Interim Results

Scottish & Southern Energy PLC 14 November 2007 14 November 2007 INTERIM RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2007 September 2007 September 2006 Change Interim Dividend 18.1p 15.1p +19.9% Adjusted Profit Before Tax* Â£664.7m Â£466.5m +42.5% Adjusted Earnings Per Share* 57.2p 40.4p +41.6% Investment and Capital Expenditure Â£363.3m Â£288.0m +26.1% Power Station Availability (Gas) 96% 95% +1% Power Station Availability (Coal) 90% 97% -7% Energy Supply Customer Numbers** 8.3m 7.5m + 800k Customer Complaints to energywatch 360 466 -22.7% Customer Minutes Lost (SHEPD) 28 34 - 6 mins Customer Minutes Lost (SEPD) 33 34 - 1 min Lost Time and Reportable Injuries 5 6 - 16.7% Reportable Environmental Incidents 0 0 - Sir Robert Smith, Chairman of Scottish and Southern Energy, said: 'SSE has again delivered an excellent financial and operational performance, with significant progress being made in all parts of the business to position it for continuing growth. Our core responsibility to shareholders is to deliver sustained real growth in the dividend, and we have again achieved that, with an interim dividend which is double that paid in 2001. Next year will see the tenth anniversary of the formation of SSE, and over recent months we have taken a number of important steps to position the business for its second decade. In addition to improving operations and making investments in established businesses, we have identified opportunities in new areas such as the water sector and emerging technologies and new markets such as Ireland. All of this means we are very well-placed to deliver more excellent results in the years ahead, as one of the UK's leading customer-serving, dividend-paying companies.' * Unless otherwise stated, this interim results statement describes adjusted operating profit before exceptional items, the impact of IAS 32 and IAS 39, and after the removal of taxation and interest on profits from jointly controlled entities and associates. In addition, it describes adjusted profit before tax before exceptional items, the impact of IAS 32 and IAS 39 and after the removal of taxation on profits from jointly-controlled entities and associates. It also describes adjusted earnings and earnings per share before exceptional items, the impact of IAS 32 and IAS 39 and deferred tax. ** As at date of interim results presentations; includes telecoms and 'shield' customers. KEY DEVELOPMENTS ENERGY SYSTEMS â€¢ Operating profit* up 11.4% to Â£205.6m â€¢ Power Systems operating profit* up 1.2% to Â£164.5m â€¢ Investment in electricity networks of Â£115.6m â€¢ Fewer Customer Minutes Lost and Customer Interruptions in both electricity networks â€¢ Share of SGN's adjusted operating profit* up 86.8% to Â£41.1m â€¢ Investment in gas networks of over Â£75m (SSE share only) GENERATION AND SUPPLY â€¢ Operating profit* up 59.2% to Â£474.3m â€¢ Commitment to invest up to Â£30m in emerging technologies â€¢ Agreement to acquire Slough Heat and Power Ltd Generation â€¢ Gas-fired power station availability 96%; coal station availability 90% â€¢ Good progress on major projects at Marchwood, Fiddler's Ferry, Ferrybridge and Glendoe â€¢ New investment options being developed for new coal-fired and gas-fired plant â€¢ First purchase of Carbon Emissions Reduction Certificates Supply â€¢ Net gain of 800,000 supply-related customers in a year â€¢ Further reduction, of 22.7%, in complaints to energywatch â€¢ First in customer satisfaction for fourth time in uSwitch.com Customer Satisfaction Report â€¢ Top-ranked supplier of electricity and gas in JD Power Customer Satisfaction Study â€¢ 'better plan' energy efficiency reward programme for customers launched â€¢ Electricity and Gas Supply Licences secured to allow entry to Irish market CONTRACTING, CONNECTIONS AND METERING â€¢ Operating profit* up 21.1% to Â£29.3m â€¢ Contracting order book in excess of Â£100m for first time â€¢ First new water and sewerage company since privatisation â€¢ In-sourcing of Metering work in three new regions GAS STORAGE â€¢ Operating profit* down 12.1% to Â£25.5m (but 87.5% higher than in six months to 30 Sept 2005) â€¢ Commissioning of gas processing plant at Aldbrough now under way â€¢ Planning permission secured to double size of Aldbrough development to over 800mcm TELECOMS â€¢ Operating profit* up 9.1% to Â£7.2m (on continuing businesses up 22.4% to Â£6.0m) â€¢ Sale of telecoms sites assets for Â£79m total consideration â€¢ Acquisition in October 2007 of new fibre optic network for Â£12.5m total consideration SHARE CAPITAL â€¢ Purchase of 16m shares (1.86% of called up share capital) for Â£230.5m â€¢ 14.8m new shares issued under 3.75% Convertible Bond FINANCIAL OVERVIEW These interim results for the six months to 30 September 2007 are reported under International Accounting Standard (IAS) 34. SSE's focus is on profit before tax before exceptional items, the impact of IAS 32 and IAS 39, and after the removal of taxation on profits from jointly controlled entities and associates, and the interim results commentary has been prepared on this basis. Sept 07 Sept 06 Â£m Â£m Reported Profit before Tax 723.6 484.5 Movement on derivatives 15.5 4.8 Exceptional items (83.0) (25.1) Tax on JVs and Associates 5.1 0.3 Interest on convertible debt 3.5 2.0 Adjusted Profit before Tax* 664.7 466.5 Adjusted current tax charge (172.1) (118.6) Adjusted Profit after Tax* 492.6 347.9 Reported profit after tax 586.3 349.0 Number of shares for basic and adjusted EPS 861.1 860.3 (million) Adjusted EPS* 57.2 40.4 Basic EPS 68.1 40.6 Adjusted profit before tax* Adjusted profit before tax* grew by 42.5%, from Â£466.5m to Â£664.7m. The greatest growth continues to be achieved in Generation and Supply. This reflects the successful deployment of SSE's diverse and flexible electricity generation portfolio, and the sustained increase in the number of energy supply-related customers, which now total 8.3 million. This performance in the first half of the financial year is likely to prove to be a significantly higher proportion of the adjusted profit before tax for 2007/ 08 as a whole than has been the case in previous years. This is because it followed the unusual sequence of wholesale and retail energy price changes experienced in the UK in the past 18 months. SSE's emphasis is on adjusted profit before tax* on a full-year basis. Adjusted earnings per share* To monitor financial performance over the medium-term, SSE continues to focus on adjusted earnings per share*, which increased by 41.6%, from 40.4p to 57.2p. Exceptional items There are two exceptional items. First, in Budget 2007, the UK government announced a reduction in the main Corporation Tax rate, from 30% to 28%, and accordingly SSE has re-stated its deferred tax provisions. A Â£28m credit has been recognised in relation to SSE's share of joint ventures and associates and is therefore reported in profit before tax, which is adjusted accordingly. A further Â£58.7m has been released by SSE, which is included in the headline tax charge. The second exceptional item was a Â£55m gain before tax on the disposal of SSE's telecoms sites assets in August 2007 (see 'Telecoms' below). Interim Dividend The Board is declaring an interim dividend of 18.1 pence per share, compared with 15.1p in the previous year, an increase of 19.9%. This follows the 22.0% increase in the final dividend for 2006/07, and completes the re-basing of SSE's dividend announced in March 2007. It establishes the base from which the interim dividend can grow in the future and ensures that it remains a similar proportion of the full-year dividend as in previous years. The underlying increase in the interim dividend is 9.7%. The interim dividend of 18.1p compares with 9.0p paid in 2001, since when it has increased by 101%, which represents a compound annual growth rate of 10.5%. SSE expects to achieve its target for the full year dividend in 2007/08 of at least 4% real growth. The progress achieved by SSE's businesses in the first half of this financial year, and the range of opportunities that have been developed in Energy Systems, Generation and Supply and in other businesses such as Gas Storage, mean SSE also expects to achieve its target of at least 4% annual real growth in the dividend payable to shareholders in 2008/09 and 2009/10, with sustained real growth thereafter. ENERGY SYSTEMS Energy Systems Overview Operating profit* in Energy Systems, including gas distribution, increased by 11.4%, from Â£184.5m to Â£205.6m, contributing 27.8% of SSE's total operating profit* in the first half of the year. In power systems, operating profit* of Â£164.5m was achieved, compared with Â£162.5m in the previous year; in gas distribution, SSE's share of the operating profit* for Scotia Gas Networks (SGN) was Â£41.1m, compared with Â£22.0m in the previous year. Southern Electric Power Distribution Southern Electric Power Distribution's (SEPD) operating profit* increased by 1.7% to Â£97.5m. During the period, SEPD distributed 15.4TWh of electricity, compared with 15.6TWh in the previous year, a reduction of 1.3%. This reduction in the number of units distributed, which was principally due to the impact of the unusually warm weather experienced in April 2007, was more than offset by changes in the price of units distributed. The average number of minutes of lost electricity supply per customer was 33, compared with 34 in the previous year. The number of supply interruptions per 100 customers was 34, compared with 36 in the previous year. Performance in respect of both minutes lost and interruptions was ahead of the targets set by Ofgem under its Quality of Service Incentive Scheme (QSIS), which gives financial benefits to distribution network operators that deliver good performance for customers. Scottish Hydro Electric Power Distribution and Scottish Hydro Electric Transmission Operating profit* for Scottish Hydro Electric Power Distribution and Scottish Hydro Electric Transmission increased by 0.6% to Â£67.0m. In the Scottish Hydro Electric area, 3.8TWh of electricity were distributed during the period, a very slight increase compared with the previous year. Changes in the price of units distributed also supported the slight increase in operating profit*. The average number of minutes of lost electricity supply per customer was 28, compared with 34 in the previous year. The number of supply interruptions per 100 customers was 31, compared with 39 in the previous year. Performance in respect of both minutes lost and interruptions was ahead of Ofgem's QSIS targets. Given that the key responsibility of electricity network businesses is the maintenance of safe and reliable supplies of electricity and the swift restoration of supplies in the event of interruptions, the delivery of improved performance in both customer minutes lost and customer interruptions in SSE's two network areas is an important achievement. Electricity Network Investment The Distribution Price Control Review for 2005-10 resulted in substantially increased allowances for capital expenditure to maintain and improve the electricity networks. Investment is therefore geared to renewing SSE's networks, which were largely built a generation ago, and thereby reducing the number and duration of power supply interruptions. It is also geared to providing the infrastructure to accommodate demand for power. For example, the Â£16m installation of two new 132kV underground cables between Bramley and Basingstoke is designed to ensure the electricity network can meet maximum demand for 650,000 customers served by the Bramley and Fleet grid supply points. The switchgear at the Inverary substation in Argyll and Bute is being replaced to accommodate the demand from local generation of renewable energy. The replacement of a key underground cable in Cowes on the Isle of Wight is designed to improve the reliability of the electricity supply in the central part of the town. Capital expenditure in the electricity networks in the first half of the year was Â£115.6m, which takes the total for the first half of the current Price Control period to just over Â£500m. This is 40% higher than in the first half of the previous Price Control period, to September 2002. Having reached the mid-way point of the five-year Price Control, SSE forecasts that the Regulatory Asset Value (RAV) of its electricity distribution and transmission businesses should grow by around Â£500m over the five years to March 2010, excluding any major transmission investment. Future Transmission Developments Scottish Hydro Electric Transmission is responsible for operating, maintaining and investing in the transmission network in its area, which serves around 70% of land mass of Scotland. As the licensed transmission company for the area, SSE has to ensure there is sufficient network capacity for those seeking to generate electricity from renewable sources. The project to replace the electricity transmission line connecting Beauly in the Highlands and Denny in the Central Belt of Scotland follows on from that responsibility. The Public Inquiry into the project began in February 2007 and was still on schedule at the end of October. Nevertheless, the Scottish Minister for Enterprise, Energy and Tourism stated in the Scottish Parliament on 19 September that Ministers do not expect to receive the report of the Inquiry until late in 2008 and that a determination is unlikely before early 2009. Longer term, the new Scottish government is committed to having discussions with the government of Norway and the European Commission to take forward the concept of a North Sea 'super grid' to facilitate the export of Scottish renewable energy to the rest of Europe. SSE is well-placed to contribute to the consideration of 'super grid' options and will continue to work on them with Scottish Ministers and officials and other stakeholders. In September 2007, the European Commission published its third package of proposals to further liberalise the EU's energy market. The package includes options for electricity and gas transmission networks: the full ownership unbundling of transmission from production and supply in both electricity and gas; or the designation of an independent system operator (ISO) that would operate, maintain and develop the networks, which would make it possible for existing vertically integrated companies to retain network ownership. SSE believes that the ISO model in Great Britain has worked well and could be successfully replicated elsewhere in the EU. Scotia Gas Networks (SGN) - Financial SSE's share of the adjusted operating profit* of SGN, in which it holds 50% of the equity, was Â£41.1m, compared with Â£22.0m in the previous year. This result was achieved largely due to changes in prices for transporting gas (partly reflecting the under-recovery of revenue in 2006/07) and greater efficiencies yielding a reduction in operating costs. Scotia Gas Networks - Operational In the six months to 30 September, the gas transportation volume for SGN's network in Scotland was 20.2TWh and for its Southern network the volume was 30.5TWh. This compares with 19.4TWh and 33.5TWh respectively in the previous year. As in Southern Electric Power Distribution, the unusually warm weather experienced in April 2007 had a significant impact on units transported in the Southern gas distribution network. SGN's medium term objective is to be at the frontier for safety, customer service and efficiency in gas distribution. During the period, it continued to make significant progress towards the achievement of this objective. In September 2007, the number of lost-time injuries in SGN fell to 0.14 per 100,000 hours worked, compared with 0.18 in September 2006. The focus on customer service helped SGN deliver a reduction in the number of complaints about it sent to energywatch for resolution of 62%, to 10. The introduction of new front office management systems, reducing the total number of systems from over 50 to 11, has been successfully completed. This means SGN now has free-standing systems which are capable of supporting more efficient deployment of resources. SGN also owns and operates SGN Connections and SGN Contracting and in August 2007 established SGN Metering. This means SGN is now an Ofgem-accredited Meter Asset Manager and it is just the second gas distribution company in the UK to become one. SGN now owns and manages a meter portfolio of around 40,000 gas meters which it has installed in the Southern and Scotland network areas and it will own and manage all new meters fitted. The in-sourcing and expansion of gas network activities means that SGN now directly employs 3,750 people, compared with 2,000 when it acquired its two distribution networks in June 2005. SGN's three-year pay and productivity deal for employees, which was agreed during 2006/07, has allowed the introduction of more flexible working patterns and associated efficiency gains. These include the removal of restrictive practices and their replacement by a consistent framework for terms and conditions. Work pattern rotas can now be determined by local management, and site start and finish provisions have been introduced to enhance productivity. Scotia Gas Networks - Investment During the period, SGN invested in excess of Â£150m in capital and mains and services replacement expenditure works. The majority of the mains replacement expenditure was incurred under the 30:30 mains replacement programme which was started in 2002. This requires that all iron gas mains within 30 metres of homes and premises must be replaced over a 30-year period and in the first half of the year SGN replaced almost 550km of its metallic gas mains with modern polyethylene pipes. Gas Distribution Price Control Review SSE is the only energy company in the UK to be involved in gas distribution, electricity distribution and electricity transmission. It therefore participates in three price control reviews in every five years, which gives it ongoing involvement in price control issues in the UK. Over 90% of SGN's income is still derived via the gas distribution price control and updated proposals for the five-year period until April 2013, were published by Ofgem in September 2007. Those proposals included a comparison of efficiency rankings in which Scotland Gas Networks was ranked the second most efficient of the eight distribution networks and Southern Gas Networks the third. This compares with seventh and sixth respectively when the two networks were acquired by SGN in 2005. The stated aim of Ofgem's proposals is to deliver 'a safe, modern gas network while ensuring that costs to customers are kept to a minimum'. Ofgem said it is 'keeping up the pressure on the gas distribution networks to operate more efficiently over the next five years'. Final proposals are expected to be published in December 2007 and a significant amount of detailed work remains to be done in advance of that to ensure there is an acceptable outcome to this process. SGN's objective is to ensure that the final proposals provide: an adequate framework for operational, replacement and capital expenditure (with progress on replacement expenditure being particularly important); opportunities to earn additional revenue through good performance; and an acceptable allowed cost of capital. GENERATION AND SUPPLY Generation and Supply Overview Operating profit* in Generation and Supply rose by 59.2%, from Â£298.0m to Â£474.3m, contributing 64.1% of SSE's total operating profit* in the first half of the year. The underlying financial performance of Generation and Supply is reported excluding the impact of IAS 39 revaluations as SSE continues to believe that this does not represent underlying business performance. In May 2007, the Energy White Paper pointed out that the UK will need substantial investment in new generation capacity over the next two decades. It also pointed out that the UK's diverse generation mix avoids exposure to the risks associated with heavy dependency on a single fuel or technology type, helps to maintain secure supplies of energy and provides the country's electricity system with the flexibility to accommodate variations in demand and to respond to changes in fossil fuel prices. The same points apply to SSE's portfolio. Its key objectives in Generation, therefore, continue to be to ensure that it has a diverse portfolio of power stations, available to generate electricity and support security of supply, with the maximum possible efficiency, in response to customer demand and market conditions, while complying fully with all safety standards and environmental regulations. Future investment decisions in Generation will be consistent with these objectives and with the attainment of SSE's target to reduce by 20% over the 10 years to 2016 the amount of carbon dioxide per kilowatt hour of electricity produced at power stations in which it has an ownership or contractual interest. SSE has substantial involvement in a variety of developments designed to achieve lower carbon energy supplies and will maintain a balanced approach to reducing carbon intensity in the years ahead. In particular, it will strive to maximise its investment in renewable sources of energy. It may also work with other parties to help secure the development of new nuclear power stations, through appropriate contractual support or investment. In its submission to the recent UK government consultation on the future of nuclear power, SSE said there is value in the UK making available the nuclear option, along with a diverse range of other generation options, provided there is a stable framework in place for investors and that an appropriate degree of public confidence in all aspects of nuclear power is maintained. Within its integrated business model, SSE's power stations are used to support performance in energy supply. The electricity produced by SSE's own power stations is supplemented by electricity acquired via bilateral contracts and through trading. This means that SSE has a balanced portfolio of assets, contracts and customers which functions as an integrated whole, is assessed as a single value chain and which is therefore greater than the sum of its parts. In this context, the continuing growth achieved by SSE's integrated Generation and Supply business reflects the company's investment in, and acquisition and operation of, a diverse range of electricity generating assets and growth of 84% in the number of energy supply-related customers over the past six years. To support power station availability, SSE is establishing an Engineering Centre to manage plant performance at all of its power stations through the delivery of a best practice asset management policy and the development of an internal capability to provide plant with specific engineering support services - thereby reducing reliance on external parties for business-critical engineering support services. In terms of the forthcoming winter period, SSE believes it has in place appropriate operational and commercial arrangements to deliver secure supplies of energy in all likely circumstances. Gas-fired Generation - Operations SSE owns 4,300MW of gas-fired electricity generation capacity, including its share of joint ventures. Good performance in BETTA (British Electricity Trading and Transmission Arrangements) is dependent on plant reliability. During the first half of the year, SSE's principal wholly-owned gas-fired power stations (Fife, Keadby, Medway and Peterhead) achieved 96% of their maximum availability to generate electricity, excluding planned outages, compared with the 95% availability in the same period last year. Gas-fired Generation - Investment Work on the construction of Marchwood Power Ltd's new 840MW combined cycle gas turbine (CCGT) plant in Southampton is now well under way, and the UK Energy Minister visited the development in September 2007. Marchwood Power Ltd is a 50: 50 joint venture between SSE and ESB International. The next key milestones will include the commencement of the installation of the heat recovery steam generators in the New Year. The 22km high pressure gas pipeline from Lockerley will be ready for commissioning in the Spring of 2008. The plant is therefore on course to be completed and in commercial operation in time for the winter of 2009/10. With a net thermal efficiency in excess of 58%, it will be one of the most efficient in the UK. Barking Power Ltd, in which SSE has a 30.4% stake, is continuing to seek Section 36 consent to develop a new 400MW CCGT. If consented, this would effectively add around 120MW to the portfolio of generation assets owned by SSE and it is hoped that a decision on the proposed development will be made by UK Ministers in the coming months. CCGT technology is likely to remain the benchmark technology for some years to come and, as stated on 1 October 2007, SSE has concluded that it should identify an option for an additional CCGT plant, either at one of its existing power station sites or an alternative 'brown-field' site. In addition, SSE has identified the potential to substitute existing plant at Peterhead power station with new state-of-the-art equipment. This would increase the modern CCGT capacity at Peterhead from 1,180MW to the station's effective electricity grid limit of 1,520MW, delivering a higher thermal efficiency and annual savings of around 350,000 tonnes of CO2. The FEED (front end engineering design) study is now under way and a decision on whether to proceed with the investment, in which transmission charges will be an important factor, will be made next year. Coal and Biomass Generation - Operations The Ferrybridge and Fiddler's Ferry power stations, each with a capacity of almost 2,000MW, achieved 90% of their maximum availability to generate electricity, excluding planned outages, during the period, compared with 97% in the same period last year. This reflected some operational issues arising at the stations as a consequence of the installation of Flue Gas Desulphurisation (FGD - see below) and the associated new high-pressure turbines. The stations also 'co-fire' fuels from renewable sources (biomass) in order to displace fossil fuels, using the direct injection technology in which SSE invested during 2005 and 2006. During the period, their output qualifying for ROCs was 154GWh, compared with 238GWh in the same period in the previous year. This reflects outages relating to the installation of FGD and difficulties relating to the 'bioswirl' facility at Ferrybridge. In May 2007, the UK government published proposals for the reform of the Renewables Obligation which would result in biomass-related output being placed in an 'Established' technology band and therefore receiving just 0.25 ROCs (Renewable Obligation Certificates) per megawatt hour of electricity produced, compared with one ROC at present. This, allied to the fact that the availability of the biomass material required for co-firing has proved to be lower than expected, means SSE has recognised a charge of Â£12.2m in 2007/08 in respect of the original expenditure on the co-firing facilities. Coal and Biomass Generation - Investment SSE has opted in to the Large Combustion Plant Directive all of the capacity at Fiddler's Ferry and half of the capacity at Ferrybridge and as a result is installing FGD equipment in an investment expected to total around Â£225m. The installation of FGD will allow a total of 3,000MW of capacity at the two stations to remain open after 2015. All of the civil works at the two sites have been completed. Installation of the FGD equipment itself is now well under way and is currently expected to be complete in time to begin generating electricity through a 'de-sulphurised' process next year. A plasterboard factory is being developed at Ferrybridge by Lafarge Plasterboard Ltd, creating around 70 new jobs. The factory building itself has been completed and when operational will use the gypsum produced as a result of FGD, process it and despatch it from the site as plasterboard. Construction work has started at Fiddler's Ferry on the first plant in the UK to separate the ash arising from electricity generation into constituent mineral parts for sale as cement substitute products and industrial minerals, following the agreement signed with RockTron Limited in February 2007. In May 2006, SSE established a partnership with Doosan Babcock Energy, Siemens and UK Coal with a view to the possible installation at Ferrybridge of a 500MW Supercritical Boiler and Steam Turbine, while re-employing existing coal handling facilities and other major infrastructure. Against a background of rising costs across the power equipment sector, SSE announced on 1 October that it would not proceed with this project. At the same time, SSE has concluded that there is still likely to be a need to replace that capacity at Ferrybridge which is scheduled to close in 2015. It is now examining the options for doing this, focusing on an 800MW unit using the Supercritical Boiler technology. This would secure a significant improvement in the thermal efficiency, from around 37% for the existing plant to around 45%, and deliver a significant reduction in the amount of CO2 per kilowatt hour of electricity produced. Any plant would also be made 'capture ready', enabling it to be fitted with carbon capture and storage (CCS) technology. Key issues in considering the options will include the price of carbon emissions allowances and the availability of turbines. As a result, any new coal plant is unlikely to be commissioned before 2014, with a decision to be made around the turn of the decade. SSE has now started preparatory work on gaining consent for this unit. In October 2007, the UK government announced that it intends to support a single post-combustion coal-fired project as the UK's first CCS plant, following a competition which it expects to launch shortly. While the proposed design specification for the competition seems very limiting, SSE remains keen to explore CCS options and is working with a number of other stakeholders to establish whether there is the scope to deliver a practical demonstration project in the UK. EU Emissions Trading Scheme Phase II of the EU Emissions Trading Scheme will commence on 1 January 2008. Across its electricity generation portfolio (taking account of contractual shares), SSE will receive an allocation of 16.3 million tonnes per annum. This can be compared with its Phase I allocation of 19.6 million tonnes per annum. SSE's Phase II allocation as a percentage of its Phase I allocation is around 83%, compared with around 80% across the electricity sector as a whole. Under the Clean Development Mechanism (CDM) established under Article 12 of the Kyoto Protocol, countries - and therefore companies - can meet their carbon emission reduction targets by purchasing Carbon Emissions Reduction Certificates (CERs) from CDM-approved carbon reduction projects in the developing world. In September 2007, SSE signed four agreements with GD Power Development Co Ltd (a subsidiary of China Guodian Corporation, one of China's major energy companies) to support the development of four new wind farms in north east China. It will purchase around two million CERs over a period of five years from the start of 2008. It has also entered into an agreement to support the refurbishment of hydro electric stations in Brazil, with the purchase of around 160,000 CERs over a period of six years. This investment in hydro and wind mirrors SSE's strategy in the UK. The large majority of SSE's investment in reducing carbon emissions will continue to be in the UK. At the same time, climate change is a global challenge and supporting the development of clean sources of energy in other parts of the world is a key means of addressing it. SSE is looking for opportunities to expand its activities in this area, with a focus on technologies with which it is directly familiar. Hydro and Wind Generation - Operations SSE owns and operates over 1,500MW of renewable energy generating capacity, including pumped storage. Total output from SSE's hydro electric stations was 1,192GWh during the period, compared with the 10-year average of 1,035GWh and with 1,104GWh during the first half of 2006/07. As at 30 September 2007, the amount of water held in SSE's reservoirs which could be used to generate electricity was 55% of the maximum, compared with 54% on the same date last year. The output of refurbished hydro-electric stations with capacity of up to 20MW qualifies for ROCs, and, in total, SSE has just over 400MW of capacity in this category (including the new plant commissioned in the last few years at Culleig, Kingairloch and Fasnakyle). Of the total hydro output in the six months to 30 September 2007, 688GWh qualified for Renewable Obligation Certificates (ROCs), compared with 573GWh in the previous year. The Tangy, Spurness, Artfield Fell and Hadyard Hill wind farms also contributed 122GWh of ROC-qualifying output in the first half of the year, compared with 139GWh in the previous year. Assuming average 'run off' of water into SSE's reservoirs during the rest of this financial year, and typical wind conditions, the ROC-qualifying output from hydro and wind generation for 2007/08 as a whole is expected to be just under 2,000GWh. Hydro and Wind Generation - Investment SSE is still aiming to have around 1,000MW of hydro and wind generation capacity qualifying for Renewable Obligation Certificates (ROCs) by the end of this decade. The achievement of this will be subject to the progress of its various developments through the planning process, and SSE's ambitions in renewable energy are being restrained by it. Nevertheless, it already has in place, or has secured consent to develop, almost 750MW of ROC-qualifying capacity (comprising refurbished and new hydro electric stations and operational and consented wind farms, including SSE's share of the Beatrice Wind Farm Demonstrator Project in the Moray Firth). The construction of SSE's new 100MW hydro electric station, at Glendoe near Loch Ness, is progressing well. This development is requiring investment of over Â£140m and it remains on course to be able to generate electricity in the first part of 2009. Having entered the hillside in the summer of 2006, the Tunnel Boring Machine is set to complete the creation of 8km of tunnels at the scheme and re-emerge from under ground within the next few weeks, which will be ahead of schedule. SSE has six onshore wind farms in operation, under construction or with consent for development. It has eight other wind farm proposals at various stages in the formal planning process, with a total capacity of over 700MW. These are: Achany (40MW), which has been the subject of a Public Local Inquiry which has now been completed; Blackcraig (69MW), which will be the subject of a Public Local Inquiry scheduled for February 2008; Harrow's Law (70MW), which will be the subject of a Public Local Inquiry on a date yet to be agreed; Gordonbush (87MW), for which support (subject to conditions) has been secured from The Highland Council in advance of the forthcoming decision by Scottish Ministers; Fairburn (35MW); Waterhead Moor (132MW), Strathy North (70MW); and Pairc (205MW). The proposed wind farm at Calliacher (62MW), which SSE has an option to acquire subject to planning consent being secured, was refused consent by Scottish Ministers in September 2007, although a scheme at this site with a capacity below 50MW could still be pursued via a planning application to the local authority. The refusal of the 62MW proposal demonstrates the significant difficulties and uncertainties associated with the process for considering wind farm applications. The construction phase of the SSE/Talisman Energy UK Beatrice Wind Farm Demonstrator Project in the Moray Firth is complete. Two 5MW turbines have been successfully installed and the operational phase of the project has commenced. SSE and Talisman Energy UK have completed a major review of the project. This has indicated that large-scale wind farm developments in deeper water further from the shore could eventually be commercial and a development of up to 1,000MW of capacity may be viable. There are, however, significant technical and commercial hurdles and the two companies are engaging with the UK government and other interested parties in an endeavour to overcome these. Following the signature of their partnership agreement in January 2007, SSE and Viking Energy, the company formed to represent Shetland Islands Council's interests in large-scale wind energy development in Shetland, have continued with the extensive pre-planning work which must be completed before the submission of a planning application for the development on Shetland Central Mainland of a wind farm with around 600MW of capacity. In addition to being subject to planning consent, the proposal is dependent upon demonstrating to Ofgem the viability of a sub-sea cable from Shetland to the mainland of Scotland. Emerging Technologies The need to bring forward emerging renewable energy technologies and to increase their deployment will be vital to the achievement of the UK's goals of improving the security of energy supplies, because they use indigenous natural resources, and reducing emissions of carbon dioxide. In support of these goals, SSE has identified a series of investment opportunities in these technologies which, cumulatively, give it a leading position in this area. In November 2006, SSE set out its intention to identify opportunities to invest in marine energy and to establish a position as a leading developer of marine-based electricity generation technologies, building on the work done by its subsidiary, Renewable Technology Ventures Ltd (RTVL). It has now merged RTVL with Aquamarine Power Ltd, an Edinburgh-based company which specialises in marine energy conversion and its commercial applications, to create an enlarged marine energy company which has retained the name Aquamarine. The enlarged company, in which SSE is also making an initial investment of Â£6.3m, and in which it owns 50% of the issued share capital, is initially focusing on delivering RTVL's Neptune tidal power device and Aquamarine's Oyster wave power device for comprehensive testing at the European Marine Energy Centre in Orkney. The Oyster device is expected to be deployed next year. In June 2007, SSE agreed to invest Â£10m in a new fund (the Sigma Sustainable Energy Fund II) to target sustainable, renewable and energy efficient technologies. The fund will be managed by a subsidiary of Sigma Capital Group, an AIM-listed fund management company that also owns Sigma Technology Investments Limited, an investor in the fund. Bank of Scotland Corporate, West Coast Capital and Consensus Business Group are also investing in the fund, which has a value of Â£45m. The fund will have an investment period of five years and has been established for investment mainly in the UK but also throughout Europe. SSE expects that its investment will yield business development opportunities in generation, storage and consumption technologies which have the potential to help the UK meet its target for reducing emissions of carbon dioxide and also help to reduce dependence on fossil fuels. SSE is already an investor in a separate Â£6m Sigma Sustainable Energy Fund, which has made investments in three separate companies. In August 2007, SSE made a further Â£1.1m investment in Solarcentury Holdings Ltd as part of a new Â£13.5m round of financing to enable Solarcentury to fund its product development and international expansion strategy. This leaves SSE with a 12.3% share in the company and implies that its initial investment of Â£1.0m in Solarcentury is now valued at Â£2.5m. Its further investment in the Solarcentury business reflects the success of the existing relationship between the two businesses and confidence in the future of this sector. SSE's subsidiary, Southern Electric Contracting (SEC), is Solarcentury's preferred installer, and SSE has also developed a new tariff for householders and small businesses which export power to the electricity network generated via solar photovoltaic panels installed on their premises. As stated in the Annual Report 2007, SSE's investment in Renewable Devices (Swift Turbines) Ltd was not successful, and it is no longer an investor in the company. In September 2007, SSE and Carbon Trust Enterprises entered into a joint venture to support InSource Energy Limited - a bio-waste energy business created by the Carbon Trust. SSE has agreed to invest up to Â£2.7m to acquire up to 40% of InSource Energy plus up to a further Â£10m to fund the company's projects as it enters the next phase of development. In total, in the first half of 2007/08, SSE has committed to investing up to Â£30m in emerging technologies, in recognition of the fact that the development of secure, reliable and cost-effective low carbon energy technologies is part of its strategy to retain leadership in sustainable energy production. In September 2007, SSE advised the Chair of the Energy Technologies Institute that it will not become a member now that the option of joining it in return for support of up to Â£2.5m a year for up to five years is no longer available. Nevertheless, as stated in its Annual Report 2007, SSE is engaging directly with universities and other research establishments with a view to making appropriate investments in new technologies as an alternative to formal membership of the ETI. It also hopes that it will be able to offer financial and other support to specific ETI research themes. Energy Supply SSE's stated objective for its energy supply business in 2007/08 is to capitalise further on its strong regional brands, best-in-sector customer service, responsible pricing policy and range of value-adding offers to increase further its number of customers. It had 8.3 million energy supply-related customers at the start of November 2007, a net gain of 800,000 in 12 months. This comprises: 5.125 million electricity customers; 2.995 million gas customers; 130,000 'talk with' telecoms customers; and 50,000 'shield' gas boiler maintenance customers. Overall, SSE has achieved a net customer gain of 3.8 million since the start of 2002, an increase of 84%. According to Datamonitor, it is now the UK's second largest supplier of electricity and gas to domestic customers. Within the total, SSE's business customers now cover 383,000 sites throughout Great Britain and over 1.6 million customers have 'loyalty' products such as 'energyplus Argos', which rewards customers with money off discount vouchers. In July 2007, Ofgem published its Domestic Retail Market Report, which confirmed that SSE is the UK's most successful supplier in terms of the share of the electricity supply market held by incumbent suppliers in the 14 regions of Great Britain. It stated that SSE had 80% of the electricity customers in the Scottish Hydro Electric area, 70% of the customers in the SWALEC area and 62% of the customers in the Southern Electric area. The next highest share of the market held by an incumbent supplier was 61%, in central southern Scotland. This has again confirmed the value of SSE's three regional energy supply brands. In October 2007, energywatch published the updated 2006/07 Fuel Mix Disclosure information by electricity suppliers, enabling customers to see at a glance what percentage of electricity their supplier sources from renewable, nuclear, gas-fired or coal-fired plants. Of the UK's main energy suppliers, SSE supplied customers with the highest proportion of electricity from renewable sources, with 10.2% of its electricity supplied coming from renewable sources, compared with a UK average of 4.7%. Customer Service Central to success in Energy Supply is the maintenance of the highest possible standards of customer service. Despite the significant growth in customer numbers, SSE secured during the first half of 2007/08 another reduction, of 22.7%, in the number of customer complaints sent to energywatch for resolution, to 360. This follows the significant reductions achieved during each of the previous four years. On 24 October, energywatch announced that SSE was responsible for the fewest number of complaints per 100,000 customers in the UK's energy supply industry. A month earlier, it was announced that SSE had come top in an energywatch survey of small business customers' satisfaction with their energy suppliers. On 31 October, uSwitch.com reported that SSE was ranked top for customer satisfaction for the fourth time in a row in its latest independent Customer Satisfaction Report and it described SSE as 'simply the best'. In the results of the JD Power 2007 UK Electricity and Gas Customer Satisfaction Study, announced on 1 November, SSE was ranked the top-performing supplier in both electricity and gas. This was the first time one supplier had achieved the top ranking in both sectors. In electricity, it was the only supplier to achieve overall customer satisfaction which was 'significantly better' than average and in gas it was one of just two suppliers to deliver 'significantly better' than average customer satisfaction. More changes have been introduced within SSE's Customer Service division, in line with the performance improvement programme which started in 2006. In September 2007, there was the implementation of the biggest-ever telephony change in SSE. Telephony and billing systems were combined, so that they now recognise a customer's phone number and bring up their details on the screen in front of the customer service adviser. This saves an average of 30 seconds per call and adds the equivalent of around 100 extra people to take calls. The programme is continuing and further enhancements will be introduced in 2008. Vulnerable Customers In October 2007, Ofgem published an update of its review of energy suppliers' voluntary initiatives to help vulnerable customers. It stated that 'SSE has adopted a strategy around competitively priced energy and excellent customer service, which benefits all of its customers, including those who are fuel poor and hard to reach' and concluded that SSE's fuel poor customers are around Â£40 per annum better off as a result of its competitive pricing strategy. SSE's approach is to keep prices as low as possible for all customers and to target a meaningful 'social' tariff to the customers who need it most. It has set a target to double the number of customers on its 'energyplus care' tariff, to 25,000, by March 2008. Product Marketing Energy supply remains intensely competitive and, in addition to responsible pricing, greater success in gaining and retaining customers' loyalty is key to long-term success. The performance improvement programme in the Customer Service division is designed to achieve that, as is product development. In line with that, SSE has launched 'better plan'. The product, which is available under the Southern Electric, SWALEC and Scottish Hydro Electric brands, is the means by which SSE aims to reward customers for saving energy. It is the most comprehensive programme introduced by an energy supplier in the UK to encourage customers to use less of its core products. The 'better plan' gives customers 10 different ways to earn cash credits, including reducing their energy consumption, which can then be used towards their SSE energy bills or further energy efficiency measures. Homes account for a quarter of the UK's carbon emissions, so in addition to providing customers with a means of saving money, 'better plan' enables them to deliver direct environmental benefits. It therefore represents responsible product development. The launch of 'better plan' is a significant milestone for SSE's energy supply business, the future progress of which will be based on continued responsible pricing and ongoing improvements in customer service, in addition to effective and responsible product development and deployment. It should, therefore, be able to extend further the period of growth which began at the start of 2002. Energy Services An increasing number of supply customers are likely to seek a wider range of energy-related services and supplying energy on an energy services basis helps shift the focus of producers and customers from the supply of units of electricity and gas to the supply of the overall services for which energy is used. SSE began the phased introduction of a new domestic boiler installation and maintenance and repair service for gas central heating systems during 2006. The product features an annual inspection, full breakdown and emergency cover and a 24-hour, 365-day manned customer helpline. It covers customers' entire gas central heating system, including the boiler, pipe work, radiators, cylinders and tanks. By the end of October 2007, the service had already attracted 50,000 customers. The number of postcode areas covered by the service has now increased from the original 13 to 40 and this will increase to 43 during the rest of 2007/08. In June 2007, the Department for Business, Enterprise and Regulatory Reform announced that around 40,000 households, including 28,000 SSE customers, would be taking part in energy saving trials in a bid to cut household bills and help tackle climate change. The trials, which are administered by Ofgem, feature state-of-the-art 'smart' meters and clip-on real-time display units which tell householders how much energy they are using. They are intended to provide firm evidence about the benefits that smart meters and display units can bring. The Energy White Paper, published in May 2007, stated that subject to the results of these trials the UK government intends to work with energy companies to roll out smart meters to households over the next 10 years. In October 2007, SSE entered into an agreement with Vital Energi Utilities Ltd, whereby it will invest Â£6m for a 30% share of the business, which is an established energy services contractor which specialises in the design, supply and installation of Combined Heat and Power (CHP) and District Heating systems in the commercial, industrial and residential sectors. The investment will allow Vital to build on its existing position as the leading provider of community energy solutions in the UK. SSE recently reached an agreement with Berkeley Homes (East Thames) Ltd, to provide the energy services requirements for its major development, The Warren, in south east London. Under the ESCO (Energy Services Company) Agreement, SSE will be responsible for installing an energy centre, including a CHP plant, which will serve over 450 apartments, a nursery unit, primary care trust and commercial units. SSE will also undertake all associated heat, electricity and gas infrastructure, metering and billing customer services, long-term operations and maintenance services and all fuel procurement requirements. Vital Energi is SSE's main contractor on this development and is responsible for all elements relating to the installation of the required energy centre and the heat distribution network. Slough Heat and Power Ltd SSE has entered into an agreement with SEGRO plc to acquire Slough Heat and Power Ltd, an integrated energy business, for a total cash consideration of Â£49.25m. The agreement is subject to a condition precedent which, once satisfied, should result in ownership transferring to SSE by the end of December 2007. The main assets of Slough Heat and Power comprise: a combined heat and power (CHP) plant, with potential generation capacity of 101MW and current capacity of around 80MW, which produces electricity plus heat which is distributed via a steam and water distribution network; around 100km of underground electricity network plus substatations; and around 3,000 industrial, commercial and domestic energy customers. The CHP plant is the UK's largest dedicated biomass energy facility. With its mix of assets and customers, Slough Heat and Power Ltd is highly compatible with SSE's business model and SSE expects to secure efficiencies and synergies as a result of the acquisition. Ireland In September 2007, SSE secured from the Commission for Energy Regulation (CER) Electricity Supply and Gas Supply and Shipping Licences to enable it to enter into and compete in the energy markets in Ireland. The Licences are owned, operated and managed by its subsidiary, SSE (Ireland) Ltd, which is registered in Dublin. It has also secured 45MW of the 500MW of capacity on the interconnector between Scotland and Ireland. SSE began actively trading in the Irish electricity market on 1 November, using its Great Britain generation portfolio to provide power to it via the interconnector. It intends to enter the electricity and gas supply markets simultaneously next year, and will concentrate first on providing electricity and gas products for the industrial and commercial market before expanding into the domestic market and then offering a wider range of energy-related products. CONTRACTING, CONNECTIONS AND METERING Operating profit* in Contracting, Connections and Metering rose by 21.1%, from Â£24.2m to Â£29.3m during the first six months of the year. Contracting SSE's Contracting business, Southern Electric Contracting (SEC), has continued to make significant progress during 2007/08, with its order book now exceeding Â£100m for the first time. The order book has been supported by significant new contract wins with a number of leading organisations, such as Vosper Thorneycroft, Reading University and Marks & Spencer. This puts the business in a good position for future growth, as does the recruitment of almost 200 apprentice electricians during the first half of the year. A major proportion of SEC's business is 'repeat' and so it is especially important that it delivers a high standard of service to customers in all of the sectors in which it operates. The benefits arising from this focus on customer service can be demonstrated by the success of PriDE, SEC's joint venture with Interserve, which is responsible as the prime contractor for estate management and construction at over 100 Ministry of Defence sites in south-east England, in securing a Â£40m contract to design and build new aircraft servicing platforms (ASPs) at RAF Brize Norton in Oxfordshire. SEC remains the UK's leading street-lighting contractor, and through its partnership with the asset finance division of The Royal Bank of Scotland, has Private Finance Initiative (PFI) contracts to replace and maintain street lights for four local authorities in England. These and its other maintenance contracts are performing well, and it is has submitted ISOS (invitation to submit outline solutions) documents in respect of four new PFI streetlighting schemes recently announced by the Department for Transport, Connections SSE's Connections business completed over 21,000 electrical connections during the first half of 2007/08. In addition, it has continued to develop its portfolio of electricity networks outside the Southern Electric and Scottish Hydro Electric Power Distribution areas. It now owns and manages 28 energised electricity networks outside these two areas, with development work ongoing at a number of these, and a further 13 are under construction, including Thamesmead in London, Western Harbour in Edinburgh and Leckwith Stadium in Cardiff. In total, SSE has 300MW of energised networks capacity, with networks totalling an additional 100MW currently under construction. Key clients are from the UK land development sector and currently include the London Development Agency, Tilfen Land, Land Securities, Hammersons, Cofton and St James Group. SSE's Connections business is also a licensed gas transporter, owning and operating gas mains and services in many parts of the country. The number of new premises connected to its gas networks continued to grow, and during the first half of the year, it connected a further 4,000 premises, taking the total number of connections to more than 48,000. On 3 October, Ofwat announced that SSE's subsidiary, SSE Water (SSEW), will become the first new company to offer both water and sewerage services since privatisation in 1989. This followed the granting of an 'inset appointment' to SSEW, which allows for one supplier to be replaced by another for a defined geographical area. SSEW will provide water and sewerage services to a housing development near Salisbury. Ofwat said 'SSE has a proven record for its high levels of customer service. Ofwat expects SSEW to set a benchmark in the water industry for similar high levels of customer service.' The granting of the inset appointment will enable SSE to provide a more comprehensive multi-utility solution to customers in the property development and housebuilding sectors, through being able to install, own, operate and supply water and sewerage services alongside SSE's existing electricity and gas services. SSE expects to make further applications for inset appointments in other areas, with the next one - in respect of a development in south Wales - expected to be submitted within the next few weeks. Metering SSE's Metering business provides services to most electricity suppliers with customers in central southern England and the north of Scotland. It supplies, installs and maintains domestic meters and carries out metering work in the commercial, industrial and generation sector. It also offers data collection services to the domestic and SME sectors. It has also expanded significantly during 2007/08, with the in-sourcing of meter reading operations in south west England and meter reading operations and meter operator work in south Wales and central and southern Scotland. This has resulted in the transfer of 158 employees to SSE, taking the total in the Metering business to over 600, and increasing its geographic coverage by 33%. The ongoing development of SSE's Metering business is designed to result in both efficiency gains and in high standards of service for SSE's customers and to support the energy supply business. GAS STORAGE Gas Storage - Operations In the six months to 30 September 2007, Gas Storage delivered an operating profit* of Â£25.5m, a decrease of 12.1% compared with the previous year (which SSE said in its Annual Report 2007 was a high point in gas storage profitability) but an increase of 87.5% compared with September 2005. The end of September 2007 marked the fifth anniversary of SSE's entry into the Gas Storage business, with the acquisition of the 325 million cubic metre (mcm) facility at Hornsea for Â£132m. In the five years since then, SSE's Gas Storage activities have delivered a total operating profit* of Â£145m. Gas Storage - Investment SSE's joint venture with Statoil (UK) Ltd to develop at Aldbrough what will become the UK's largest onshore gas storage facility is continuing to progress. SSE is investing Â£150m in Aldbrough, out of a total of Â£225m. With a total new capacity of around 420 million cubic metres, of which SSE will have the ownership interest in 280 million cubic metres, Aldbrough will provide valuable gas storage for the UK energy industry. In its Interim Management Statement in July 2007, SSE said the commissioning of the first gas storage capacity at Aldbrough would get under way during 2007/08. In line with this, the full commissioning of the gas processing plant at Aldbrough has started, with the next key milestone in this process being dewatering and injection of gas into the first three of the nine caverns. This is subject to a number of factors and, as a result, is now most likely to take place in the Spring of 2008. The dewatering process takes a further three months before the caverns are fully operational. All of this means that the development as a whole is taking longer than was expected when it started in 2004. In May 2007, SSE and Statoil (UK) Ltd secured consent from East Riding of Yorkshire Council to increase the storage capacity at the Aldbrough site beyond that currently under development and the necessary agreement under Section 106 of the Town and Country Planning Act has now been reached. They are now able to develop a further nine gas storage caverns, taking the total to 18. If developed in full, this would approximately double the amount of gas that can be stored, to over 800mcm. After the completion of the extension to its maximum capacity, the Aldbrough facility would be able to provide enough gas in a day to supply around 13 million homes. It is expected that each company would contribute 50% of the cost of the extension in return for ownership of 50% of the additional capacity. Jacobs Engineering Group has been awarded the contract to provide programme management, design, and construction management services for the extension. TELECOMS SSE's combined Telecoms business (SSE Telecom and Neos) achieved an operating profit* of Â£7.2m in the first six months of the year, an increase of 9.1% (excluding the telecoms sites assets disposed of in August 2007, operating profit* was Â£6.0m, an underlying increase of 22.4%). The business offers customers a national telecoms network, and has a UK-wide sales force and a competitive range of products targeted at commercial and public sector customers. As a subsidiary of SSE, it is also able to position itself as one of the UK's most financially secure telecoms network operators, which gives an important competitive advantage. In July 2007 it entered into an agreement with The Wireless Infrastructure Company Limited under which it sold its telecoms sites assets, involving over 220 tower sites, for a total consideration of Â£79m, excluding working capital, at a gain before tax of Â£55m. The assets disposed of contributed approximately 0.3% of SSE's profit in 2006/07. The disposal reflected SSE's commitment to complete the re-focusing of its telecoms business on network-related services, as opposed to site-related services. In line with this, in October 2007, SSE acquired a 1,100km fibre optic network from TeliaSonera International Carrier UK Ltd for a total consideration of Â£12.5m. The acquisition means that the network owned and operated by SSE's telecoms subsidiary, Neos Networks, has increased to 3,500km and SSE's total telecoms network, including leased fibre optic, has increased to over 8,000km. The asset acquired by SSE comprises a duct containing fibre running between London, Bristol, Manchester and Leeds plus ten operational repeater sites. It provides SSE with owned fibre capacity throughout the UK, together with local connectivity that could be integrated into its existing network. The enlarged network will enable Neos to reduce its costs and to provide a greater volume of large bandwidth services. CAPITAL AND INVESTMENT EXPENDITURE SSE's substantial capital and investment programme is continuing, with the objective of upgrading existing assets and developing new assets and thereby contributing to the ongoing expansion of the scale and scope of its activities. Capital and investment expenditure (excluding SGN) totalled Â£363.3m during the first half of 2007/08, compared with Â£288.0m in the previous year. Capital expenditure in Power Systems was Â£115.6m, compared with Â£90.6m in the previous year, in line with the investment focus described under 'Electricity Network Investment'. The largest project currently in the programme is the installation of the two new 132kV underground cables between Bramley and Basingstoke. In addition, there was investment of Â£146.1m for growth in Generation in the first half of the year, with the Marchwood development, construction work at Glendoe, the installation of FGD equipment and other work such as the installation of re-designed high-pressure turbines and static blades at Fiddler's Ferry and Ferrybridge and investments in emerging technologies. As well as Power Systems and Generation, Â£20.4m was invested in the new gas storage facility at Aldbrough. Within the overall total, capital expenditure for growth was Â£225.5m during the first half of 2007/08. This mainly comprised electricity generation and gas storage. Capital expenditure will continue to be substantial and for 2007/08 as a whole, it is on course to be around Â£850m. All investments are expected to achieve returns which are greater than the cost of capital, enhance earnings and contribute to dividend growth. FINANCIAL MANAGEMENT Net Debt and Cash Flow As at 30 September 2007, SSE's net debt was Â£2.05bn, compared with Â£2.23bn at 31 March 2007. Underlying cash generated from operations was very strong in the first half of the year, reflecting timely collections from electricity and gas customers and the sale of the telecoms sites assets. This enabled SSE to finance increased capital expenditure, the dividend payment and share buy backs while reducing net debt. Net debt also benefited from the conversion of Â£133.6m of the Convertible Bond (see below). Borrowings and Facilities At 30 September 2007, 81.6% of SSE's borrowings were at fixed rates, after taking account of interest rate swaps. SSE had undrawn committed bank facilities of Â£650m, with a weighted average period, until maturity, of 2.2 years. The objective for SSE is to maintain a balance between continuity of funding and flexibility, with a range of maturity dates. Its average debt maturity profile as at 30 September 2007 was 14.9 years, compared with 13.5 years as at 30 September 2006. Net Finance Costs The table below reconciles reported net finance costs to adjusted net finance costs, which SSE believes is a more meaningful measure. As in 2006/07, net income associated with pension scheme assets and liabilities is no longer excluded in arriving at adjusted net finance costs. In line with this, SSE's adjusted net finance costs during the first half of 2007/08 were Â£75.1m, compared with Â£74.6m in the previous year. Sept 07 Sept 06 Â£m Â£m Reported net finance costs 17.0 31.9 add/(less) Share of JCE*/Associate interest 63.1 55.8 Interest on convertible debt (3.5) (2.0) Movement on derivatives (1.5) (11.1) Adjusted net finance costs 75.1 74.6 Return on pension scheme assets 70.2 64.5 Interest on pension scheme liabilities (58.5) (53.4) Notional interest arising on discounted provisions (1.5) (1.0) Adjusted interest costs** 85.3 84.7 *Jointly Controlled Entities **Adjusted finance income and costs for interest cover calculation The average interest rate for SSE, excluding JCE/Associate interest, during the period was 5.34%, compared with 5.57% for the six months to 30 September 2006. Based on adjusted interest costs, underlying interest cover for 2007/08 as a whole is currently expected to be around eight times (including interest related to SGN), compared with 7.1 times in 2006/07. For the first six months it was 8.6 times, compared with 6.4 times in the six months to 30 September 2006, and excluding interest related to SGN it was 15.5 times (9.8 times in the six months to 30 September 2006). Within the adjusted net interest costs of Â£85.3m, the element relating to SGN's net finance costs was Â£40.5m (compared with Â£31.8m in the previous year), after netting loan stock interest payable to SSE. Its contribution to SSE's profit before tax* was, therefore, a profit of Â£0.6m, compared with a loss of Â£9.8m in the previous year. The seasonal nature of SGN's business means that the key performance period is the second half of the financial year. TAX To assist the understanding of SSE's tax position, the adjusted current tax charge is calculated as follows: Sept 07 Sept 06 Â£m Â£m Reported tax charge add back: 137.3 135.5 Share of JCE/Associate tax less: 5.1 0.3 Deferred tax (17.1) (12.2) Exceptional tax 46.8 (5.0) Adjusted current tax charge 172.1 118.6 The effective adjusted current tax rate, based on adjusted profit before tax*, was 25.9%, compared with 25.4% in the previous year, on the same basis. The impact of SSE's higher capital expenditure programme and the changes introduced in Budget 2007 are likely to have a positive impact on the effective current tax rate in future years. The reported tax charge was 19.0%, compared with 28.0% in the previous year. This reflects the restatement of the deferred tax position following the corporation tax rate change introduced in Budget 2007. BALANCE SHEET In line with its core financial principles, SSE continues to maintain one of the strongest balance sheets in the global utility sector. This continues to give it significant competitive advantage. It enables SSE to pay interest at lower rates than would otherwise be the case and also enables it to respond speedily to opportunities which emerge to invest in, or acquire, assets. In addition, events in the capital markets over the past few months have again demonstrated the risks associated with excessive debt. In line with the IAS 19 treatment of pension scheme assets, liabilities and costs, pension scheme liabilities of Â£195.1m and a pension scheme asset of Â£177.1m are recognised in the balance sheet at 30 September 2007, gross of deferred tax. Overall, this represents a reduction in net liabilities of Â£73.9m compared with the position at March 2007. During the first six months of 2007/08, employer cash contributions to the Scottish Hydro Electric scheme amounted to Â£6.9m. Contributions to the Southern Electric scheme, including deficit repair contributions of Â£17.7m, amounted to Â£26.1m. As part of the Distribution Price Control for 2005-2010, it was agreed that allowances for 76% of deficit repair contributions should be included in price controlled revenue. At 30 September 2007, there was a net asset arising from IAS 39 of Â£49.0m, before tax, compared with a net asset of Â£45.0m, before tax, at 31 March 2007. PURCHASE OF OWN SHARES AND CONVERTIBLE BOND MATURITY Between 7 June 2007 and 21 September 2007 SSE purchased 16.01 million of its own shares for cancellation, which contributed to the enhanced earnings per share in the first half of the year. The weighted average price per share (before costs) was Â£14.30, with the purchase price ranging from Â£13.87 to Â£14.74. The aggregate consideration was Â£230.5m and the purchases represented 1.86% of the called-up share capital of the company. With the close period now at an end, SSE will resume the purchase of its own shares, in line with the approach adopted in the first half of 2007/08, when the appropriate conditions apply. SSE also has an outstanding 3.75% convertible bond which matures on 29 October 2009, which had an initial nominal value of Â£300m. To date, holders have excercised their option to exchange their bonds for Ordinary Shares in the Company at Â£9 per share, in respect of bonds totalling Â£133.6m nominal value. New shares issued as a consequence of these conversions total 14.8 million. A nominal value of Â£166.4m or 55.5% of the original bond issue, remains outstanding. CORPORATE RESPONSIBILITY Risk Management SSE actively monitors the risk factors that may affect it. The principal risks and uncertainties, and SSE's approach to addressing them, were set out in the Annual Report 2007. They are: the operation of assets, equipment and processes; financial risks, such as interest rate or commodity exposure; the impact of public policy or regulatory developments in the areas of energy and the environment; and the impact of the weather on SSE's interests in the generation of electricity from renewable sources, in energy supply and in energy distribution. These remain the principal risks and uncertainties for the second half of this financial year and beyond, and they are regularly considered by the Board. In terms of transactions with related parties, there has been no change to the nature of these which has materially affected the financial position or performance of SSE during the period. Safety and the Environment SSE aims to create value for shareholders by running the business with a strong emphasis on its six core values, which include safety and sustainability. During the first six months of the year, the number of lost time and reportable accidents within the company was five, compared with six in the previous year. The number of serious, or potentially serious, road traffic accidents involving employees driving company vehicles was four, compared with six in the previous year. SSE's target for any given year is zero reportable environmental incidents. There were no such incidents during the first six months of 2007/08. SSE published a series of environmental targets in its Corporate Responsibility Report 2007 and is on course to deliver improved environmental performance in many key activities during 2007/08. STRATEGY AND OUTLOOK SSE's strategy is to deliver sustained real growth in the dividend payable to shareholders through the efficient operation of, and investment in, a balanced range of regulated and non-regulated energy-related businesses. The day-to-day implementation of this strategy continues to be governed by the six key financial principles set out in the Annual Report 2007. The Energy White Paper in May 2007 confirmed that there are two major challenges facing the UK, and these set the context for SSE's future development. The first is the need to tackle climate change by cutting greenhouse gas emissions and the second is the need to ensure there are secure energy supplies as UK reserves of oil and gas decline and competition for energy resources increases. These challenges present SSE with major investment opportunities in electricity generation and in gas storage. There are also equally important investment opportunities in ensuring that the country's electricity and gas networks continue to be reliable and safe. Investment in these areas remains, therefore, a key means by which SSE expects to create value for shareholders in the years ahead. SSE also expects to enhance value through continuous improvement of its operations and thereby generate electricity, distribute and supply electricity and gas and provide other energy-related services with the maximum possible efficiency and effectiveness and in a way which delivers clear benefits for customers and shareholders. This emphasis on operations and investment means SSE's assets in electricity generation, energy networks and energy supply, gas storage and other businesses will increase significantly in the next few years, and so its recent increase in scale will continue. In this context, the successful completion of SSE's current portfolio of major projects is of key importance. All of this means that while SSE is clearly the broadest-based UK energy company, it is not yet the largest participant in any part of it, except in the generation of renewable energy. It has, therefore, substantial scope for future growth. At the same time, SSE is complementing its existing programme of investment by identifying opportunities in new areas such as the water sector and emerging technologies and in new markets such as Ireland. This will broaden its scope in a measured and controlled way while positioning it to identify additional potential for growth in new areas in the next few years. Where prices for appropriate assets have been commensurate with value creation and consistent with its financial principles, SSE has supplemented its investment programme with acquisitions, and this will continue to be its approach. All of this means SSE continues to be in a very good position to expand its businesses further and to deliver its core objective of sustained real growth in the dividend. In May 2007, it set out its long-term ambition to again double the dividend and that is its over-riding priority for shareholders in the years ahead. Investor Timetable Ex-dividend date 20 February 2008 Record date 22 February 2008 Payment date 25 March 2008 Preliminary results 29 May 2008 AGM (Bournemouth) 24 July 2008 Disclaimer This interim results statement contains forward-looking statements about financial and operational matters. Because they relate to future events and are subject to future circumstances, these forward-looking statements are subject to risks, uncertainties and other factors. As a result, actual financial results, operational performance and other future developments could differ materially from those envisaged by the forward-looking statements. Enquiries to: Scottish and Southern Energy plc Alan Young - Director of Corporate Affairs + 44 (0)870 900 0410 Sally Fairbairn - Investor Relations Manager + 44 (0)870 900 0410 Financial Dynamics Andrew Dowler + 44 (0)20 7831 3113 There will be an analysts' presentation starting at 09:30GMT at the offices of Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB. Webcast facility: This is available by going to:www.scottish-southern.co.uk then click on Investor Centre. Telephone conference call: UK Dial in: 0845 146 2004 International dial in: +44 (0) 1452 569 393 Replay facility (for one week) UK local rate no: UK dial-in 0845 245 5205 UK International no: International dial-in: +44 (0) 1452 550 000 UK PIN (access) no: 22165250# Consolidated Condensed Income Statement for the period 1 April 2007 to 30 September 2007 Six months ending 30 September 2007 2006 Before Exceptional Total Before Exceptional exceptional items and exceptional items and items and certain items and certain certain re-measurements certain re-measurements re-measurements re-measurements (note 6) (note 6) Total Note Â£m Â£m Â£m Â£m Â£m Â£m Revenue 5 5,646.9 - 5,646.9 4,398.2 - 4,398.2 Cost of sales (4,699.0) (16.3) (4,715.3) (3,640.3) 2.9 (3,637.4) Gross profit 947.9 (16.3) 931.6 757.9 2.9 760.8 Operating costs (279.5) - (279.5) (261.1) - (261.1) Other operating income - 55.0 55.0 - 24.5 24.5 Operating profit before jointly controlled entities and associates 668.4 38.7 707.1 496.8 27.4 524.2 Jointly controlled entities and associates: Share of operating profit 71.4 - 71.4 44.3 0.9 45.2 Share of interest (63.1) - (63.1) (55.8) - (55.8) Share of movement on derivatives - 2.3 2.3 - 3.4 3.4 Share of tax (5.1) 28.0 22.9 (0.3) (0.3) (0.6) Share of profit / (loss) on jointly controlled entities and associates 3.2 30.3 33.5 (11.8) 4.0 (7.8) Operating profit 5 671.6 69.0 740.6 485.0 31.4 516.4 Finance income 7 101.4 - 101.4 97.1 - 97.1 Finance costs 7 (116.9) (1.5) (118.4) (117.9) (11.1) (129.0) Profit before taxation 656.1 67.5 723.6 464.2 20.3 484.5 Taxation 8 (184.1) 46.8 (137.3) (130.5) (5.0) (135.5) Profit for the period 472.0 114.3 586.3 333.7 15.3 349.0 Attributable to: Equity holders of the parent 472.0 114.3 586.3 333.7 15.3 349.0 Basic earnings per share (pence) 10 68.1p 40.6p Diluted earnings per share (pence) 10 66.8p 39.5p Dividends paid in the period (Â£m) 9 345.5 281.3 The accompanying notes are an integral part of this interim statement. Consolidated Condensed Income Statement for the year ended 31 March 2007 Before Exceptional items exceptional and items and certain certain re-measure-ments re-measure-ments (note 6) Total Note Â£m Â£m Â£m Revenue 5 11,867.1 - 11,867.1 Cost of sales (10,247.7) 61.3 (10,186.4) Gross profit 1,619.4 61.3 1,680.7 Operating costs (557.5) - (557.5) Other operating income - 33.0 33.0 Operating profit before jointly controlled entities and 1,061.9 94.3 1,156.2 associates Jointly controlled entities and associates: Share of operating profit 169.2 0.9 170.1 Share of interest (117.9) - (117.9) Share of movement on derivatives - 5.5 5.5 Share of tax (31.8) (2.0) (33.8) Share of profit on jointly controlled entities and 19.5 4.4 23.9 associates Operating profit 5 1,081.4 98.7 1,180.1 Finance income 7 193.4 - 193.4 Finance costs 7 (230.9) (10.6) (241.5) Profit before taxation 1,043.9 88.1 1,132.0 Taxation 8 (276.4) (25.1) (301.5) Profit for the year 767.5 63.0 830.5 Attributable to: Equity holders of the parent 767.5 63.0 830.5 Basic earnings per share (pence) 10 96.5p Diluted earnings per share (pence) 10 93.9p Dividends paid in the year (Â£m) 9 411.3 Consolidated Condensed Balance Sheet as at 30 September 2007 At 31 At 30 At 30 March September September 2007 2007 2006 Â£m Note Â£m Â£m Assets 5,042.1 Property, plant and equipment 5,230.1 4,818.4 Intangible assets: 293.2 Goodwill 293.2 293.4 12.9 Other intangible assets 11.1 11.7 702.3 Investments in associates and jointly controlled entities 719.2 675.0 4.1 Other investments 5.6 5.0 128.1 Retirement benefit assets 14 177.1 75.4 66.0 Deferred tax assets 54.6 89.1 54.5 Derivative financial assets 13 51.4 47.5 6,303.2 Non-current assets 6,542.3 6,015.5 177.7 Other intangible assets 117.2 250.1 214.1 Inventories 258.2 247.4 1,861.4 Trade and other receivables 1,172.2 1,009.1 56.1 Cash and cash equivalents 27.2 52.6 452.9 Derivative financial assets 13 124.4 24.8 2,762.2 Current assets 1,699.2 1,584.0 9,065.4 Total assets 8,241.5 7,599.5 Liabilities 474.8 Loans and other borrowings 11 386.7 326.4 1,935.1 Trade and other payables 1,458.7 1,375.4 199.2 Current tax liabilities 225.3 206.9 8.0 Provisions 7.9 2.2 351.9 Derivative financial liabilities 13 46.0 134.2 2,969.0 Current liabilities 2,124.6 2,045.1 1,803.8 Loans and other borrowings 11 1,692.3 1,705.6 923.7 Deferred tax liabilities 897.4 882.5 104.4 Provisions 106.3 77.5 327.7 Trade and other payables 372.7 456.5 220.0 Retirement benefit obligations 14 195.1 294.1 120.9 Derivative financial liabilities 13 80.8 44.2 3,500.5 Non-current liabilities 3,344.6 3,460.4 6,469.5 Total liabilities 5,469.2 5,505.5 2,595.9 Net assets 2,772.3 2,094.0 Equity 431.0 Share capital 12 430.4 430.2 99.1 Share premium 231.9 91.4 13.7 Capital redemption reserve 21.7 13.7 14.6 Equity reserve 8.1 14.6 (10.5) Hedge reserve 1.3 (59.8) 2,048.0 Retained earnings 2,078.9 1,603.9 2,595.9 Total equity attributable to equity holders of the parent 15 2,772.3 2,094.0 Consolidated Condensed Statement of Recognised Income and Expense for the period 1 April 2007 to 30 September 2007 Year Six months Six months ended 31 ended 30 ended 30 March September2007 September 2007 2006 Â£m Â£m Â£m (22.6) Gains/ (losses) on effective portion of cash flow hedges (net of tax) 11.0 (66.3) 33.2 Actuarial gain / (loss) on retirement benefit schemes (net of tax) 31.6 (35.6) - Effect of change in corporation tax rate on deferred tax liabilities and (1.4) - assets recognised in equity Jointly controlled entities and associates 5.5 Share of gains on effective portion of cash flow hedges (net of tax) 0.3 - (1.4) Share of actuarial gain / (loss) on retirement benefit schemes (net of 0.5 (14.5) tax) - Share of effect of change in corporation tax rate on deferred tax assets (0.5) - recognised in equity 14.7 Net income / (expense) recognised directly in equity 41.5 (116.4) 830.5 Profit for the period 586.3 349.0 845.2 Total recognised income and expense for the period 627.8 232.6 Attributable to: 845.2 Equity holders of the parent 627.8 232.6 Consolidated Condensed Cash Flow Statement for the period 1 April 2007 to 30 September 2007 Year Six months Six months ended 31 ended 30 ended 30 March September September 2007 2007 2006 Â£m Â£m Â£m Cash flows from operating activities 830.5 Profit for the period after tax 586.3 349.0 301.5 Taxation 137.3 135.5 (50.7) Movement on financing and operating derivatives 17.8 8.2 230.9 Finance costs 116.9 117.9 (193.4) Finance income (101.4) (97.1) (23.9) Share of jointly controlled entities and associates (33.5) 7.8 (31.6) Pension service charges less contributions paid (18.3) (14.8) 239.1 Depreciation and impairment of assets 138.9 117.2 57.2 Amortisation and impairment of intangible assets 22.5 1.5 (15.1) Deferred income released (7.7) (8.8) (48.7) (Increase) in inventories (44.1) (84.0) (225.0) Decrease/(Increase) in receivables 688.9 645.3 40.4 (Decrease)/Increase in payables (308.0) (305.5) 25.7 Increase/(decrease) in provisions 0.3 (2.1) 6.8 Charge in respect of employee share awards 4.5 3.4 (5.0) Profit on disposal of property, plant and equipment (56.8) (0.7) 1.7 Loss on disposal of replaced assets - - 1,140.4 Cash generated from operations 1,143.6 872.8 22.7 Dividends received from jointly controlled entities 19.9 14.3 63.4 Finance income received 26.3 32.6 (118.8) Finance costs paid (66.2) (71.9) (212.2) Income taxes paid (143.9) (90.6) (26.6) Payment for consortium relief - - 868.9 Net cash from operating activities 979.7 757.2 Cash flows from investing activities (564.1) Purchase of property, plant and equipment (416.3) (299.2) (3.7) Purchase of software (1.2) (0.6) 12.4 Deferred income received 4.6 12.3 13.0 Proceeds from sale of property, plant and equipment 78.3 9.6 (5.5) Loans to jointly controlled entities (2.5) (7.7) (5.0) Equity investment in Marchwood Power Limited - (5.0) 33.8 Loans repaid by jointly controlled entities 5.4 5.4 0.8 Loans repaid by associates - 0.2 - Investment in associates and jointly controlled entities (4.4) - (2.8) Increase in other investments (1.5) (2.3) (521.1) Net cash from investing activities (337.6) (287.3) Cash flows from financing activities 9.2 Proceeds from issue of share capital 0.2 0.6 - Repurchase of ordinary share capital for cancellation (230.5) - (411.3) Dividends paid to company's equity holders (345.5) (281.3) (8.2) Employee share awards share purchase (10.6) (6.8) 236.5 New borrowings 365.7 - (169.4) Repayment of borrowings (450.9) (181.4) (343.2) Net cash from financing activities (671.6) (468.9) 4.6 Net (decrease)/increase in cash and cash equivalents (29.5) 1.0 43.8 Cash and cash equivalents at the start of period 48.4 43.8 4.6 Net (decrease)/increase in cash and cash equivalents (29.5) 1.0 48.4 Cash and cash equivalents at the end of period 18.9 44.8 Notes on the Condensed Interim Statements for the period 1 April 2007 to 30 September 2007 1. Condensed Financial Statements The financial information set out in these interim statements does not constitute the Company's statutory accounts for the periods ended 30 September 2007, 31 March 2007 or 30 September 2006 within the meaning of Section 240 of the Companies Act 1985. Statutory accounts for the year ended 31 March 2007, which were prepared in accordance with International Financial Reporting Standards as adopted by the EU (adopted IFRS), have been reported on by the Company's auditors and delivered to the Registrar of Companies. The report of the auditors was (i) unqualified (ii) did not include reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain statements under section 237 (2) or (3) of the Companies Act 1985. The interim financial information is unaudited but has been formally reviewed by the auditors and their report to the Company is set out on page 38. The financial information set out in these interim statements has been prepared in compliance with IAS 34 Interim Financial Reporting as adopted by the EU. These interim statements were authorised by the Board on 13 November 2007. 2. Basis of preparation These condensed interim statements have been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's consolidated financial statements for the year ended 31 March 2007. The following accounting standards and interpretations have been adopted by the Group from 1 April 2007: â€¢ IFRS 7 Financial Instruments: Disclosures â€¢ IFRIC 8 Scope of IFRS 2 â€¢ IFRIC 9 Reassessment of Embedded Derivatives â€¢ Amendment to IAS 1 Presentation of Financial Statements - Capital Disclosures The adoption of these standards and interpretations does not have any significant effect on the policies applied in the preparation of the consolidated financial statements for the year ended 31 March 2007. In the process of applying the Group's accounting policies, management necessarily makes judgements and estimates that have a significant effect on the amounts recognised in the condensed financial statements. Changes in the assumptions underlying the estimates could result in a significant impact to the statements. The most critical of these accounting judgement and estimation areas are noted in the Company's consolidated financial statements for the year ended 31 March 2007. 3. Basis of consolidation of the Group The interim statements consolidate the interim financial information of Scottish and Southern Energy plc and its subsidiaries together with the Group's share of the trade and net assets of its jointly controlled entities and associates. The results of subsidiary undertakings acquired or sold are consolidated from the date that control commences until the date control ceases using the acquisition method of accounting. Investments in jointly controlled entities are accounted for under the equity method of accounting from the date that joint control commences until the date joint control ceases. Jointly controlled operations are businesses which use assets and liabilities that are separable from the rest of the Group. In these arrangements, the Group accounts for its own share of property, plant and equipment, carries its own inventories, incurs its own expenses and liabilities and raises its own finance. The Group's share of the total recognised gains and losses of associates are included on an equity accounted basis from the date that significant influence commences until the date significant influence ceases. 4. Seasonality of operations Certain activities of the Group are affected by weather and temperature conditions. In Energy Systems, the volumes of electricity and gas distributed or transmitted across network assets are dependent on levels of customer demand which are generally higher in winter months. In Generation and Supply, notable seasonal effects include the impact on customer demand of warmer temperatures in the first half of the financial year and also the related impact of demand on wholesale commodity prices and the timing of retail price changes. Other businesses are not considered to be seasonal in nature. 5. Segmental information Primary reporting format - business segments The primary segments, as defined by IAS 14, are as reported for management purposes and reflect the day-to-day management of the business. The Group's primary segments are the distribution and transmission of electricity in the North of Scotland, the distribution of electricity in the South of England (together referred to as Power Systems), the generation and supply of electricity and sale of gas in Great Britain (Generation and Supply). The Group' s 50% equity share in Scotia Gas Networks plc, a business which distributes gas in Scotland and the South of England, is included as a separate segment where appropriate due to its significance. Analysis of revenue and operating profit by segment is provided below. All revenue and profit before taxation arise from operations within Great Britain and Ireland. Notes on the Condensed Interim Statements for the period 1 April 2007 to 30 September 2007 5. Segmental information (continued) a) Revenue by segment Year ended 31 March Six months ended 30 September Six months ended 30 September 2007 2007 2006 Total Intra-segment External Total Intra-segment External Total Intra-segment External revenue revenue revenue revenue revenue revenue revenue revenue revenue Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Power Systems 270.4 99.1 171.3 Scotland 129.8 46.4 83.4 126.4 46.3 80.1 407.4 189.6 217.8 England 194.9 90.3 104.6 186.9 93.4 93.5 677.8 288.7 389.1 324.7 136.7 188.0 313.3 139.7 173.6 10,977.9 15.4 10,962.5 Generation and 5,174.1 6.8 5,167.3 4,001.7 12.2 3,989.5 Supply 859.4 343.9 515.5 Other businesses 473.0 181.4 291.6 400.9 165.8 235.1 12,515.1 648.0 11,867.1 5,971.8 324.9 5,646.9 4,715.9 317.7 4,398.2 Revenue from the Group's investment in Scotia Gas Networks plc, the Group's share being Â£135.6m (September 2006 - Â£113.4m, March 2007 - Â£297.3m), is not recognised as revenue of the Group under equity accounting. b) Operating profit by segment Six months ended 30 September 2007 Adjusted JCE / Before Exceptional Associate exceptional items and share of items and certain interest certain re-measurements and tax (i) re-measurements Total Â£m Â£m Â£m Â£m Â£m Power Systems Scotland 67.0 - 67.0 - 67.0 England 97.5 - 97.5 - 97.5 164.5 - 164.5 - 164.5 Scotia Gas Networks plc 41.1 (55.7) (14.6) 25.3 10.7 Energy Systems 205.6 (55.7) 149.9 25.3 175.2 Generation and Supply 474.3 (12.4) 461.9 (11.3) 450.6 Other businesses 63.8 (0.1) 63.7 55.0 118.7 743.7 (68.2) 675.5 69.0 744.5 Unallocated expenses (ii) (3.9) - (3.9) - (3.9) 739.8 (68.2) 671.6 69.0 740.6 Six months ended 30 September 2006 Adjusted JCE / Before Exceptional Total Associate exceptional items and share of items and certain interest certain re-measurements and tax (i) re-measurements Â£m Â£m Â£m Â£m Â£m Power Systems Scotland 66.6 - 66.6 - 66.6 England 95.9 - 95.9 - 95.9 162.5 - 162.5 - 162.5 Scotia Gas Networks plc 22.0 (45.0) (23.0) 3.4 (19.6) Energy Systems 184.5 (45.0) 139.5 3.4 142.9 Generation and Supply 298.0 (11.1) 286.9 28.0 314.9 Other businesses 62.2 - 62.2 - 62.2 544.7 (56.1) 488.6 31.4 520.0 Unallocated expenses (ii) (3.6) - (3.6) - (3.6) 541.1 (56.1) 485.0 31.4 516.4 Notes on the Condensed Interim Statements for the period 1 April 2007 to 30 September 2007 5. Segmental information (continued) b) Operating profit by segment (continued) Year ended 31 March 2007 Adjusted JCE / Before Exceptional Associate exceptional items and share of items and certain interest certain re-measurements and tax (i) re-measurements Total Â£m Â£m Â£m Â£m Â£m Power Systems Scotland 144.0 - 144.0 - 144.0 England 224.0 - 224.0 - 224.0 368.0 - 368.0 - 368.0 Scotia Gas Networks plc 103.1 (122.2) (19.1) 3.8 (15.3) Energy Systems 471.1 (122.2) 348.9 3.8 352.7 Generation and Supply 642.6 (27.1) 615.5 94.9 710.4 Other businesses 125.2 (0.4) 124.8 - 124.8 1,238.9 (149.7) 1,089.2 98.7 1,187.9 Unallocated expenses (ii) (7.8) - (7.8) - (7.8) 1,231.1 (149.7) 1,081.4 98.7 1,180.1 (i) The adjusted operating profit of the Group is reported after removal of the Group's share of interest, movements on financing derivatives and tax from jointly controlled entities and associates. The share of Scotia Gas Networks plc interest includes loan stock interest payable to the consortium shareholders. The Group has accounted for its 50% share of this, Â£17.6m (2006 - Â£18.0m, March 2007 - Â£35.8m), as finance income (note 7). (ii) Unallocated expenses comprise corporate office costs which are not directly allocable to particular segments. c) Capital additions to Property Plant and Equipment March September September 2007 2007 2006 Â£m Â£m Â£m Power Systems 73.9 Scotland 47.2 36.8 130.6 England 68.4 53.8 204.5 115.6 90.6 299.6 Generation and Supply 174.2 150.1 126.8 Other businesses 52.3 47.2 630.9 342.1 287.9 Notes on the Condensed Interim Statements for the period 1 April 2007 to 30 September 2007 6. Exceptional items and certain re-measurements i) Exceptional items During the period, the Group disposed of telecoms sites assets to the Wireless Infrastructure Company Limited, for a total potential consideration of Â£79.0m. The gain recognised on this disposal at September was Â£55.0m. This gain has been disclosed separately in the income statement. In previous periods, the Group financial statements included net dividends received in relation to the administration of TXU Europe Energy Trading Limited which had been placed into administration in 2002 (2006 - Â£24.5m, March 2007 - Â£33.0m). In addition to this, the Group's share of the net dividend from the administration of TXU Europe Energy Trading Limited recognised as income by an associate company, Barking Power Limited was also shown separately within the share of operating profit from jointly controlled entities and associates. These amounts were 2006 - Â£0.9m and March 2007 - Â£0.9m, respectively. The Group has separately recognised the tax effect of the exceptional items and certain re-measurments summarised. In addition to this, the Group has also separately disclosed the effect of the announced change in the base corporation tax rate of 30% to 28%, which is effective from 1 April 2008. This has an impact on any temporary differences which will exist at 1 April 2008 (note 8). The Group's share of tax from jointly controlled entities and associates is recognised in operating profit. ii) Certain re-measurements Certain re-measurements arising from IAS 39 are disclosed separately to aid understanding of the underlying performance of the Group. This category includes the movement on derivatives as described in note 13. These transactions can be summarised thus: Year Six months Six months ended 31 ended 30 ended 30 March September September 2007 2007 2006 Â£m Â£m Â£m Exceptional items 33.9 Distributions from TXU administrator - 25.4 - Disposal of Telecoms Masts Assets 55.0 - - Share of change in corporation tax in jointly controlled 28.7 - entities and associates (0.3) Share of tax in jointly controlled entities and associates - (0.3) 33.6 83.7 25.1 Certain re-measurements 61.3 Movement on operating derivatives (note 13) (16.3) 2.9 (10.6) Movement on financing derivatives (note 13) (1.5) (11.1) 3.8 Share of movements on derivatives in jointly controlled 1.6 3.4 entities (net of tax) 54.5 (16.2) (4.8) 88.1 Profit before taxation 67.5 20.3 Exceptional items - Effect of change in corporation tax on deferred tax 58.7 - liabilities and assets (9.9) Taxation on other exceptional items (16.8) (7.4) (9.9) 41.9 (7.4) Certain re-measurements (15.2) Taxation on certain re-measurements 4.9 2.4 (25.1) Taxation 46.8 (5.0) 63.0 Impact on profit for the period 114.3 15.3 Notes on the Condensed Interim Statements for the period 1 April 2007 to 30 September 2007 7. Net finance costs Year ended Six months Six months 31 March ended 30 ended 30 2007 September September Â£m 2007 2006 Â£m Â£m Finance income: 130.1 Return on pension scheme assets 70.2 64.5 3.8 Interest income from short term deposits 2.0 1.7 Other interest receivable: 35.8 Scotia Gas Networks loan stock 17.6 18.0 9.5 Other jointly controlled entities and associates 5.2 4.6 14.2 Other receivable 6.4 8.3 59.5 29.2 30.9 193.4 Total finance income 101.4 97.1 Finance costs: (34.0) Bank loans and overdrafts (21.0) (16.8) (98.2) Other loans and charges (42.4) (50.3) (107.2) Interest on pension scheme liabilities (58.5) (53.4) (3.6) Accretion of convertible debt component (3.5) (2.0) 13.5 Less: interest capitalised 10.0 5.6 (1.4) Notional interest arising on discounted items (1.5) (1.0) (230.9) Finance costs excluding movement on financing derivatives (116.9) (117.9) (10.6) Movement on financing derivatives (note 13) (1.5) (11.1) (241.5) Total finance costs (118.4) (129.0) (48.1) Net finance costs (17.0) (31.9) Adjusted net finance costs are arrived at after the following adjustments: Year ended Six months Six months 31 March ended 30 ended 30 2007 September September Â£m 2007 2006 Â£m Â£m (48.1) Net finance costs (17.0) (31.9) (add)/less: Share of interest from jointly controlled entities and associates (35.8) Scotia Gas Networks loan stock (17.6) (18.0) (82.1) Other jointly controlled entities and associates (45.5) (37.8) (117.9) (63.1) (55.8) 3.6 Accretion of convertible debt component 3.5 2.0 10.6 Movement on financing derivatives (note 13) 1.5 11.1 (151.8) Adjusted finance income and costs (75.1) (74.6) (130.1) Return on pension scheme assets (70.2) (64.5) 107.2 Interest on pension scheme liabilities 58.5 53.4 1.4 Notional interest arising on discounted items 1.5 1.0 (173.3) Adjusted finance income and costs for interest cover (85.3) (84.7) calculations Notes on the Condensed Interim Statements for the period 1 April 2007 to 30 September 2007 8. Taxation The income tax expense reflects the anticipated effective rate of tax on profits before taxation for the Group for the year ending 31 March 2008, taking account of the movement in the deferred tax provision in the period so far as it relates to items recognised in the income statement. In the period, it has been confirmed that the corporation tax rate applicable to the Group will change from 30% to 28% from 1 April 2008. Temporary differences which exist at 1 April 2008 will reverse at 28% rather than 30%, which was the basis at 31 March 2007. Consequently, the Group has recognised the following credits in respect of this in the period to 30 September 2007: Â£m Adjustments recognised in Income Statement in respect of Group entities 58.7 Adjustments recognised in Equity in respect of Group entities (1.4) 57.3 Share of adjustments recognised in Income Statement in Joint Ventures and 28.7 Associates Share of adjustments recognised in Equity in Joint Ventures and Associates (0.5) 85.5 The reported effective rate in the Income Statement is 19.0% (2006 - 28.0%, March 2007 - 26.6%). The total effective adjusted rate of tax on profits before taxation excluding exceptional items, IAS 39 and IAS 32; and adjusted for tax on associates and jointly controlled entities and net pension finance income for the period can be represented: Year ended Six months Six months 31 March ended 30 ended 30 2007 September September 2007 2006 Effective adjusted rate: 26.2% Current tax 25.9% 25.4% 2.5% Deferred tax 2.7% 2.5% 28.7% Total effective adjusted rate 28.6% 27.9% 9. Dividends The final dividend of 39.9p per ordinary share declared in the financial year ended 31 March 2007 (2006 - 32.7p) was approved at the Annual General Meeting on 26 July 2007 and was paid to shareholders on 21 September 2007. An interim dividend of 18.1p per ordinary share (2006 - 15.1p) has been proposed and is due to be paid on 25 March 2008 to those shareholders on the Scottish & Southern Energy plc share register on 20 February 2008. The proposed interim dividend has not been included as a liability in these financial statements. Notes on the Condensed Interim Statements for the period 1 April 2007 to 30 September 2007 10. Earnings per share Basic earnings per share The calculation of basic earnings per share at 30 September 2007 is based on the net profit attributable to ordinary shareholders and a weighted average number of ordinary shares outstanding during the period ended 30 September 2007. All earnings are from continuing operations. Adjusted earnings per share Adjusted earnings per share has been calculated by excluding the charge for deferred tax, net finance income relating to pensions, items disclosed as exceptional, and the impact of IAS 39. Year ended Six months ended Six months ended 31 March 2007 30 September 2007 30 September 2006 Earnings Earnings Earnings Earnings Earnings Earnings per per per Â£m share Â£m share Â£m share pence pence pence 830.5 96.5 Basic 586.3 68.1 349.0 40.6 (63.0) (7.3) Exceptional items and certain re-measurements (114.3) (13.3) (15.3) (1.8) (note 6) 767.5 89.2 Basic excluding exceptional items and certain 472.0 54.8 333.7 38.8 re-measurements Adjusted for: 9.8 1.1 Deferred tax 19.5 2.3 5.8 0.7 15.8 1.8 Deferred tax from share of jointly controlled (2.4) (0.3) 6.4 0.7 entities and associates 3.6 0.4 Accretion of convertible debt component 3.5 0.4 2.0 0.2 796.7 92.5 Adjusted 492.6 57.2 347.9 40.4 830.5 96.5 Basic 586.3 68.1 349.0 40.6 10.7 1.2 Convertible debt interest (net of tax) 2.5 0.3 5.3 0.6 - (3.8) Dilutive effect of convertible debt and exercise - (1.6) - (1.7) of share options 841.2 93.9 Diluted 588.8 66.8 354.3 39.5 (63.0) (7.0) Exceptional items and certain re-measurements (114.3) (13.0) (15.3) (1.7) 778.2 86.9 Diluted excluding exceptional items and certain 474.5 53.8 339.0 37.8 re-measurements The weighted average number of shares used in each calculation is as follows: Year ended Six months Six months 31 March ended 30 ended 30 2007 September September 2007 2006 Number of Number of Number of shares shares shares (millions) (millions) (millions) 860.9 For basic and adjusted earnings per share 861.1 860.3 1.8 Effect of exercise of share options 2.0 2.3 862.7 863.1 862.6 33.3 Effect of dilutive convertible debt 18.5 33.3 896.0 For diluted earnings per share 881.6 895.9 Notes on the Condensed Interim Statements for the period 1 April 2007 to 30 September 2007 11. Loans and other borrowings March September September 2007 2007 2006 Â£m Â£m Â£m Current 7.7 Bank overdraft 8.3 7.8 466.6 Other short-term loans 378.0 318.2 0.5 Obligations under finance leases 0.4 0.4 474.8 386.7 326.4 Non current 1,803.2 Loans including convertible debt 1,691.8 1,704.7 0.6 Obligations under finance leases 0.5 0.9 1,803.8 1,692.3 1,705.6 2,278.6 Total loans and borrowings 2,079.0 2,032.0 (56.1) Cash and cash equivalents (27.2) (52.6) 10.4 Fair value adjustments - 6.8 2,232.9 Net debt 2,051.8 1,986.2 i. Movement in net debt Decrease in Non-cash At At cash and cash movements 30 September 1 April equivalents in debt 2007 2007 and debt Â£m Â£m Â£m Â£m Cash and cash equivalents 56.1 (28.9) - 27.2 Bank overdraft (7.7) (0.6) - (8.3) 48.4 (29.5) - 18.9 Loans and borrowings (2,287.9) 84.4 125.4 (2,078.1) Finance lease creditors (1.1) 0.2 - (0.9) Bank overdraft 7.7 0.6 - 8.3 (2,281.3) 85.2 125.4 (2,070.7) Net debt (2,232.9) 55.7 125.4 (2,051.8) Bank overdrafts are reported on the balance sheet as part of current loans and borrowings. For cash flow purposes, these have been included as cash and cash equivalents. The non-cash movement in debt relates to the partial conversion of the convertible bond. ii. Repayment of borrowings In the period from 1 April 2007, the following short-term loans as at 31 March 2007 have been repaid: At March 2007 Â£m US $100m bond repaid 1 May 2007 61.5 6.83% European Investment Bank repaid on 15 September 2007 25.0 The Group has no new long-term borrowings in the period other than an increase of Â£16.4m in non-recourse borrowings in relation to the Group's Tay Valley Lighting subsidiaries. Notes on the Condensed Interim Statements for the period 1 April 2007 to 30 September 2007 11. Loans and other borrowings (continued) iii. Convertible bond The convertible bond was issued on 26 October 2004 in exchange for Â£300.0m in cash. The bond entitles holders to convert the bond into ordinary shares at any time up to 24 October 2009 at the applicable conversion share price of Â£9.00 per ordinary share at the date of issue. The conversion price is subject to adjustment in certain circumstances set out in the offering circular including payment of dividends greater than amounts set out in the circular, capital restructuring and change of control. Conversion is at the option of the bond holder. At 30 September 2007, bond holders had converted debt with a nominal value of Â£133.6m at the Â£9.00 per share conversion price. Conversion took place in the following periods: Nominal Number of Value of Shares Bond Converted Â£m Year to 31 March 2007 0.1 11,111 Six month period to 30 September 2007 133.5 14,832,544 133.6 14,843,655 The net proceeds received from the issue of the bond had been split between a liability element and an equity component, the liability element representing the initial fair value of the debt excluding the option to convert the liability into equity of the Group. At At 30 At 30 31 March September September 2007 2007 2006 Â£m Â£m Â£m 299.9 Nominal value of convertible bond 166.4 299.9 (1.4) Costs of issue (1.1) (1.7) 298.5 Nominal value of convertible bond less costs of issue 165.3 298.2 (13.6) Less: equity component and accreted debt element (5.8) (15.2) 284.9 Book value of convertible bond less costs of issue 159.5 283.0 On partial conversion, a debt element of Â£125.4m was converted from debt to equity. The costs of issue of the bond are amortised over the term of the bond. Combined with the accretion interest charge, the net movement in the book value of the convertible bond less costs to issue is Â£129.3m. For the purpose of diluted Earnings per Share (EPS), convertible bond interest of Â£3.5m (2006 - Â£7.6m, March 2007 - Â£15.3m) is added back to earnings and the number of potential ordinary shares to be issued includes the following in respect of this bond: March September September 2007 2007 2006 Number of Number of Number of shares shares shares 33,322,222 Weighted average number of shares 18,489,678 33,322,222 12. Share capital In the period to 30 September 2007, the Company re-purchased 16,010,000 shares (2006 - nil, March 2007 - nil) for a consideration of Â£230.5m, including fees, which have been charged to equity. These shares were subsequently cancelled. In addition, the Company purchased 737,031 shares (2006 - 571,389, March 2007 - 702,057) for a consideration of Â£10.6m (2006 - Â£6.8m, March 2007 - Â£8.2m) to be held in trust for the benefit of employee share schemes. In the same period, the Company issued 37,367 shares (2006 - 135,246, March 2007 - 1,651,166) under various employee share option schemes for a consideration received of Â£0.2m (2006 - Â£0.1m, March 2007 - Â£0.8m). As discussed in note 11, under the terms of the Convertible bond, the Company also issued 14,832,544 shares in the period (2006 - 11,111; March 2007 - 11,111). The Company has one class of ordinary share which carries no right to fixed income. The holders of ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at meetings of the Company. Notes on the Condensed Interim Statements for the period 1 April 2007 to 30 September 2007 13. Financial Assets / Liabilities For financial reporting purposes, the Group has classified derivative financial instruments into two categories, operating derivatives and financing derivatives. Operating derivatives relate to qualifying commodity contracts which include certain contracts for electricity, gas, oil, coal and carbon. Financing derivatives include all fair value and cash flow interest rate hedges, non-hedge accounted (mark-to-market) interest rate derivatives, cash flow foreign exchange hedges and non-hedge accounted foreign exchange contracts. Non-hedge accounted contracts are treated as held for trading. The net movement reflected in the Interim Income Statement can be summarised thus: Year ended Six months Six months 31 March ended 30 ended 30 2007 September September 2007 2006 Â£m Â£m Â£m Operating derivatives (134.5) Total result on operating derivatives (i) 177.8 (16.9) 195.8 Less: amounts settled (ii) (194.1) 19.8 61.3 Movement in unrealised derivatives (16.3) 2.9 Financing derivatives (and hedged items) (117.7) Total result on financing derivatives (i) (79.8) (18.2) 107.1 Less: amounts settled (ii) 78.3 7.1 (10.6) Movement in unrealised derivatives (1.5) (11.1) 50.7 Total (17.8) (8.2) (i) Total result on derivatives in the income statement represents the total amounts (charged) or credited to the income statement in respect of operating and financial derivatives. (ii) Amounts settled in the year represent the result on derivatives transacted which have matured or been delivered and have been included within the total result on derivatives. The net financial assets / (liabilities) are represented as follows: March September September 2007 2007 2006 Â£m Â£m Â£m Financial Assets 54.5 Non-current 51.4 47.5 452.9 Current 124.4 24.8 507.4 175.8 72.3 Liabilities (120.9) Non-current (80.8) (44.2) (351.9) Current (46.0) (134.2) (472.8) (126.8) (178.4) 10.4 Loans (note 11) - 6.8 45.0 49.0 (99.3) The Group's exposure to Risk and the policies and management objectives enacted to manage these exposures remain as stated in the Group's Financial Statements to 31 March 2007. 14. Retirement Benefit Obligations Defined Benefit Schemes The Group has two funded final salary pension schemes which provide defined benefits based on final pensionable pay. The schemes are subject to independent valuations at least every three years. The Group also has an Employer Financed Retirement Benefit scheme and a Group Personal Pension Plan, details of which were provided in the Group's Financial Statements to 31 March 2007. Summary of Defined Benefit Pension Schemes: Actuarial Pension Actuarial gain/(loss) Pension (liability) gain/(loss) (liability) recognised in respect / asset recognised / asset of the pension asset in in the SoRIE the SoRIE March March September September September September 2007 2007 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m 17.6 128.1 Scottish Hydro Electric 37.8 (23.9) 177.1 75.4 Pension Scheme 29.8 (220.0) Southern Electric Pension 6.1 (26.9) (195.1) (294.1) Scheme 47.4 (91.9) 43.9 (50.8) (18.0) (218.7) Notes on the Condensed Interim Statements for the period 1 April 2007 to 30 September 2007 14. Retirement Benefit Obligations (continued) The major assumptions used by the actuaries in both schemes were: At 31 March At 30 September At 30 September 2007 2007 2006 4.6% Rate of increase in pensionable salaries 4.9% 4.4% 3.1% Rate of increase in pension payments 3.4% 2.9% 5.4% Discount rate 5.9% 5.0% 3.1% Inflation rate 3.4% 2.9% 15. Reconciliation of movements in shareholders' funds Year Six months Six months ended 31 ended 30 ended 30 March September September 2007 2007 2006 Â£m Â£m Â£m 830.5 Profit for the period 586.3 349.0 (411.3) Dividends (345.5) (281.3) 419.2 240.8 67.7 14.7 Net income / (expense) recognised directly in equity 41.5 (116.4) 9.2 Share capital issued 0.2 0.7 8.8 Current and deferred tax recognised in equity in - - respect of employee share awards - Convertible bond converted to equity 130.5 - - Purchase and cancellation of own shares (230.5) - (8.2) Investment in own shares for employee share awards (10.6) (6.8) 6.8 Credit in respect of employee share awards 4.5 3.4 450.5 Net addition/(reduction) in shareholders' funds 176.4 (51.4) 2,145.4 Opening shareholders' funds 2,595.9 2,145.4 2,595.9 Closing shareholders' funds 2,772.3 2,094.0 16. Related Party Transactions The transactions which took place in the six months to 30 September 2007 with related parties were consistent with those reported in the Company's consolidated financial statements for the year ended 31 March 2007. Statement of directors' responsibilities in respect of the condensed interim financial statements The Directors confirm that this condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union, and that the interim management report herein includes a fair review of the information required by the Disclosure Rules and Transparency Rules of the Financial Services Authority, paragraphs DTR 4.2.7 and DTR 4.2.8. The Directors of Scottish and Southern Energy plc are listed in the Group's Annual Report for the year ended 31 March 2007, with the exception of David Payne, who retired on 26 July 2007. For and on behalf of the Board of Directors: Gregor Alexander Finance Director London 13 November 2007 Independent review report to Scottish and Southern Energy plc Introduction We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2007 which comprises the Consolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Statement of Recognised Income and Expense, the Consolidated Cash Flow Statement and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. This report is made solely to the company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules ('the DTR') of the UK's Financial Services Authority ('the UK FSA'). Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FSA. As disclosed in note 2, the annual financial statements of the Company are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. Our responsibility Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2007 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA. KPMG Audit Plc Chartered Accountants Edinburgh 13 November 2007 This information is provided by RNS The company news service from the London Stock Exchange

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Another day and another round of takeover talk with Hargreaves Lansdown being eyed by private equity suitors. AJ Bell also advances on upbeat earnings news whilst QinetiQ upgrades its profit guidance, too.

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