chief Executive. The outcome of this process was reported to the Chief Executive and Chief Financial Officer.

In turn, a report was presented to the Audit Committee setting out the process followed by management and the outcome of the exercise. The Audit Committee reviewed this report with management and Group Audit and, based on that review, reported to the Board on the effectiveness of BG Group’s Internal Control Framework.

As a result, the Board has determined that the Group’s system of internal controls is effective.

In addition, the Directors confirm that there were no changes in the Group’s internal controls over financial reporting that occurred during the year ended 31 December 2005 that have materially affected, or are reasonably likely to materially affect, these controls.

Evaluation of disclosure controls and procedures

For 2005, a review of the Group’s disclosure controls and procedures has also been facilitated by the Disclosure Committee, which met with each of the control owners to receive assurance on the effectiveness of disclosure controls and procedures for the Group’s key external releases.

These disclosure controls and procedures are designed to ensure that information required to be disclosed is accumulated and communicated to management, including the Chief Executive and Chief Financial Officer, to allow timely decisions regarding the disclosure of information externally.

As a result of that evaluation, the Chief Executive and Chief Financial Officer have concluded that, as at 31 December 2005, the Group’s disclosure controls and procedures were effective.

Section 404 of the US Sarbanes-Oxley Act 2002

This legislation was implemented to protect investors by improving the accuracy and reliability of corporate disclosures by US domestic companies and non-US companies with US listings. The Group has made good progress on the work required to ensure full compliance with Section 404 of the Sarbanes-Oxley Act relating to the evaluation and reporting of internal controls over financial reporting, on which it is required to report for the financial year ending 31 December 2006.

Risk management
The objective of risk management within BG Group is to improve performance and decision making through the identification, evaluation and management of key risks.

To achieve this, a business risk management process has been established to identify, evaluate and assist with the management of the risks faced by the Group. The process operates on a global basis and provides the Audit Committee with assurance that the major risks faced by the Group have been identified and are regularly assessed and that there are controls in place to manage these risks.

BG Group views risk management as integral to good business practice. Risk assessment and evaluation are incorporated into the key business processes including strategy and business planning, investment appraisal, performance management and HSSE management processes.

The risk management process is reviewed by the Governance and Risk Committee and the GEC. The Audit Committee oversees the process on behalf of the Board.

Independent Assurance
The third element of BG Group’s Governance framework is Independent Assurance, which is provided primarily by Group Audit, by the independent external Auditors, and by other external advisers.

The purpose of Group Audit is to provide assurance to the Board, Audit Committee, GEC and management that effective and efficient internal control processes are in place to identify and manage business risks across the Group.

Specifically, Group Audit:

provides an independent assessment of the Group’s systems of risk management and internal control;
   
assists management by carrying out independent appraisals and making recommendations for improvement; and
   
supports development of the Group’s governance and business risk management policies.

The independent external Auditors’ report to shareholders and their audit opinion on the accounts are set out on page 62.

In addition, the external reserves consultant, Degolyer and MacNaughton provides an independent review on certain of BG Group’s oil and gas reserves.


 


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44

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Corporate governance
Board of Directors

 


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

45
   

 

1 Sir Robert Wilson KCMG (62)
Chairman
Sir Robert Wilson was appointed Chairman with effect from 1 January 2004, having been a non-executive Director since September 2002. He was chairman of Rio Tinto from 1997 to 2003 and prior to that was chief executive between 1991 and 1997. He is also chairman of The Economist Group and a non-executive director of GlaxoSmithKline plc. He has previously been a non-executive director of Diageo plc, BP plc and The Boots Company PLC. (b), (d), (e), (g)

2 Frank Chapman (52)
Chief Executive

Frank Chapman was appointed Chief Executive with effect from 23 October 2000, having been appointed to the Board of BG plc in February 1997. He joined British Gas plc in November 1996 as Managing Director, Exploration and Production. He is an engineer and has worked in the oil and gas industry for 30 years. Prior to joining British Gas plc, he spent 22 years with Shell and BP. (a), (b), (d), (g)

3 William Friedrich (57)
Deputy Chief Executive
William Friedrich was appointed Deputy Chief Executive with effect from 23 October 2000. He is also responsible for the Group’s portfolio and strategy development. He joined British Gas plc in December 1995 as General Counsel after a 20 year career with Shearman & Sterling, where he became a partner in 1983. Whilst with the firm, he practised as a general corporate lawyer, working mainly on international transactions, and ultimately headed the firm’s worldwide project development and project finance practice. He is also a non-executive director of The Royal Bank of Scotland Group plc. (a), (b), (d), (g)

4 Ashley Almanza (42)
Chief Financial Officer

Ashley Almanza was appointed Chief Financial Officer with effect from 1 August 2002. He is responsible for Group finance, tax, treasury, investor relations, internal audit, legal and secretariat. He joined British Gas plc in 1993 and has held a number of roles including Finance Director of BG International Downstream. He acted as Group Finance Director from October 2000 to January 2001 before he was appointed Group Financial Controller. Prior to joining British Gas plc, he trained as a chartered accountant, working in South Africa and London. (a), (b), (d)

 

5 Peter Backhouse (54)
Non-Executive Director

Peter Backhouse was appointed to the Board as a non-executive Director with effect from 19 July 2000. He was formerly executive vice president, refining and marketing at BP Amoco plc. Previous roles at BP included deputy chief executive of BP Oil and chief executive of BP Oil Europe. He gained considerable gas experience in international LNG and in UK natural gas as head of BP’s UK gas marketing business. He is also a member of the advisory board of Carlyle/Riverstone Energy Partners, a US private equity fund. (c), (f), (g)

6 Sir John Coles GCMG (68)
Non-Executive Director

Sir John Coles was appointed to the Board of BG plc as a non-executive Director in March 1998. He had a 37 year career with the Foreign and Commonwealth Office (FCO) and retired as Permanent Under-Secretary of State in the FCO and Head of the Diplomatic Service in November 1997. He is chairman of Sight Savers International. (f), (g)

7 Paul Collins (69)
Senior Independent Director
Paul Collins was appointed to the Board as a non-executive Director with effect from 23 October 2000 after a long career with Citigroup Inc. The Board nominated him as the Senior Independent Director from 4 May 2005. He joined Citicorp in 1961 and subsequently served as the chief investment officer, headed the financial markets division, corporate planning, finance and administration, and Europe, Africa and the Middle East. He was appointed a director of Citicorp and its principal subsidiary, Citibank, in 1985 and vice-chairman in 1988. He is a director of Actis Capital LLP, The Enstar Group and a director and vice chairman of Nokia Corporation. (c), (e), (f)

8 Jürgen Dormann (66)
Non-Executive Director

Jürgen Dormann was appointed to the Board as a non-executive Director with effect from 1 June 2005. He became chairman of Swiss-based ABB Ltd in 2001 and chief executive in 2002, having been a non-executive director since 1998. He stepped down as chief executive on 1 January 2005, continuing his role as chairman. Prior to his roles at ABB, he had a successful career at Hoechst and Aventis spanning almost 40 years. He is vice chairman of the board at Sanofi-Aventis (France) and at Adecco S.A. (Switzerland) and is a member of the board at IBM (USA). (f), (g)

 

9 Baroness Hogg (59)
Non-Executive Director

Baroness Hogg was appointed to the Board as a non-executive Director with effect from 27 January 2005. She is a former head of the Prime Minister’s Policy Unit and has extensive experience of business, government and the media. She is chairman of 3i Group plc and Frontier Economics Ltd, deputy chairman of GKN plc, a non-executive director of Carnival plc and Carnival Corporation and is a member of the Financial Reporting Council. (c), (e), (f)

10 Lord Sharman (63)
Non-Executive Director

Lord Sharman was appointed to the Board as a non-executive Director with effect from 23 October 2000. He is currently non-executive chairman of Aegis Group plc and Aviva plc, and a non-executive director of Reed Elsevier plc. He is also a member of the supervisory board of ABN Amro NV. A chartered accountant, he was chairman of KPMG International from 1997 to 1999, having been a senior partner since 1994. (c)

 

 

 

 

 

 

 

 

 

Membership of committees
(a)      Group Executive
(b)      Chairman’s
(c)      Audit
(d)      Finance
(e)      Nominations
(f)      Remuneration
(g)      Corporate Responsibility


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46

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Corporate governance
Group Executive Committee and Company Secretary

 


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

47
   

 

1 Frank Chapman (52)*
Chief Executive

2 William Friedrich (57)*
Deputy Chief Executive

3 Ashley Almanza (42)*
Chief Financial Officer

4 Charles Bland (56)
Executive Vice President, Policy &
Corporate Affairs

Charles Bland joined BG plc in 1999. He is responsible for government and public affairs, brand and marketing, communications, Corporate Responsibility policy and community affairs. He was appointed to his current position in 2002 having previously been President, BG Kazakhstan, and Vice President, Government Affairs. Before joining BG he worked in UK Government, holding various posts in the Ministry of Defence.

5 Jørn Berget (53)
Executive Vice President & Managing
Director, BG Advance

Jørn Berget joined BG Group plc in November 2004 from Shell, where he was, most recently, production director for all E&P assets in the USA and South America, in addition to being a board member of Enventure Technologies and Enterprise Products GP, LLC. He has 29 years’ experience covering all aspects of the E&P business, with assignments in Norway, Argentina, the Netherlands, Peru, Oman, Brunei, the UK and USA. He is responsible for providing BG Group’s corporate technical assurance and services, continuing development of strategic technical and commercial capabilities.

6 Peter Duffy (44)
Executive Vice President, Human Resources
Peter Duffy joined BG Group plc in 2001, when he was appointed to his current position with responsibility for all matters relating to human resources strategy and policy. He has extensive international human resource management experience, particularly in the area of organisation development, performance and change management. He previously worked for TRW Inc., LucasVarity plc, and British Aerospace plc.

7 Stuart Fysh (49)
Executive Vice President & Managing
Director, Mediterranean Basin and Africa

Stuart Fysh joined BG plc in 1998 and was appointed Executive Vice President in November 2003 with responsibility for the Group’s activities in Egypt, Tunisia, Mauritania, Nigeria and Libya, and development activities elsewhere in the region. He was appointed Vice President BG Egypt in June 2001 and prior to that he was Vice President BG Thailand,

Singapore and Malaysia. He previously spent 17 years with the mining, steel and petroleum conglomerate BHP, where his roles included commercial, business development, corporate planning and research & development. He has lived and worked in Australia, Pakistan, India, Singapore and Egypt.

8 Martin Houston (48)
Executive Vice President & Managing
Director, North America, Caribbean and
Global LNG

Martin Houston joined British Gas in 1983 and was appointed Executive Vice President (EVP) in 2000. He was appointed to his current position in September 2003 and is based in Houston. Prior to his first EVP appointment in 2000, he held a number of technical and commercial posts predominantly with an international focus. He played a leading role in the development of the LNG industry in Trinidad and Tobago and was Chairman of Atlantic LNG from 1996 to 2000. His most recent positions have included President and General Manager of BG Trinidad and Tobago, Director of LNG and Vice President of Strategy and Portfolio Development. He is a non-executive director of Severn Trent Plc and a fellow of the Geological Society of London.

9 Mark Carne (47)
Executive Vice President & Managing
Director, Europe and Central Asia

Mark Carne joined BG Group plc in May 2005 from Shell, where he held a number of senior positions, most recently managing director of Brunei Shell Petroleum and country chairman for Shell companies in Brunei. Prior to this role, he was the asset director responsible for Shell’s UK North Sea oil production. His international experience includes various general management roles in the UK, the Netherlands and Oman covering operations, engineering, commercial and business development.

10 Rick Waddell (46)
Executive Vice President & Managing
Director, South America

Rick Waddell joined BG Group plc in 2002 when he was appointed to his current position. Based in São Paulo, he is responsible for all upstream and downstream activities in South America, including Comgas in São Paulo and MetroGAS in Buenos Aires. He is a former senior vice president of Enron Corporation for Latin America and, prior to that, was regional logistics manager for South America with Wal-Mart International.

11 Stefan Ricketts (38)
General Counsel

Stefan Ricketts joined BG plc in 1999 and was appointed General Counsel in September 2005, with responsibility for

the legal affairs of the Group. Prior to becoming General Counsel, he was Head of the Legal Department at BG Group, a role he has held since 2002. Before joining BG, he was with the international law firm, Herbert Smith, and worked in London, the Middle East and Asia.

12 Ben Mathews (39)
Company Secretary

Ben Mathews joined BG Group plc in 2002 and is responsible for all matters relating to the Board, its committees and governance. He was appointed Company Secretary on 9 November 2004. He previously worked for National Grid plc, British American Tobacco plc and PricewaterhouseCoopers.

     
     
     
     
     
     
     
     
     
  Dave Roberts (45) was Executive Vice President & Managing Director for Asia and the Middle East during the year ended 31 December 2005 and has since resigned from his current position. He joined BG Group plc in January 2003 when he was appointed to that position, with responsibility for the Group’s activities in India, South East Asia, the Middle East and Kazakhstan. He was previously adviser to Chevron Texaco’s vice chairman and director of strategy management for Texaco’s worldwide upstream business. He has extensive experience in surface and sub-surface engineering and technical leadership, operations and general management.  
     
     
  The Group Executive Committee will also include the Executive Vice President & Managing Director for the newly created Asia Pacific Region when an appointment is made.  
     
     
  * See page 45 for biographical details.  
  A description of the Group Executive Committee is given on page 42.  



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Contents        
  49 Directors’ report   134 Three year financial summary (unaudited)  
  51 Remuneration report   136 Five year financial summary (unaudited)  
  62 Auditors’ report   138 Shareholder information  
  63 Principal accounting policies   139 Additional shareholder information  
  66 Consolidated income statement   146 Notice of meeting  
  67 Consolidated statement of recognised income and expense   150 Cross-reference to Form 20-F  
  68 Balance sheets   151 Index  
  70 Cash flow statements   152  Presentation of non-GAAP measures  
  71 Notes to the accounts   153 Definitions  
  128 Supplementary information – gas and oil (unaudited)        
  133 Historical production        

 


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

49
   

Directors’ report

The Directors present their report and the audited Financial Statements for the year ended 31 December 2005. A report from the Directors on corporate governance is set out on pages 38 to 43 and a report from the Remuneration Committee on remuneration is on pages 51 to 61.

The Operating and financial review (pages 6 to 37) reports on the Group’s performance during the past year, its strategy and future prospects, corporate responsibility, and risk factors (including the risks associated with the use of certain financial instruments).

The Directors note that the UK Government has removed the requirement for quoted companies to publish an Operating and Financial Review. The Directors will continue to monitor applicable statutory and regulatory requirements as they emerge and ensure that the Company’s reporting is consistent with such requirements.

PRINCIPAL ACTIVITIES
BG Group is an integrated gas company with activities across the whole range of gas operations from exploration to the end consumer. Broadly, these activities are:

Exploration and Production (E&P)
E&P comprises exploration, development, production and marketing of hydrocarbons with a focus on gas.

Liquefied Natural Gas (LNG)
The LNG business combines the development and use of LNG import and export facilities with the purchase, shipping and sale of LNG and regasified natural gas.

Transmission and Distribution (T&D)
T&D develops, owns and operates major pipelines and distribution networks, and supplies gas through these to the end customer.

Power Generation (Power)
Power develops, owns and operates natural gas-fired power generation plants around the world.

RESULTS AND DIVIDEND
The profit before tax was £2 509m (2004 £1 499m). A final dividend of 4.09p per ordinary share is proposed (2004 2.08p), making a total dividend for 2005 of 6.00p (2004 3.81p) . The results are dealt with fully in the Financial Statements (pages 63 to 127) and in the Operating and financial review (pages 6 to 37).

SIGNIFICANT EVENTS SUBSEQUENT TO 31 DECEMBER 2005
There are no significant events affecting the Company or its subsidiaries which have occurred since the end of the financial year.

SUBSTANTIAL SHAREHOLDERS
At 3 March 2006, the only interests in the ordinary share capital of the Company, disclosable under Part VI of the Companies Act 1985, which had been notified to the Directors are those of FMR Corp. and Fidelity International Limited which have an interest in 186 301 359 ordinary shares representing 5.28% of the issued share capital.

ANNUAL GENERAL MEETING
The Annual General Meeting (AGM) will be held at 11.00 am on Friday 28 April 2006 at the International Convention Centre, Birmingham. The Notice of AGM is set out on pages 146 to 149

of this document. An explanation of the proposed resolutions is set out on pages 147 to 148 of this document.

A summary of the business carried out at the AGM will be published on the BG Group website.

AUDITORS
Resolutions to reappoint PricewaterhouseCoopers LLP as Auditors to the Company and to authorise the Audit Committee to determine their remuneration will be proposed at the AGM.

SHARE CAPITAL
The Company was given authority at the 2005 AGM to make market purchases of up to 353 843 302 of its own ordinary 10p shares at a maximum price per share of 105% of the middle market price. This authority will expire at the 2006 AGM and approval from shareholders will be sought at that meeting to renew the authority for a further year. In November 2005, the Company announced its intention to return up to £1 billion to shareholders in accordance with this authority. For further information and details of shares purchased and issued during the year, see page 27 and note 26 to the accounts on page 98.

DIRECTORS AND OFFICERS
The names of the current Directors and their biographical details are given on pages 44 and 45.

Jürgen Dormann was appointed to the Board as a non-executive Director on 1 June 2005. Directors appointed by the Board are required to retire at the first AGM following their appointment and to seek election by shareholders. He will therefore be seeking election by shareholders at the 2006 AGM.

In addition, Directors are subject to re-election by shareholders every three years. Accordingly, Sir Robert Wilson, Frank Chapman, Ashley Almanza and Sir John Coles will retire and are proposed for re-election by shareholders at the 2006 AGM. Shareholders originally elected Sir Robert Wilson and Ashley Almanza for the first time at the 2003 AGM following their appointments to the Board. Frank Chapman and Sir John Coles were re-elected at the 2003 AGM. Further details, including the Board’s reasons for proposing their re-elections, are set out in the Notice of AGM on pages 146 to 149.

Keith Mackrell, Elwyn Eilledge and Dame Stella Rimington were non-executive Directors until their retirement on 4 May 2005.

Details of the Executive Directors’ service contracts and the letters of appointment for the non-executive Directors, their emoluments and share interests can be found in the Remuneration report on pages 51 to 61.

The executive officers of the Company at 31 December 2005 (including members of the Group Executive Committee and the Company Secretary) and their biographical details are given on pages 46 and 47.

The aggregate remuneration of the executive officers in 2005 was

£5 146 788 (2004 £5 197 546) and aggregate pension contributions were £53 452 (2004 £54 655). At 3 March 2006, the executive officers had the following aggregate beneficial interests in the Company’s shares: ordinary shares 570 137; long-term incentive schemes 4 179 688 (notional allocation). For the allocation made in September 2002, the performance period ended on 5 September 2005. BG Group’s performance meant that 57% of the original allocation was transferred to participating executive officers in September 2005.



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50

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Directors’ report continued

 

At 3 March 2006, executive officers held options under the Sharesave Scheme over a total of 26 865 ordinary shares at exercise prices between £2.19 and £3.95 per share, exercisable between November 2006 and April 2011; under the Company Share Option Scheme they held options over a total of 3 711 876 ordinary shares at exercise prices between £2.5175 and £4.9942 per share, exercisable between November 2003 and September 2015. A description of the Company’s employee share schemes is given on pages 53 to 55.

INDEMNITIES AND INSURANCE
BG Group maintains liability insurance for its Directors and officers, with a cover limit for each claim or series of claims against them in that capacity. The Directors, and those Directors who retired during 2005, have also been granted a qualifying third party indemnity provision under Section 309A-B of the Companies Act 1985. Neither the Company’s indemnity nor insurance provides cover in the event that a Director is proved to have acted fraudulently or dishonestly.

EMPLOYEES
The Group had 5 390 employees worldwide at 31 December 2005, of which 3 945 were employed outside the UK. Employees are informed about significant business issues and the Group’s performance using electronic mail, the Company’s intranet and in-house publications, as well as videos, DVDs and briefing meetings at each business location. When appropriate, consultation with employee and union representatives also takes place.

The Group takes the issues of equality and diversity seriously and encourages its partners to do likewise. By using the talent and skills available in all groups and communities in the countries in which it operates, the Group is able to build a strong foundation for the lasting success of its business. This is achieved by using appropriate recruitment and selection techniques, ensuring equality of employment opportunity and equal access to development opportunities.

The Group is also committed to providing a work environment free from harassment and discrimination and remains committed to fair treatment of people with disabilities in relation to job applications, training, promotion and career development. Every effort is made to find appropriate alternative jobs for those who are unable to continue in their existing job because of disability. Equally, the Group encourages its partners to take a similar approach to these issues where Group policies are not able to be implemented directly.

Employees are encouraged to become shareholders in the Company and a significant number participate in its Sharesave Scheme and the Share Incentive Plan.

COMMUNITY INVOLVEMENT
During 2005, the Group donated around£0.6m to registered charities in the UK. Adding contributions of cash, employee time and equipment to community groups in the UK (in accordance with the London BenchmarkingGroup model), this figure rises to around £0.8m.

Under the Group’s Statement of Business Principles, it is the Group’s policy not to make political donations. No donations were made in the EU for political purposes, as defined in Section 347A of the Companies Act 1985. For further information on BG Group’s social investment, see page 33.

SUPPLIERS
The Group aims to pay all its creditors promptly and in accordance with contractual and other legal obligations. It is the Group’s policy

to agree the payment terms at the start of business with each supplier and to ensure that they are aware of the terms of payment.

The Group had 24 days’ purchases outstanding at 31 December 2005 based on the average daily amount invoiced by suppliers during the year.

GOING CONCERN
The accounts have been prepared on the going concern basis since the Directors are satisfied that the Group’s and the Company’s activities are sustainable for the foreseeable future.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES FOR PREPARING THE FINANCIAL STATEMENTS
The Directors are required by the Companies Act 1985 to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Company and of the Group at the end of the financial year and of the profit or loss of the Company and the Group for the financial year. The Company is also required to prepare financial statements for US shareholders in accordance with the requirements of the US Securities and Exchange Commission.

The Directors consider that, in preparing the Financial Statements on pages 63 to 127, the Company has used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgments and estimates and all applicable accounting standards have been followed. The Company has complied with UK and US disclosure requirements in this report in order to present a consistent picture to all shareholders.

The Directors have responsibility for ensuring that the Company keeps accounting records that disclose with reasonable accuracy the financial position of the Company and of the Group and that enable them to ensure that the Financial Statements comply with the Companies Act 1985.

The Directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities and have adopted a control framework for application across the Group. The Directors, having prepared the Financial Statements, have asked the Auditors to take whatever steps and to undertake whatever inspections they consider to be appropriate for the purposes of enabling them to give their audit report.

The Directors confirm that the Audit Committee continues to review the adequacy of the system of internal control adopted by the Group.

A copy of the Financial Statements of the Company is placed on the BG Group website. The maintenance and integrity of the BG Group website is the responsibility of the Directors. The work carried out by the Auditors does not involve consideration of these matters and, accordingly, the Auditors accept no responsibility for any changes that may have occurred to the Financial Statements since they were initially presented on the website.

Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Registered Office:  By order of the Board 
100 Thames Valley Park Drive  Ben Mathews 
Reading  Company Secretary 
Berkshire RG6 1PT   
   
Registered in England & Wales No. 3690065 8 March 2006


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

51
   

Remuneration report

 

This report is made by the Board on the recommendation of the Remuneration Committee. The first part of the report provides details of BG Group’s remuneration policy. The second part provides details of the remuneration, service contracts and share interests of the Directors for the year ended 31 December 2005. The report has been approved by the Board and signed on its behalf by Baroness Hogg, Chairman of the Remuneration Committee. A resolution will be put to shareholders at the Annual General Meeting (AGM) of the Company to be held on 28 April 2006 inviting them to approve this report.

BG Group’s remuneration policy is designed to ensure that executives of the highest calibre are recruited and retained and that our strong performance ethic is reinforced. BG Group continues to place greater emphasis on performance related incentives rather than base salaries for these executives.

In accordance with Schedule 7A of the Companies Act 1985, as inserted by the Directors’ Remuneration Report Regulations 2002 (the ‘Regulations’), the following sections of the report have been audited: Directors’ Remuneration; Directors’ Interests in Shares under the BG Group Long Term Incentive Scheme; Options; and the table and notes in the Pensions section of the report. The remaining sections are not subject to audit.

REMUNERATION COMMITTEE

The Committee’s principal responsibilities are:

  setting, reviewing and recommending to the Board for approval the Company’s overall remuneration policy and strategy;
     
  setting, reviewing and approving individual remuneration arrangements for Executive Directors and the Chairman including terms and conditions of employment and any changes;
     
  reviewing the salary structure and terms, conditions and benefits of employment of other Group Executive Committee members and the Company Secretary; and
     
  approving the rules, and launch, of any Company share, share option or cash based incentive scheme and the grant, award, allocation or issue of shares, share options or payments under any such scheme.
     
  The full terms of reference of the Committee can be found on the BG Group website and copies are available on request.

The Committee consists exclusively of independent non-executive Directors and meets on at least four occasions each year. The members are:

  To 4 May 2005


Baroness Hogg Elwyn Eilledge
(Chairman from 4 May 2005) (Chairman until 4 May 2005)


Peter Backhouse Dame Stella Rimington


Sir John Coles  


Paul Collins  


Jürgen Dormann  
(from 16 June 2005)  


Ben Mathews, Company Secretary, attends meetings as Secretary to the Committee.

Sir Robert Wilson, Chairman of the Board, Frank Chapman, Chief Executive, Peter Duffy, Executive Vice President Human Resources, and Natarajan Sundar, Head of Performance and Reward, attend meetings by invitation and provide advice to the Committee to enable it to make informed decisions. No Director is present when his or her own remuneration is being discussed.

The Committee also meets without management and receives information and independent executive remuneration advice from Kepler Associates(a)(b), an external consultancy firm appointed by the Committee. During 2005, Kepler Associates provided advice to the Committee on market trends, incentive schemes and other remuneration issues.

Other external advisers also provide support and advice in relation to executive remuneration to the Committee. Towers Perrin(a)(b) provides general compensation and benefits advice and information to the Committee and to BG Group management. Herbert Smith LLP(a)(b) provides legal advice and services on share schemes (as well as other legal services to the Group and to the trustees of the Ballylumford Power Pension Scheme) and Watson Wyatt(a)(b) provides actuarial advice to the Committee, the Group, and the trustees of the BG Pension Scheme and the Ballylumford Power Pension Scheme as well as other general consultancy services to the Group. These advisers are appointed by management or the relevant trustees as appropriate.

REMUNERATION POLICY
BG Group needs to be able to employ and retain international employees of the highest calibre with the necessary skills, capabilities and experience to execute its business strategy and thereby deliver strong growth. The catchment area for recruitment is increasingly outside the UK and the talent required is scarce.

The overriding objectives of the Group’s remuneration policy are:

to enable the recruitment and retention of this limited resource; and
   
to reinforce the Group’s strong performance ethic.

The central premise of the policy is that, while reward arrangements should be market competitive, employees should look to performance related incentives rather than base salaries to earn above average reward. Performance related incentive schemes form a significant proportion of the total reward package for executives and are designed to align their interests with those of shareholders and establish a clear link between pay and performance.

In defining BG Group’s remuneration policy, the Committee takes into account advice received from external consultants and also best practice guidelines set by institutional shareholder bodies, including the principles and guidelines on executive remuneration issued by the Association of British Insurers (ABI).

 

 

(a) Kepler Associates, Towers Perrin, Herbert Smith LLP and Watson Wyatt have given, and not withdrawn,their written consent to the issue of this document with the inclusion of the reference to their respective names in the form and content in which they appear. A copy of each consent letter is available for inspection at BG Group plc, 100Thames Valley Park Drive, Reading, Berkshire RG6 1PT.
   
(b)  Other than in the provision of the services outlined above,none of Kepler Associates, Towers Perrin, Herbert Smith LLP or Watson Wyatt provides any services to the Group or has any connection with the Group.


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52

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Remuneration report continued

 

To implement the policy, BG Group has a well-developed, Group- wide performance management system and operates three complementary performance related incentive schemes for executives:

the Annual Incentive Scheme (AIS) – designed to focus executives on the business priorities of the financial year and to reinforce the individual and Company performance ethic;
the Long Term Incentive Scheme (LTIS) – aims to motivate participants to maximise total shareholder return (TSR)(a) as measured against a comparator group of international oil and gas companies over a period of three years; and
the Company Share Option Scheme (CSOS) – aims to drive real earnings growth over the long term. The mechanism used for measuring this is the growth in the Group’s earnings per share (EPS)(b) relative to the growth in the Retail Price Index, excluding mortgage interest repayments (RPIX).

The varying performance periods and performance conditions  of the three schemes combine and complement each other to  enable the measurement and reward of both short- and long-term  performance as well as absolute (AIS), sustained (CSOS) and comparative (LTIS) financial performance.

The Committee reviews the remuneration policy on a regular basis and recommends changes as and when appropriate. During the year, the Committee performed a review of the annual and long-term incentive schemes. Based on this review, the Committee is satisfied that the incentive schemes continue to  be appropriate in fulfilling the remuneration objectives outlined above and have been operated effectively, including particularly the determination of the grant population, performance targets and the overall quantum of reward. During 2006, the Committee  will continue to review the operation of the incentive schemes to  ensure optimal performance alignment.

COMPONENTS OF REMUNERATION
The current remuneration package for Executive Directors comprises performance related and non-performance related  components. The performance related components are the  incentive schemes referred to above and the non-performance related components are base salary, taxable benefits and pension entitlements. In addition, the Executive Directors are eligible to  participate in the Company’s all-employee share schemes. Pay and  employment conditions elsewhere in the Group have been taken into account by the Committee in determining the remuneration packages for Executive Directors and the Committee has also  followed the provisions of Schedule A to the Combined Code which  relate to the design of performance related remuneration.

 
(a)      TSR is defined as the returnon investment obtained from holding a company’s shares over a period. It includes dividends paid, the change in the capital value of the shares and other payments to, or by, shareholders within the period. TSR is calculated on a common currency basis to ensure that international comparisons are fair.
(b)      EPS is calculated by dividing the earnings for the financial year (excluding disposals and re-measurements) by the weighted average number of ordinary shares in issue and ranking for dividend during the year. EPS is published quarterly when BG Group reports its results. For grants made on or after 21 July 2004, the Group’s published EPS is adjusted to take into account the volatility of both commodity prices and exchange rates. See page 54 for further details.
(c)      Average capital employed consists of total shareholders’ funds plus commodity financial instruments (including associated deferred tax) and net funds/(borrowings), averaged between the start and the end of the year. Return on average capital employed represents profit before tax (excluding disposals and re-measurements) plus net finance costs payable onnet funds/(borrowings) as a percentage of average capital employed.

The proportion of each Executive Director’s total remuneration that is performance related is significant even for target performance. For stretch performance, the proportion of total remuneration that is performance related is higher, as is the total amount of remuneration payable.

In determining the relative importance of those elements of remuneration that are, and those that are not, performance related as required by the Regulations, a number of assumptions have been made about the Company’s share price growth and TSR, relative to the Company’s comparator group, over the next three years. These assumptions have not changed from last year. Pension values can vary quite significantly from year to year and from person to person and are shown separately on page 61. The average proportion of remuneration (excluding pension) that is performance related is illustrated by the chart below.

  Composition of remuneration package    
  for Executive Directors (average)    
  As a % of total remuneration    
         
  Target Performance   Stretch Performance  
 
 
 
 

 
     Performance related pay    
 

 
    Non-performance related pay    
 

 

Base salaries
Executive Directors’ salaries are reviewed each year with any changes taking effect from 1 April. This review takes into account individual performance and market competitiveness. Pensionable salary is derived from base salary only.

In line with our remuneration policy, the Committee benchmarks Executive Directors’ salaries against a comparator group. The Committee considered it appropriate to reference Executive Directors’ base salaries for the 2005 salary review against the FTSE 50.

Annual Incentive Scheme (AIS)
The Group operates a cash based annual incentive scheme, which in 2005 provided an incentive opportunity in the range of 0% to 100% of base salary.

At the start of the incentive year (1 January), based on the Group’s business priorities, the Committee sets the performance measures and the Board sets challenging stretch and budget financial performance targets. Incentives at the higher end of the range are payable only for demonstrably superior Group and individual performance. During the transition to International Financial Reporting Standards (IFRS), the comparison between actual performance and the targets has been measured on a consistent basis.

For the Executive Directors, the financial performance measures for the 2005 incentive year were EPS and return on average capital employed (ROACE)(c). As in the prior year, actual results were adjusted to exclude the volatility of upstream



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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

53
   

 

prices and the UK£/US$ exchange rate. This adjustment is reviewed by the Company’s independent external Auditors, PricewaterhouseCoopers LLP. The Committee reviewed the Company’s performance against these financial measures and concluded that stretch performance was achieved in 2005 on both.

When determining actual incentive payments, the Committee considers:

overall Group performance, including financial performance, performance against the annual work programme and Health, Safety, Security and Environmental performance;
   
Group performance relative to peers; and
   
individual performance.

For the 2005 incentive year, taking into account the stretch financial performance and the above factors, the Committee decided that the Chief Executive and the Deputy Chief Executive should be awarded AIS payments of 95% of base salary. An award of 100% of base salary was made to the Chief Financial Officer. Payments in respect of the 2005 incentive year were made in March 2006. Payments under the AIS are non-pensionable.

The Committee has decided that the same financial performance measures will apply to the AIS for 2006 and also that it will review the future operation of the scheme.

Long-term incentives
Estimated Present Value (EPV)
EPV is a measure that describes the value, at the time of grant or allocation, of long-term incentives that may, or may not, pay out in the future.

This measure, which is based on generally accepted remuneration practice, takes account of the performance conditions and the risk that grants and allocations may be forfeited. This EPV is then used to determine the appropriate levels of face value CSOS grants and LTIS allocations.

As agreed by shareholders at the AGM in 2002, the Committee is able to make awards under both schemes, up to a maximum combined EPV of 175% of base salary each year. The actual maximum combined EPV granted during 2005 was 175%.

Blend of CSOS and LTIS
Each year, the Committee decides on the appropriate blend of CSOS grants and LTIS allocations to be made to Executive Directors within the maximum combined EPV. Awards will always be made under both schemes with not less than 20% and not more than 80% of the total combined EPV delivered by either scheme.

When making the decision on the exact mix, the Committee takes into consideration a number of factors including cost, the performance conditions considered to be key to BG Group’s strategy at the time of the allocation or grant and the need to remain within scheme dilution limits.

Long Term Incentive Scheme (LTIS)
A limited number of key employees are allocated Company shares under the LTIS. This allocation marks the beginning of a three year performance period. The Company’s TSR performance against that of a comparator group over the three year period will determine what proportion of the allocated shares will be transferred into the ownership of the employee. There is no retest provision. The Committee considers that measuring performance against a comparator group of companies ensures that executives are rewarded based on BG Group’s performance relative to the performance of the other companies in the comparator group. During 2005, the TSR performance was measured by the independent TSR monitoring service of Alithos Limited and reviewed by Kepler Associates.

For the 2002, 2003 and 2004 LTIS allocations, the comparator group comprised 21 companies, including BG Group plc. This group was chosen because the Committee considered that it represented an appropriate set of international oil and gas companies against which the performance of BG Group could be compared by shareholders.

For the 2005 allocation, the group was reduced to 19, due to the merger of Royal Dutch Petroleum Co. and Shell Transport and Trading Co. plc to form Royal Dutch Shell plc and the acquisition of Unocal Corporation by Chevron Texaco Corporation(a) (now called Chevron Corporation).

The other companies in the comparator group are currently as follows:

Amerada Hess Duke Energy Energy Norsk Hydro
Corporation Corporation  ASA 



Anadarko El Paso Corporation Occidental 
Petroleum   Petroleum 
Corporation   Corporation 



BP p.l.c. ENI S.p.A.  Royal Dutch
    Shell plc 



Burlington Exxon Mobil  Repsol YPF S.A.
Resources Inc. Corporation  



Chevron Kerr-McGee Statoil ASA
Corporation Corporation  



ConocoPhillips Marathon Oil Total S.A.
  Corporation  



Of these companies, 11 are headquartered in the USA, two in the UK and five elsewhere in Europe.

The Committee intends to review this comparator group for any future allocations under the LTIS.


 

(a) A different comparator group was used for the 2001 allocation.

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54

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Remuneration report continued

 

The Committee has set the following performance conditions for the 2002, 2003, 2004 and 2005 allocations:

BG Group’s TSR position in comparator group % of allocated shares transferred


Top 100


Upper Quartile 75


Median 30


Below Median All allocated shares are forfeited


   
   

Where performance is between Upper Quartile (UQ) and Top (T), or between Median (M) and UQ, the percentage of shares to be transferred is determined on a proportionate basis.

These performance conditions are illustrated by the graph below:

LTIS performance conditions
% of allocated shares transferred

The performance period for the 2002 allocation ended on 4 September 2005. BG Group’s final TSR for this period relative to the TSRs of companies in the relevant comparator group placed it in 8th position. The Committee decided, in accordance with the performance condition for the 2002 allocation, that 57% of the original allocation of shares had vested and, accordingly, these shares were transferred to the participating employees on 12 September 2005.

Shares allocated under the 2001 LTIS scheme were transferred to eligible employees on 22 November 2005 when the one year retention period ended.

In May 2002, shareholders approved the removal of the retention period for allocations made from then onwards. Accordingly, the allocations made in 2001 and 2002 were both transferred during 2005.

In the event of a change of control, vesting of shares under the LTIS is not automatic and would depend upon the extent to which the performance conditions had been met at the time.

Company Share Option Scheme (CSOS)
Approximately 2 000 employees are currently eligible to participate in the CSOS, including all UK payroll employees and those overseas employees above a certain level of seniority.

The Company grants an option over its shares to each eligible employee and the option price is set at the fair market value at the time of the grant. As described below, the CSOS measures performance according to EPS growth relative to the growth in the RPIX. The Committee considers that an EPS performance measure ensures that employees receive rewards only when the Company has achieved sustained earnings growth during the performance period. The calculation of EPS growth for grants made on or after

21 July 2004 has been made using constant commodity prices and constant exchange rates.

During the transition to IFRS, EPS growth figures are being calculated on a consistent basis by restating prior years’ results in compliance with IFRS.

To the extent that the performance target has been met three years from the date of grant, the option may be exercised (in whole or in part) at any time up to the expiry of ten years from the date of grant.

For grants made on or after 21 July 2004, there is no retest provision. For grants made in 2003, fixed point retesting is currently allowed in years four and five, but in this event EPS growth of RPIX plus 40% or 50% respectively must be achieved for all of the options to become exercisable. At the end of year five, the options will be exercisable only to the extent that the performance condition has been met.

As in prior years, the levels of grant made to individual employees in 2005 were differentiated based on each individual’s performance to date and expectation of future contributions. For the 2005 grant, the Committee set the following performance targets:

EPS growthover RPIX (over 3 years) % of optionthat is exercisable


30% or greater 100


15% 50


Less than 15% Option is forfeited


A proportion of between half and all of the options will be exercisable if the Company achieves EPS growth over three years of RPIX plus between 15% and 30%, respectively.

These targets are the same as those which apply to the 2003 and 2004 grants (and applied to the 2002 grant) and are considered by the Committee to be particularly demanding.

These performance targets are illustrated by the graph below:


% EPS growth over three years in excess of RPIX

CSOS performance conditions
% of option exercisable

Over the three year performance period for the 2002 CSOS grant, the Company’s EPS growth above the growth in the RPIX exceeded 30%. As a result, 100% of the shares under option granted to employees in September 2002 are exercisable prior to September 2012.

In the event of a change of control, exercise of an option under the CSOS is not automatic and would depend upon the extent to which the performance condition had been satisfied at the time.



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CSOS options were exercised during the year by Frank Chapman, Chief Executive, William Friedrich, Deputy Chief Executive and Ashley Almanza, Chief Financial Officer. Details of these exercises can be found on page 60.

All-Employee Share Schemes
In order to encourage share ownership, the Company currently provides two all-employee share schemes for its UK employees, the Share Incentive Plan and the Sharesave Scheme.

Share Incentive Plan (SIP)
The BG Group SIP is approved by HM Revenue and Customs. There are two parts to the SIP – the Partnership Shares Plan and the Free Shares Plan.

(a) Partnership Shares
Eligible employees are offered the opportunity to buy Company shares from pre-tax earnings as part of a regular share purchase plan. Shares are currently purchased every six months using employees’ accumulated deductions and are placed in trust.

At 31 December 2005, 64% of eligible employees were participating in this plan. Of those participating, 77% were contributing the maximum of £125 per month.

(b) Free Shares
A Free Shares award of 716 shares, representing the value of the £3 000 statutory limit, was made on 7 April 2005 to all eligible employees in the UK, based on the Group’s performance during 2004. These shares will be held in trust for up to five years.

For 2005, the Committee may approve the award of Free Shares in the Company up to the statutory limit for each individual. All eligible employees will receive the same number of shares. This number will be determined based on the Group’s performance during 2005.

Sharesave Scheme
The Company continued to operate the BG Group Sharesave Scheme in 2005. The scheme is approved by HM Revenue and Customs and enables eligible employees to acquire the Company’s shares with the proceeds of a monthly savings contract. The contract period is three or five years. At 31 December 2005, 73% of eligible employees were participating in the Sharesave Scheme. Of those participating, 70% were contributing the statutory maximum of £250 per month.

DILUTION
The ABI has published guidelines relating to the disclosure of the percentage of a company’s issued share capital that can be issued to employees under share schemes. In the event of all options outstanding as at 31 December 2005 under BG Group’s CSOS and Sharesave Schemes (which involve the issue of new shares) becoming exercisable, the resulting issue of shares would represent less than 1.66% of the issued share capital as at that date.

SHAREHOLDING GUIDELINES
The Committee has adopted guidelines for Executive Directors, Group Executive Committee members and certain other senior employees to encourage substantial long-term share ownership. These require that, over a period of five years from the introduction of the guidelines in 2002 (or date of appointment, if later), Executive Directors build up, and then retain, a holding of shares with a value

equivalent to 200% of base salary. The required holding for other members of the Group Executive Committee is 100% of base salary and for certain other senior employees is 50% of base salary. The guidelines require that, in relation to the 2002 and later LTIS allocations, vested shares (net of tax) should be retained by the individual until the required shareholding level is reached.

SERVICE CONTRACTS
The Executive Directors’ service contracts, including arrangements for early termination, are carefully considered by the Committee and are designed to recruit, retain and motivate Directors of the quality required to manage the Company. The Committee considers that a notice period of one year is appropriate.

The Executive Directors’ service contracts contain change of control provisions. Should the Directors’ employment be terminated within 12 months of a change of control, they are entitled to liquidated damages. The amount of liquidated damages is equal to one year’s gross salary and a credit of one year’s pensionable service (less any deductions the employer is required to make), which the Committee considers to be a genuine pre-estimate of loss. The Committee considers that these provisions assist with recruitment and retention and that their inclusion is therefore in the best interests of shareholders.

Other than change of control, the Executive Directors’ service contracts do not contain provisions for compensation in the event of early termination. When calculating termination payments the Committee takes into account a variety of factors, including individual and Company performance, the obligation for the Director to mitigate his or her own loss (for example, by gaining new employment) and the Director’s age and length of service. Further details of the Executive Directors’ service contracts can be found on page 58.

SENIOR EXECUTIVES BELOW THE EXECUTIVE DIRECTORS
The policy and practice with regard to the remuneration of senior employees below the Executive Directors is entirely consistent with that for the Executive Directors. These senior executives all have a significant portion of their reward package linked to performance. They all qualify for AIS, CSOS and LTIS, and their financial targets are the same as, or cascaded from, the targets for the Executive Directors. The Committee reviews and approves the individual remuneration packages for the Group Executive Committee members and the Company Secretary in accordance with the overriding objectives of our remuneration policy. Their individual performance is reviewed and their base salary increases, AIS payments, and CSOS and LTIS awards are subject to approval by the Committee each year.

NON-EXECUTIVE DIRECTORS
The Board aims to recruit non-executive Directors of a high calibre with broad commercial, international or other relevant experience. Non-executive Directors are appointed by the Board on the recommendation of the Nominations Committee. Their appointment is for an initial term of three years, subject to election by shareholders at the first AGM following their appointment. They are generally reappointed for a second term of three years, subject to re-election by shareholders. There is no notice period and no provision for termination payments. The terms of engagement of the non-executive Directors are set out in a letter of appointment.



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56

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Remuneration report continued

 

Non-executive Directors are paid a basic annual fee of £57 500. Additional fees are also payable, for example, for membership of, or chairing, a committee of the Board or acting as Senior Independent Director. Fees are reviewed annually, taking into account time commitment, competition for high quality non-executive directors and market movements.

Non-executive Directors are not eligible to participate in any of the Company’s share schemes, incentive schemes or pension schemes.

CHAIRMAN

Sir Robert Wilson was appointed as Chairman with effect from 1 January 2004. In line with the non-executive Directors, Sir Robert’s appointment is for an initial three year term and there is no notice period and no provision for payment in the event of early termination. The fee paid to Sir Robert Wilson was reviewed during the year and revised to £550 000 per annum effective 1 July 2005, which is next subject to review in December 2006.

PERFORMANCE GRAPH

The graph on the right shows BG Group’s TSR performance for the five year period ended 31 December 2005 (calculated in accordance with the Regulations) against the performance of the FTSE 100. The FTSE 100 was chosen because this is a recognised broad equity market index of which the Company is a member.

Historical TSR performance
Growth in the value of a hypothetical £100 holding of BG Group plc shares over the five year period ended 31 December 2005.




BG Group (based on spot values)


FTSE 100 (based on spot values)


Source: Towers Perrin



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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

57
   

The following section of this report provides details of the remuneration, service contracts or letters of appointment and share interests of all the Directors for the year ended 31 December 2005.

DIRECTORS’ REMUNERATION

INDIVIDUAL REMUNERATION FOR THE YEAR TO 31 DECEMBER

  Salary/fees Taxable benefit (a)   Bonus   Total  
 

  2005     2004   2005     2004   2005     2004   2005     2004  
  £     £   £     £   £     £   £     £  





















Sir Robert Wilson 525 000     500 000   1 794     1 175         526 794     501 175  





















Ashley Almanza(c)(d)(e) 484 497     420 747   1 794     1 175   480 000     420 000   966 291     841 922  





















Frank Chapman(c)(d)(e) 814 097     711 372   3 422     3 610   779 000     710 000   1 596 519     1 424 982  





















William Friedrich(c)(d)(f) 632 997     592 997   42 523     40 134   608 000     600 000   1 283 520     1 233 131  





















Peter Backhouse(b) 66 492     57 500               66 492     57 500  





















Sir John Coles(b) 69 207     60 000               69 207     60 000  





















Paul Collins(b) 80 901     57 500               80 901     57 500  





















Jürgen Dormann(b) 38 750                   38 750      





















Baroness Hogg(b) 65 958                   65 958      





















Lord Sharman(b) 71 250     65 000               71 250     65 000  





















Former Directors                                        
Elwyn Eilledge(b)(g) 24 086     65 000   240             24 326     65 000  





















Sir Richard Giordano(h)       49 737     42 930         49 737     42 930  





















Keith Mackrell(b)(g)(i) 46 452     125 000   264             46 716     125 000  





















Dame Stella Rimington(b)(g) 22 366     57 500   240             22 606     57 500  





















   
(a) Taxable benefits include items such as company car, fuel, driver, financial advice and medical insurance.
(b) Each non-executive Director was paid a fee of £50 000 per annum until 30 June 2004. From 1 July 2004, this increased to £55 000 per annum. A fee of £5 000 per annum was also paid for membership of the Audit, Corporate Responsibility and Remuneration committees, other than for the chairmen of those committees. The chairmen of the Audit and Remuneration committees received an additional fee of £10 000 per annum until 30 June 2004. From1 July 2004, this increased to £15 000 per annum for chairing the Audit Committee. From 1 July 2005, the fee per annum payable to each non-executive Director increased to £57 500. All other fees were unchanged. A fee of £10 000 per annum for chairing the Corporate Responsibility Committee was introduced with effect from 15 March 2005. From 4 May 2005, Paul Collins received a fee of £20 000 per annum as Senior Independent Director.
(c) Bonus figures for 2004 represent payments under the AIS in respect of the 2004 incentive year which were made in February 2005. Bonus figures for 2005 represent payments under the AIS in respect of the 2005 incentive year which were made in March 2006.
(d) Salary figures for Executive Directors include Free Shares to the value of £2997 received under the SIP in April 2004 and £2997 in April 2005. In 2006, Ashley Almanza, Frank Chapman and William Friedrich will be eligible to receive up to a further £3 000 worth of Free Shares under the SIP.
(e) Salary figures for Ashley Almanza and Frank Chapman for both 2004 and 2005 include a cash allowance in lieu of a company car.
(f) William Friedrich, who is a US citizen, is covered by long-term care insurance if he returns to the USA. The value of the taxable benefit for 2005 was £9 102. Cover is being paid by ten instalments, the first of which was paid in 2002.
(g) Elwyn Eilledge, Keith Mackrell and Dame Stella Rimington retired as Directors on 4 May 2005.
(h) Sir Richard Giordano retired as Chairman and Director on 31 December 2003.Until 31 December 2005, the Company paid reasonable fees incurred by his tax advisers as provided in his contract of employment. Sir Richard continues to be entitled to private medical insurance and long-term care insurance. The long-term care insurance is being paid by ten instalments.
(i) Keith Mackrell was Deputy Chairman of the Company until 4 May 2005, for which he received £70 000 per annum in addition to his fee as a non-executive Director.
 

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58

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Remuneration report continued

 

DIRECTORS’ SERVICE CONTRACTS

EXECUTIVE DIRECTORS
Details of the service contracts of the Executive Directors who served during the year are set out below.

              Compensation (a)
payable
Contract Unexpired Notice uponearly
date term period termination









Ashley Almanza 01 Aug 02   rolling 1yr   1yr   n/a  









Frank Chapman 14 Sep 00   rolling 1yr   1yr   n/a  









William Friedrich 14 Sep 00   rolling 1yr   1yr   n/a  









(a) Other than the change of control provisions, the Executive Directors’ service contracts do not contain provisions for compensation payable upon early termination.

Change of control
As described on page 55, the Executive Directors’ service contracts contain change of control provisions.

For the purposes of these provisions, a change of control is deemed to occur if the Company becomes a subsidiary of another company; or if 50% or more of the voting rights of the Company or the right to appoint or remove the majority of the Board of the Company become vested in any individual or body or group of individuals or bodies acting in concert; or if all or substantially all of the business, assets and undertakings of the Company become owned by any person, firm or company (other than a subsidiary or associated company). A change of control is also deemed to occur if the whole of the issued capital of BG Energy Holdings Limited or a substantial part of the undertaking of that company (including its subsidiaries) is transferred to another company, unless that transferee company is a subsidiary of the Company, or a company ultimately owned by substantially the same shareholders as are the ultimate owners of the Company.

However, a change of control does not occur if (and only if) through a process of reconstruction the Company becomes a subsidiary of another company owned by substantially the same shareholders as are the shareholders of the Company. The Executive Directors’ service contracts provide that any payments made pursuant to these provisions will be made less any deductions the employer is required to make. Any such payments shall be in full and final settlement of any claims the Executive Director may have against the employer or any associated company arising out of the termination of employment except for any personal injury claim, any claim in respect of accrued pension rights or statutory employment protection claims.

CHAIRMAN AND NON-EXECUTIVE DIRECTORS

  Date of letter of   Unexpired  
appointment term





Sir Robert Wilson(a) 30 Jun 03   10mths  





Peter Backhouse(b) 5 Mar 04   1yr 2mths  





Sir John Coles 15 Feb 03   2mths  





Paul Collins(b) 2 Mar 04   1yr 2mths  





Jürgen Dormann 23 May 05   3yrs 2mths  





Baroness Hogg 9 Feb 05   2yrs 2mths  





Lord Sharman(b) 25 Feb 04   1yr 2mths  





Former Directors         





Elwyn Eilledge(c) 17 Feb 03   n/a  





Keith Mackrell(b)(c) 4 Mar 04   n/a  





Dame Stella Rimington(c) 15 Feb 03   n/a  





The non-executive Directors’ letters of appointment do not contain any notice period or provision for compensation in the event of early termination of their appointment.

(a) Sir Robert Wilson was appointed as Chairman with effect from 1 January 2004. His unexpired term is subject to re-election by shareholders at the 2006 AGM.
(b) Peter Backhouse, Paul Collins and Lord Sharman were appointed for a further three year term, commencing on the date of the 2004 AGM. Keith Mackrell’s appointment was for a term of one year from the date of the 2004 AGM.
(c) Elwyn Eilledge, Keith Mackrell and Dame Stella Rimington retired as Directors on 4 May 2005.
   

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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

59
   

 

DIRECTORS’ INTERESTS IN SHARES UNDER THE BG GROUP LONG TERM INCENTIVE SCHEME

                Shares vested                
                      during the year                
          Notional           (including                
      Notional   allocations   Number of shares added   shares added               Notional
  Market price   allocations of   of shares   through dividend   through   End of           allocation of
  at date of   shares as at   made during   reinvestment (c) dividend   performance           shares as at
Awarddate award   1 Jan2005   the year   23 May 05   4 Oct05   reinvestment)   period (d) Vesting date   Value vested   31 Dec 2005





















Ashley Almanza                                      





















     22 Nov 01(a) £2.6100   29 848       149   107   30 104   21 Nov 04   22 Nov 05 (e)  £170 840  





















     05 Sep 02(b) £2.5175   274 272               156 335   04 Sep 05   05 Sep 05 (f) £809 034  





















     05 Sep 03 £2.6600   324 935                   04 Sep 06   05 Sep 06       324 935





















     03 Sep 04 £3.5000   400 000                   02 Sep 07   03 Sep 07       400 000





















     02 Sep 05 £5.0775       371 563               01 Sep 08   02 Sep 08       371 563





















Totals     1 029 055   371 563                           1 096 498





















Frank Chapman                                      





















     22 Nov 01(a) £2.6100   225 706       1 128   809   227 643   21 Nov 04   22 Nov 05 (e) £1 291 874  





















     05 Sep 02(b) £2.5175   611 286               348 433   04 Sep 05   05 Sep 05 (f)  £1 803 141  





















     05 Sep 03 £2.6600   688 956                   04 Sep 06   05 Sep 06       688 956





















     03 Sep 04 £3.5000   750 000                   02 Sep 07   03 Sep 07       750 000





















     02 Sep 05 £5.0775       673 768               01 Sep 08   02 Sep 08       673 768





















Totals     2 275 948   673 768                           2 112 724





















William Friedrich                                      





















     22 Nov 01(a) £2.6100   223 403       1 117   800   225 320   21 Nov 04   22 Nov 05 (e) £1 278 691  





















     05 Sep 02(b) £2.5175   450 881               257 002   04 Sep 05   05 Sep 05 (f)  £1 329 985  





















     05 Sep 03 £2.6600   549 407                   04 Sep 06   05 Sep 06       549 407





















     03 Sep 04 £3.5000   580 000                   02 Sep 07   03 Sep 07       580 000





















     02 Sep 05 £5.0775       480 555               01 Sep 08   02 Sep 08       480 555





















Totals     1 803 691   480 555                           1 609 962





















(a) As a result of the performance criteria measured in November 2004, 100% of the November 2001 notional allocation was subject to the one year retention period. These shares were transferred to the Executive Directors on 22 November 2005, after the end of the retention period.
(b) As a result of the performance criteria measured in September 2005, 57% of the September 2002 notional allocation was transferred to the Executive Directors on 12 September 2005.
(c) Dividends paid on shares held in trust may, at the discretion of the trustees, be reinvested in BG Group plc shares by the trustees and held on behalf of the Executive Directors until the normal release date of the respective allocations. The market prices at the dates of reinvestment during 2005 were as follows: 23 May 2005 –£4.135 and 4 October 2005 –£5.29.
(d) The transfer of shares is dependent on the achievement of performance criteria at the end of a three year performance period. In the case of awards made in 2001, there was a retention period of one year following the end of that performance period. No retention period applies to awards made in 2002, 2003, 2004 and 2005. The performance conditions for the scheme are set out on pages 53 and 54.
(e) The market price on 22 November 2005, the date of transfer, was £5.675.
(f) The market price on 12 September 2005, the date of transfer, was £5.175.

The Executive Directors also have a deemed beneficial interest in 322 413 shares as potential beneficiaries in the BG Group New Employees Share Trust.

DIRECTORS’ INTERESTS IN ORDINARY SHARES

OPTIONS
The numbers of share options held by the Directors under the BG Group Sharesave Scheme were as as follows:

Options as at Exercised Granted Lapsed Options as at 31 Exercise Earliest normal Expiry
1 Jan 2005 in year in year in year Dec 2005  price exercise date date

















Ashley Almanza 3 458 3 458 £2.74 Nov 07 May 08

















Frank Chapman 4 286 2 398 4 286 2 398 £3.95 Nov 08 May 09

















William Friedrich 7 368 7 368 £2.29 Mar 06 Sep 06


















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60

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Remuneration report continued

 

The number of share options held by the Directors under the BG Group Company Share Option Scheme was as follows:

Options as at Exercised Granted Lapsed Options as at 31 Exercise Earliest normal Expiry
1 Jan2005 in year in year in year Dec 2005 price exercise date date

















Ashley Almanza 33 519 11 173 (a) 22 346 £2.6850 Nov 03 Nov 10
  50 557   50 557 £2.5634 Nov 04 Nov 11
  196 623   196 623 £2.5175 Sep 05 Sep 12
  204 066   204 066 £2.7050 Sep 06 Sep 13
  250 000   250 000 £3.4733 Sep 07 Sep 14
    337 892 337 892 £4.9942 Sep 08 Sep 15

















Frank Chapman 167 597 11 173 (b) 156 424 £2.6850 Nov 03 Nov 10
  382 304   382 304 £2.5634 Nov 04 Nov 11
  409 136   409 136 £2.5175 Sep 05 Sep 12
  440 406   440 406 £2.7050 Sep 06 Sep 13
  500 000   500 000 £3.4733 Sep 07 Sep 14
    612 711 612 711 £4.9942 Sep 08 Sep 15

















William Friedrich 166 480 11 173 (c) 155 307 £2.6850 Nov 03 Nov 10
  378 403   378 403 £2.5634 Nov 04 Nov 11
  343 435   343 435 £2.5175 Sep 05 Sep 12
  362 292   362 292 £2.7050 Sep 06 Sep 13
  380 000   380 000 £3.4733 Sep 07 Sep 14
    437 007 437 007 £4.9942 Sep 08 Sep 15

















(a) The market price on 25 August 2005, the date of exercise, was £4.865. The total gain on exercise was £24 357.
(b) The market price on 31 August 2005, the date of exercise, was £4.995. The total gain on exercise was £25 810.
(c) The market price on 4 August 2005, the date of exercise, was £4.8825. The total gain on exercise was £24 553.

The aggregate gain on exercise was £74 720. The performance measure for the CSOS is set out on page 54.

The closing price of an ordinary share on 31 December 2005 was £5.745. The range during the year was £5.77 (high) and £3.465 (low). All market price figures are derived from the Daily Official List of the London Stock Exchange.

ORDINARY SHARES
The Directors’ beneficial interests in ordinary shares of the Company at the end of the financial year were as follows:

Beneficial interests   
in ordinary shares(a)




As at    As at   
1 Jan2005* 31 Dec 2005





Sir Robert Wilson 70 000 70 000





Ashley Almanza 33 896 156 172





Frank Chapman 224 549 569 488





William Friedrich(b) 316 673 607 340





Peter Backhouse 20 500 20 500





Sir John Coles 5 829 5 829





Paul Collins(c) 100 000 100 000





Jürgen Dormann (appointed 1 June 2005) 11 000 11 000





Baroness Hogg (appointed 27 January 2005) 5 904 5 904





Lord Sharman 1 956 1 956





 
* or on date of appointment
   
(a) Beneficial interests including shares acquired pursuant to the BG Group Share Incentive Plan.
(b) William Friedrich holds 77 740 ordinary shares in the form of 15 548 American Depositary Shares (ADSs). Each ADS represents five ordinary shares.
(c) Paul Collins’holding is in the formof 20 000 ADSs.

There have been no changes in the interests of the Directors in the share capital of the Company or any of its subsidiary undertakings between 1 January 2006 and 8 March 2006.

As of 8 March 2006, the Directors’ interests in the share capital of the Company represent less than 1% of the issued share capital of the Company.


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

61
   

PENSIONS
Frank Chapman, William Friedrich and Ashley Almanza were members of the BG Pension Scheme throughout the year. The benefits provided for them under the BG Pension Scheme are subject to the earnings cap, which is a restriction on the amount of pay that can be used to calculate pensions payable from a UK tax approved pension scheme. Consequently, retirement benefits (including contingent death benefits) that are not covered by the BG Pension Scheme are provided by the Company under an unapproved arrangement, the BG Supplementary Benefits Scheme. Provision has been made in respect of the additional obligations for these post-retirement benefits.

The arrangements for all the Executive Directors have not changed during the year. They provide an accrual of benefits designed to target a pension equivalent to two-thirds of their final 12 months’ salary on retirement from BG Group at age 60, inclusive of retained benefits. As for all members of the BG Pension Scheme, if the Company consents to retirement, no actuarial reduction is applied to pensions payable from age 55, provided ten years’ service has been completed with the Group (which includes pensionable service transferred from previous employment). Pensions in payment are increased in line with retail price inflation. An adult dependant’s pension is payable on death in service, equal to two-thirds of that payable to the pension scheme member based on potential service to retirement age. On death in retirement, an adult dependant’s pension is payable equal to two-thirds of the member’s pension prior to exchanging any of it for a cash lump sum.

A new pensions taxation regime comes into force from April 2006 and the Company has reviewed the effect that this will have on its pension arrangements. The Company has concluded that the current level of pension benefit provided to Directors and other members continues to be appropriate.

The earnings cap in the BG Pension Scheme will be disapplied once the new tax regime comes into effect. The BG Supplementary Benefits Scheme will be retained and will be available to provide benefits in excess of the new ‘lifetime allowance’. The new taxation regime will, therefore, result in a different allocation of benefits between the BG Pension Scheme and the BG Supplementary Benefits Scheme, but there will be no change in the overall level of benefits payable. The Company will not compensate individuals for any changes in their personal tax liabilities that may result from changes to pension taxation.

The revised arrangements regarding the BG Supplementary Benefits Scheme will be available to all UK employees whose benefits reach the ‘lifetime allowance’.

Directors’ pension provisions were as follows:

  Directors’   Age at Increase in accrued   Total accrued   Retirement  
contributions in annual pension in year annual
year to to 31 Dec 2005 pension at
31 Dec 2005   (a)   £000 pa 31 Dec 2005
£000 31 Dec 2005 (b) £000 pa age













Ashley Almanza 14 42 24   22   99   60













Frank Chapman 16 52 67   57   373   60













William Friedrich 16 56 49   40   328   60













(a) Actual increase
(b) Increase net of price inflation
   
Transfer value of Transfer value of Increase in transfer  
accruedpension as accruedpension as value over the year less
at 31 Dec 2004 (c) at 31 Dec 2005 (c) Director’s own contributions
£000 £000 £000







Ashley Almanza 693   987   280  







Frank Chapman 4 433   5 810   1 361  







William Friedrich 4 803   6 124   1 305  







   
(c) The transfer values shown at the end of 2004 and 2005 represent the value of each Executive Director’s accrued pension based on total service completed to the relevant date. The accrued pensions are the amounts that would have been paid if the Executive Director had left service at the relevant date. The transfer values have been calculated in accordance with guidance note ‘GN11’ issued by the Institute of Actuaries and Faculty of Actuaries.

EXTERNAL APPOINTMENTS
To broaden the experience of Executive Directors, it is Company policy to allow each of them to accept one external appointment as a non-executive director of another company, the fees for which would be retained by the individual Director. On 1 March 2006, William Friedrich was appointed as a non-executive director of The Royal Bank of Scotland Group plc (RBS), for which he receives an annual fee of £55 000. RBS is one of a number of relationship banks providing a variety of commercial banking and other financial services to BG Group.

By order of the Board
Baroness Hogg
Chairman of the Remuneration Committee

8 March 2006

Registered office:
100 Thames Valley Park Drive
Reading
Berkshire RG6 1PT
Registered in England & Wales No. 3690065


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

63
   

Principal accounting policies

 

BASIS OF PREPARATION
The Financial Statements for the year ended 31 December 2005 have been prepared in accordance with International Financial Reporting Standards (IFRS), and International Financial Reporting Interpretations Committee (IFRIC) interpretations. These include standards and interpretations endorsed by the EU. In addition, the Financial Statements have been prepared in accordance with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. The Financial Statements have been prepared using historical cost principles except that, as disclosed in the accounting policies below, certain items, including derivatives, are measured at fair value.

The preparation of Financial Statements in conformity with generally accepted accounting principles requires management to make judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the Financial Statements and the reported revenues and expenses during the reporting period. Actual results could differ from these estimates. BG Group believes that the accounting policies associated with exploration expenditure, depreciation, decommissioning, impairments, financial instruments including commodity contracts and revenue recognition are the critical policies where changes in estimates and assumptions could have a significant impact on the Financial Statements. Further discussion on these policies, estimates and judgments can be found in the Financial review, pages 21 to 30 and note 6, page 81.

BG Group adopted IFRS from 1 January 2005. In accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards, BG Group is required to explain how the transition from UK GAAP to IFRS has affected its financial position, financial performance and cash flows. The financial information provided in note 33, page 118 addresses this requirement. IFRS 1 allows exemptions from the application of certain IFRSs to assist companies with the transition process. The exemptions used by BG Group are set out in note 33. As permitted by IFRS 1, the comparative information for the years ended 31 December 2003 and 31 December 2004 has not been prepared in accordance with IAS 32 and IAS 39. The financial information provided in respect of financial instruments for these years is based on BG Group’s accounting policy under UK GAAP and does not take into account the requirements of IAS 32 and IAS 39. The adjustments made to the balance sheet as at 1 January 2005 on adoption of IAS 32 and IAS 39 are set out on page 122. The presentation adopted by the Group for its results under IFRS is explained in note 2, page 71.

BASIS OF CONSOLIDATION
The accounts comprise a consolidation of the accounts of the Company and its subsidiary undertakings and incorporate the results of its share of jointly controlled entities and associates using the equity method of accounting. Consistent accounting policies have been used to prepare the consolidated Financial Statements.

Most of BG Group’s Exploration and Production activity is conducted through jointly controlled operations. BG Group accounts for its own share of the assets, liabilities and cash flows associated with these jointly controlled operations, using the proportional consolidation method.

The results of undertakings acquired or disposed of are consolidated from or to the date when control passes to or from the Company. For the Company Financial Statements only, investments in subsidiary undertakings are stated at cost less provision for impairment.

PRESENTATION OF RESULTS
The Group presents its results in the income statement to separately identify the contribution of disposals and certain re-measurements in order to provide readers with a clear and consistent presentation of the underlying operating performance of the Group’s ongoing business, see presentation of non-GAAP measures, page 152, note 2, page 71 and note 10, page 85.

SEGMENT REPORTING
The Group’s primary format for segment reporting is business segments and the secondary format is geographical segments. This reflects the fact that the risks and returns of the Group’s operations are primarily based on its business activities rather than the geographical location of the Group’s operations.

BUSINESS COMBINATIONS AND GOODWILL
In the event of a business combination, fair values are attributed to the net assets acquired. Goodwill, which represents the difference between the purchase consideration and the fair value of the net assets acquired, is capitalised and subject to an impairment review at least annually or more frequently if events or changes in circumstances indicate that the goodwill may be impaired. Goodwill is treated as an asset of the relevant entity to which it relates, including foreign entities. Accordingly, it is re-translated into Sterling at the closing rate of exchange at each balance sheet date.

PROPERTY, PLANT AND EQUIPMENT EXCLUDING
DECOMMISSIONING ASSETS
All property, plant and equipment is carried at depreciated historical cost. Additions represent new or replacements of specific components of property, plant and equipment. Contributions received towards the cost of property, plant and equipment (including government grants) are included in creditors as deferred income and credited to the income statement over the life of the assets. Finance costs associated with borrowings used to finance major capital projects are capitalised up to the point of commissioning.

DEPRECIATION AND AMORTISATION
Freehold land is not depreciated. Other property, plant and equipment, except exploration and production assets, is depreciated on a straight-line basis at rates sufficient to write off the historical cost less residual value of individual assets over their estimated useful economic lives. The depreciation periods for the principal categories of assets are as follows:

Freehold and leasehold buildings  up to 50  years



Mains, services and meters  up to 60  years



Plant and machinery  5 to 30  years



Motor vehicles and office equipment  up to 10  years



Exploration and production assets are depreciated from the commencement of production in the fields concerned, using the unit of production method based on the proved developed reserves of those fields, except that a basis of total proved reserves is used for acquired interests and for facilities. Changes in these estimates are dealt with prospectively.

Asset lives are kept under review and complete asset life reviews are conducted periodically. Residual values applied to certain non-exploration and production assets are reassessed annually. Intangible assets in respect of contractual rights are recognised at cost less amortisation. They are amortised on a straight-line basis over the term of the related contracts.


 


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64

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Principal accounting policies continued

 

IMPAIRMENT OF NON-CURRENT ASSETS
Any impairment of non-current assets is calculated as the difference between the carrying values of cash generating units (including associated goodwill) and their recoverable amount, being the higher of the estimated value in use or fair value less costs to sell at the date the impairment loss is recognised. Value in use represents the net present value of expected future cash flows discounted on a pre-tax basis.

ASSETS HELD FOR SALE
When an asset or disposal group’s carrying value will be recovered principally through a sale transaction rather than through continuing use, it is classified as held for sale and stated at the lower of carrying value and fair value less costs to sell. No depreciation is charged in respect of non-current assets classified as held for sale.

INVENTORIES
Inventories, including inventories of gas and oil held for sale in the ordinary course of business, are stated at weighted average historical cost less provision for deterioration and obsolescence or, if lower, net realisable value.

REVENUE RECOGNITION
Revenue associated with exploration and production sales (of crude oil and petroleum products) is recorded when title passes to the customer. Revenue from the production of natural gas and oil 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 contracts (entitlement method). Differences between production sold and the Group’s share of production are not significant.

Sales of liquefied natural gas (LNG) and associated products are recognised when title passes to the customer as the product passes the delivery point at the loading port or the tailgate of the regasification terminal. LNG shipping revenue is recognised over the period of the relevant contract.

Revenue from gas transmission and distribution activities is recognised in the same period in which the related volumes are delivered to the customer.

Power generation revenues are recognised based on the availability status of the power station to produce at a given point in time. Revenue associated with the costs of actual production is recognised whenever power is generated.

All other revenue is recognised when title passes to the customer.

EXPLORATION EXPENDITURE
BG Group uses the ‘successful efforts’ method of accounting for exploration expenditure. Exploration expenditure, including licence acquisition costs, is capitalised as an intangible asset when incurred and certain expenditure, such as geological and geophysical exploration costs, is expensed. A review of each licence or field is carried out, at least annually, to ascertain whether proved reserves have been discovered. When proved reserves are determined, the relevant expenditure, including licence acquisition costs, is transferred to property, plant and equipment and depreciated on a unit of production basis. Expenditure deemed to be unsuccessful is written off to the income statement. Exploration expenditure is assessed for impairment when facts and circumstances suggest that its carrying amount exceeds its recoverable amount. For the purposes of impairment testing, exploration and production assets may be aggregated into appropriate cash generating units based on considerations including geographical location, the use of common facilities and marketing arrangements.

DECOMMISSIONING COSTS
Where a legal or constructive obligation has been incurred, provision is made for the net present value of the estimated cost of decommissioning at the end of the producing lives of fields.

When this provision gives access to future economic benefits, an asset is recognised and then subsequently depreciated in line with the life of the underlying producing field, otherwise the costs are charged to the income statement. The unwinding of the discount on the provision is included in the income statement within finance costs. Any changes to estimated costs or discount rates are dealt with prospectively.

FOREIGN CURRENCIES
On consolidation, assets and liabilities denominated in foreign currencies are translated into pounds Sterling at closing rates of exchange. Trading results of overseas subsidiary undertakings, jointly controlled entities and associates are translated into pounds Sterling at average rates of exchange. Differences resulting from the retranslation of the opening net assets and the results for the year are taken to reserves. Any differences arising from 1 January 2003, the date of transition to IFRS, are presented as a separate component of equity.

Exchange differences on monetary assets and liabilities are taken to the income statement, with the exception of exchange differences on monetary items that form part of a net investment in a foreign operation. These differences are taken to reserves until the related net investment is disposed of. All other exchange movements are dealt with through the income statement.

CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash on hand, deposits with a maturity of three months or less and other short-term highly liquid investments that are readily convertible to known amounts of cash.

DEFERRED TAX
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Financial Statements. Currently enacted tax rates are used in the determination of deferred income tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available, against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in 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.

LEASES
Assets held under finance leases are capitalised and included in property, plant and equipment at the lower of fair value and the present value of the minimum lease payments as determined at the inception of the lease. The obligations relating to finance leases, net of finance charges in respect of future periods, are determined at the inception of the lease and 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 income statement on a straight-line basis over the lease term.



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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

65

   

 

FINANCIAL INSTRUMENTS (FROM 1 JANUARY 2005)
Derivative financial instruments are initially recognised and subsequently measured at fair value.

Derivative financial instruments utilised by the Group’s treasury operations include interest rate swaps, foreign currency swaps, cross currency interest rate swaps, forward rate agreements, and forward exchange contracts.

Certain derivative financial instruments are designated as hedges in line with the Group’s risk management policies. Gains and losses arising from the re-measurement of these financial instruments are either recognised in the income statement or deferred in equity depending on the type of hedging relationship. When a hedging instrument is sold or expires, any cumulative gain or loss previously recognised in equity remains in equity until the hedged transaction is recognised in the income statement. Movements in the fair value of derivative financial instruments not included in hedging relationships are recognised in the income statement. Loans held by the Group are initially measured at fair value and subsequently carried at amortised cost except where they form the underlying transaction in an effective fair value hedge relationship when the carrying value is adjusted to reflect fair value movements associated with the hedged risks. Such adjustments are reported in the income statement. Other financial instruments such as receivable balances are measured at amortised cost less impairments.

FINANCIAL INSTRUMENTS (TO 31 DECEMBER 2004)
Derivatives used for hedging are accounted for on an accruals basis. Termination payments made or received in respect of derivatives are spread over the shorter of the life of the original instrument or the life of the underlying exposure in cases where the underlying exposure continues to exist. Where the underlying exposure ceases to exist, any termination payments are taken to the income statement.

Interest differentials on derivative instruments are recognised by adjusting the net interest charge. Premiums or discounts on derivative instruments are amortised over the shorter of the life of the instrument or the underlying exposure. 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.

COMMODITY INSTRUMENTS (FROM 1 JANUARY 2005)
Within the ordinary course of business the Group routinely enters into sale and purchase transactions for commodities. The majority 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 commodity in accordance with the Group’s expected sale, purchase or usage requirements. Such contracts are not within the scope of IAS 39.

Certain long-term gas sales contracts operating in the UK gas market have terms within the contract which constitute written options, and accordingly they fall within the scope of IAS 39. In addition, commodity instruments are used to manage certain price exposures in respect of optimising the timing of gas sales associated with contracted storage and pipeline capacity. These contracts are recognised on the balance sheet at fair value with movements in fair value recognised in the income statement, see Presentation of Results above, presentation of non-GAAP measures, page 152, note 2, page 71, and note 10, page 85.

The Group uses various commodity based derivative instruments to manage some of the risks arising from fluctuations in commodity prices. Such contracts include physical and net settled forwards, futures, swaps and options. Where these derivatives have been

designated as cash flow hedges of underlying commodity price exposures, certain gains and losses attributable to these instruments are deferred in equity and recognised in the income statement when the underlying hedged transaction crystallises.

All other commodity contracts within the scope of IAS 39 are measured at fair value with gains and losses taken to the income statement.

Gas contracts and related derivative instruments associated with the physical purchase and re-sale of third-party gas are presented on a net basis within other operating income.

COMMODITY INSTRUMENTS (TO 31 DECEMBER 2004)
The Group uses various commodity based derivative instruments to manage some of the risks arising from fluctuations in commodity prices. Such contracts include physical- and cash-settled forwards, futures, swaps and options. Under specified conditions, certain gains and losses attributable to cash-settled derivative contracts designated as hedging particular gas price exposures are deferred and recognised in the income statement when the underlying hedged transaction crystallises. All other gains and losses relating to net-settled commodity derivatives are taken to the income statement on the maturity or termination of the instrument. Upstream gas trading contracts and related derivative instruments that are settled by the physical purchase and re-sale of third-party gas are presented on a net basis within E&P’s costs.

PENSIONS
The amount recognised on the balance sheet in respect of liabilities for defined benefit pension and post-retirement benefit plans represents the present value of the obligations offset by the fair value of plan assets and excluding actuarial gains and losses not recognised.

The cost of providing retirement pensions and related benefits is charged to the income statement over the periods benefiting from the employees’ services. Current service costs are reflected in operating profit and financing costs are reflected in finance costs in the period in which they arise. Actuarial gains and losses which exceed the greater of 10% of plan assets or plan obligations are spread over the average remaining service lives of the employees participating in the plan and are reflected in operating profit.

SHARE-BASED PAYMENTS
The cost of providing share-based payments to employees is charged to the income statement over the vesting period of the related share options or share allocations. The cost is based on the fair value of the options or shares allocated and the number of awards expected to vest. The fair value of each option or share is determined using either a Black-Scholes option pricing model or a Monte Carlo projection model, depending on the type of award. Market related performance conditions are reflected in the fair value of the share. Non market related performance conditions are allowed for using a separate assumption about the number of awards expected to vest; the final charge made reflects the number actually vesting.

RESEARCH AND DEVELOPMENT AND ADVERTISING EXPENDITURE
All research and advertising expenditure is written off as incurred.

Development expenditure is written off as incurred unless it meets the recognition criteria set out in IAS 38 ‘Intangible Assets’. Where the recognition criteria are met, intangible assets are capitalised and amortised over their useful economic lives.



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66

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Consolidated income statement

 

    for the year ended 31 December 2005  
   


  Notes    £m  





Group revenue  2   5 612  





Other operating income 3, 6   (188 ) 





Group revenue and other operating income  2   5 424  





Operating costs 4   (3 526 ) 





Profit/(loss) on disposal of non-current assets 6   446  





Operating profit before share of results         
from joint ventures and associates  2   2 344  





Finance income 6, 7   105  





Finance costs 6, 7   (100 ) 





Share of post-tax results from        
joint ventures and associates 2   160  





Profit before tax      2 509  





Taxation 6, 8   (941 ) 





Profit for the year  2, 6   1 568  





Profit attributable to:        





       Minority interests 2, 6   40  
       Shareholders (earnings)  2, 6   1 528  





      1 568  





Earnings per ordinary share (pence)         





       Basic 10   43.2  
       Diluted 10   43.0  





The results for the year are derived solely from continuing operations.
For information on dividends paid and proposed in the year see note 9, page 84.

 

The accounting policies onpages 63 to 65 together with the notes on pages 71 to 127 form part of these accounts.


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BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

67

   

Consolidated income statements continued

 

           for the year ended 31 December  
   



    2004   2003  
   



           
  Notes  £m   £m  






Group revenue  2 4 053   3 558  






Other operating income 3  10   6  






Group revenue and other operating income  2  4 063   3 564  






Operating costs 4  (2 743 ) (2 480 )






Profit/(loss) on disposal of non-current assets 6  87   116  






Operating profit before share of results           
from joint ventures and associates  2  1 407   1 200  






Finance income 7  42   44  






Finance costs 7  (75 ) (74 )






Share of post-tax results from          
joint ventures and associates 2  125   132  






Profit before tax    1 499   1 302  






Taxation 6, 8  (585 ) (500 )






Profit for the year  2, 6  914   802  






Profit attributable to:          
    Minority interests 2  28   28  
    Shareholders (earnings)  2, 6  886   774  






    914   802  






Earnings per ordinary share (pence)           






    Basic 10  25.1   21.9  
    Diluted 10  25.0   21.9  






           
The results for the years are derived solely from continuing operations.                 

Consolidated statement of recognised income and expense

for the year ended 31 December      2005   2004   2003  
  Note   £m   £m   £m  









Profit for the year      1 568   914   802  









Net fair value gains/(losses) on cash flow hedges 26   (45 )    









Transfers to income statement on cash flow hedges 26   18      









Net fair value gains/(losses) on net investment hedges 26   (74 )     









Tax on cash flow and net investment hedges 26   31      









Currency translation adjustments(a) 26   528   (136 ) (10 )









Net gains/(losses) recognised directly in equity     458   (136 ) (10 )









Total recognised income/(expense) for the year      2 026   778   792  









Attributable to:                









       Minority interests     54   31   52  









       Shareholders     1 972   747   740  









      2 026   778   792  









Effect of adoption of IAS 39 33   (238 )     









      1 788   778   792  









   
(a) In 2005, £11m (2004 £5m; 2003£nil) was transferred to the income statement as part of the profit/(loss) ondisposal of foreign operations.

 

The accounting policies on pages 63 to65 together with the notes on pages 71 to 127 form part of these accounts.


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68

BG GROUP ANNUAL REPORT AND ACCOUNTS 2005

   

Balance sheets

 

          as at 31 December      
     

      The Group   The Company  
     

      2005   2004   2005   2004  
  Notes    £m   £m   £m   £m  











Assets                     











Non-current assets                     











Goodwill  11    342   272      











Other intangible assets  12    682   585      











Property, plant and equipment  13    5 567   4 509      











Investments in subsidiary undertakings  14        2 269   2 269  











Investments accounted for using equity method  14    1 123   1 049      











Other investments  14    1   1      











Deferred tax assets  24    84   68      











Trade and other receivables  17    52   46      











Derivative financial instruments  21    84        











      7 935   6 530   2 269   2 269  











Current assets