Interim Results

14th Nov 2007 07:08

Scottish & Southern Energy PLC14 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* £664.7m £466.5m +42.5%Adjusted Earnings Per Share* 57.2p 40.4p +41.6%Investment and Capital Expenditure £363.3m £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 + 800kCustomer Complaints to energywatch 360 466 -22.7%Customer Minutes Lost (SHEPD) 28 34 - 6 minsCustomer 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 itfor continuing growth. Our core responsibility to shareholders is to deliversustained real growth in the dividend, and we have again achieved that, with aninterim dividend which is double that paid in 2001. Next year will see the tenth anniversary of the formation of SSE, and overrecent months we have taken a number of important steps to position the businessfor its second decade. In addition to improving operations and makinginvestments in established businesses, we have identified opportunities in newareas such as the water sector and emerging technologies and new markets such asIreland. All of this means we are very well-placed to deliver more excellentresults in the years ahead, as one of the UK's leading customer-serving,dividend-paying companies." * Unless otherwise stated, this interim results statement describes adjustedoperating profit before exceptional items, the impact of IAS 32 and IAS 39, andafter the removal of taxation and interest on profits from jointly controlledentities and associates. In addition, it describes adjusted profit before taxbefore exceptional items, the impact of IAS 32 and IAS 39 and after the removalof taxation on profits from jointly-controlled entities and associates. It alsodescribes adjusted earnings and earnings per share before exceptional items, theimpact 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 • Operating profit* up 11.4% to £205.6m • Power Systems operating profit* up 1.2% to £164.5m • Investment in electricity networks of £115.6m • Fewer Customer Minutes Lost and Customer Interruptions in both electricity networks • Share of SGN's adjusted operating profit* up 86.8% to £41.1m • Investment in gas networks of over £75m (SSE share only) GENERATION AND SUPPLY • Operating profit* up 59.2% to £474.3m • Commitment to invest up to £30m in emerging technologies • Agreement to acquire Slough Heat and Power Ltd Generation • Gas-fired power station availability 96%; coal station availability 90% • Good progress on major projects at Marchwood, Fiddler's Ferry, Ferrybridge and Glendoe • New investment options being developed for new coal-fired and gas-fired plant • First purchase of Carbon Emissions Reduction Certificates Supply • Net gain of 800,000 supply-related customers in a year • Further reduction, of 22.7%, in complaints to energywatch • First in customer satisfaction for fourth time in uSwitch.com Customer Satisfaction Report • Top-ranked supplier of electricity and gas in JD Power Customer Satisfaction Study • 'better plan' energy efficiency reward programme for customers launched • Electricity and Gas Supply Licences secured to allow entry to Irish market CONTRACTING, CONNECTIONS AND METERING • Operating profit* up 21.1% to £29.3m • Contracting order book in excess of £100m for first time • First new water and sewerage company since privatisation • In-sourcing of Metering work in three new regions GAS STORAGE • Operating profit* down 12.1% to £25.5m (but 87.5% higher than in six months to 30 Sept 2005) • Commissioning of gas processing plant at Aldbrough now under way • Planning permission secured to double size of Aldbrough development to over 800mcm TELECOMS • Operating profit* up 9.1% to £7.2m (on continuing businesses up 22.4% to £6.0m) • Sale of telecoms sites assets for £79m total consideration • Acquisition in October 2007 of new fibre optic network for £12.5m total consideration SHARE CAPITAL • Purchase of 16m shares (1.86% of called up share capital) for £230.5m • 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 underInternational Accounting Standard (IAS) 34. SSE's focus is on profit before taxbefore exceptional items, the impact of IAS 32 and IAS 39, and after the removalof taxation on profits from jointly controlled entities and associates, and theinterim results commentary has been prepared on this basis. Sept 07 Sept 06 £m £m Reported Profit before Tax 723.6 484.5 Movement on derivatives 15.5 4.8Exceptional items (83.0) (25.1)Tax on JVs and Associates 5.1 0.3Interest 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 £466.5m to £664.7m. Thegreatest growth continues to be achieved in Generation and Supply. Thisreflects the successful deployment of SSE's diverse and flexible electricitygeneration portfolio, and the sustained increase in the number of energysupply-related customers, which now total 8.3 million. This performance in the first half of the financial year is likely to prove tobe 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 itfollowed the unusual sequence of wholesale and retail energy price changesexperienced in the UK in the past 18 months. SSE's emphasis is on adjustedprofit before tax* on a full-year basis. Adjusted earnings per share* To monitor financial performance over the medium-term, SSE continues to focus onadjusted 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 governmentannounced a reduction in the main Corporation Tax rate, from 30% to 28%, andaccordingly SSE has re-stated its deferred tax provisions. A £28m credit hasbeen recognised in relation to SSE's share of joint ventures and associates andis therefore reported in profit before tax, which is adjusted accordingly. Afurther £58.7m has been released by SSE, which is included in the headline taxcharge. The second exceptional item was a £55m gain before tax on the disposalof 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, comparedwith 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'sdividend announced in March 2007. It establishes the base from which the interimdividend can grow in the future and ensures that it remains a similar proportionof the full-year dividend as in previous years. The underlying increase in theinterim dividend is 9.7%. The interim dividend of 18.1p compares with 9.0p paid in 2001, since when it hasincreased by 101%, which represents a compound annual growth rate of 10.5%. SSEexpects to achieve its target for the full year dividend in 2007/08 of at least4% real growth. The progress achieved by SSE's businesses in the first half of this financialyear, 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 alsoexpects to achieve its target of at least 4% annual real growth in the dividendpayable to shareholders in 2008/09 and 2009/10, with sustained real growththereafter. ENERGY SYSTEMS Energy Systems Overview Operating profit* in Energy Systems, including gas distribution, increased by11.4%, from £184.5m to £205.6m, contributing 27.8% of SSE's total operatingprofit* in the first half of the year. In power systems, operating profit* of£164.5m was achieved, compared with £162.5m in the previous year; in gasdistribution, SSE's share of the operating profit* for Scotia Gas Networks (SGN)was £41.1m, compared with £22.0m in the previous year. Southern Electric Power Distribution Southern Electric Power Distribution's (SEPD) operating profit* increased by1.7% to £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 reductionin the number of units distributed, which was principally due to the impact ofthe unusually warm weather experienced in April 2007, was more than offset bychanges 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 per100 customers was 34, compared with 36 in the previous year. Performance inrespect of both minutes lost and interruptions was ahead of the targets set byOfgem under its Quality of Service Incentive Scheme (QSIS), which givesfinancial benefits to distribution network operators that deliver goodperformance for customers. Scottish Hydro Electric Power Distribution and Scottish Hydro ElectricTransmission Operating profit* for Scottish Hydro Electric Power Distribution and ScottishHydro Electric Transmission increased by 0.6% to £67.0m. In the Scottish HydroElectric area, 3.8TWh of electricity were distributed during the period, a veryslight increase compared with the previous year. Changes in the price of unitsdistributed 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 per100 customers was 31, compared with 39 in the previous year. Performance inrespect of both minutes lost and interruptions was ahead of Ofgem's QSIStargets. Given that the key responsibility of electricity network businesses is themaintenance of safe and reliable supplies of electricity and the swiftrestoration of supplies in the event of interruptions, the delivery of improvedperformance in both customer minutes lost and customer interruptions in SSE'stwo network areas is an important achievement. Electricity Network Investment The Distribution Price Control Review for 2005-10 resulted in substantiallyincreased allowances for capital expenditure to maintain and improve theelectricity networks. Investment is therefore geared to renewing SSE'snetworks, which were largely built a generation ago, and thereby reducing thenumber and duration of power supply interruptions. It is also geared toproviding the infrastructure to accommodate demand for power. For example, the £16m installation of two new 132kV underground cables betweenBramley and Basingstoke is designed to ensure the electricity network can meetmaximum demand for 650,000 customers served by the Bramley and Fleet grid supplypoints. The switchgear at the Inverary substation in Argyll and Bute is beingreplaced to accommodate the demand from local generation of renewable energy.The replacement of a key underground cable in Cowes on the Isle of Wight isdesigned to improve the reliability of the electricity supply in the centralpart of the town. Capital expenditure in the electricity networks in the first half of the yearwas £115.6m, which takes the total for the first half of the current PriceControl period to just over £500m. This is 40% higher than in the first half ofthe previous Price Control period, to September 2002. Having reached themid-way point of the five-year Price Control, SSE forecasts that the RegulatoryAsset Value (RAV) of its electricity distribution and transmission businessesshould grow by around £500m over the five years to March 2010, excluding anymajor transmission investment. Future Transmission Developments Scottish Hydro Electric Transmission is responsible for operating, maintainingand 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, SSEhas to ensure there is sufficient network capacity for those seeking to generateelectricity from renewable sources. The project to replace the electricitytransmission line connecting Beauly in the Highlands and Denny in the CentralBelt of Scotland follows on from that responsibility. The Public Inquiry intothe project began in February 2007 and was still on schedule at the end ofOctober. Nevertheless, the Scottish Minister for Enterprise, Energy and Tourismstated in the Scottish Parliament on 19 September that Ministers do not expectto receive the report of the Inquiry until late in 2008 and that a determinationis unlikely before early 2009. Longer term, the new Scottish government is committed to having discussions withthe government of Norway and the European Commission to take forward the conceptof a North Sea 'super grid' to facilitate the export of Scottish renewableenergy to the rest of Europe. SSE is well-placed to contribute to theconsideration of 'super grid' options and will continue to work on them withScottish Ministers and officials and other stakeholders. In September 2007, the European Commission published its third package ofproposals to further liberalise the EU's energy market. The package includesoptions for electricity and gas transmission networks: the full ownershipunbundling of transmission from production and supply in both electricity andgas; or the designation of an independent system operator (ISO) that wouldoperate, maintain and develop the networks, which would make it possible forexisting vertically integrated companies to retain network ownership. SSEbelieves that the ISO model in Great Britain has worked well and could besuccessfully 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% ofthe equity, was £41.1m, compared with £22.0m in the previous year. This resultwas achieved largely due to changes in prices for transporting gas (partlyreflecting the under-recovery of revenue in 2006/07) and greater efficienciesyielding a reduction in operating costs. Scotia Gas Networks - Operational In the six months to 30 September, the gas transportation volume for SGN'snetwork in Scotland was 20.2TWh and for its Southern network the volume was30.5TWh. This compares with 19.4TWh and 33.5TWh respectively in the previousyear. As in Southern Electric Power Distribution, the unusually warm weatherexperienced in April 2007 had a significant impact on units transported in theSouthern gas distribution network. SGN's medium term objective is to be at the frontier for safety, customerservice and efficiency in gas distribution. During the period, it continued tomake significant progress towards the achievement of this objective. In September 2007, the number of lost-time injuries in SGN fell to 0.14 per100,000 hours worked, compared with 0.18 in September 2006. The focus oncustomer service helped SGN deliver a reduction in the number of complaintsabout it sent to energywatch for resolution of 62%, to 10. The introduction ofnew front office management systems, reducing the total number of systems fromover 50 to 11, has been successfully completed. This means SGN now hasfree-standing systems which are capable of supporting more efficient deploymentof resources. SGN also owns and operates SGN Connections and SGN Contracting and in August2007 established SGN Metering. This means SGN is now an Ofgem-accredited MeterAsset Manager and it is just the second gas distribution company in the UK tobecome one. SGN now owns and manages a meter portfolio of around 40,000 gasmeters which it has installed in the Southern and Scotland network areas and itwill own and manage all new meters fitted. The in-sourcing and expansion of gas network activities means that SGN nowdirectly employs 3,750 people, compared with 2,000 when it acquired its twodistribution networks in June 2005. SGN's three-year pay and productivity dealfor employees, which was agreed during 2006/07, has allowed the introduction ofmore flexible working patterns and associated efficiency gains. These includethe removal of restrictive practices and their replacement by a consistentframework for terms and conditions. Work pattern rotas can now be determined bylocal management, and site start and finish provisions have been introduced toenhance productivity. Scotia Gas Networks - Investment During the period, SGN invested in excess of £150m in capital and mains andservices replacement expenditure works. The majority of the mains replacementexpenditure was incurred under the 30:30 mains replacement programme which wasstarted in 2002. This requires that all iron gas mains within 30 metres ofhomes and premises must be replaced over a 30-year period and in the first halfof the year SGN replaced almost 550km of its metallic gas mains with modernpolyethylene 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 thereforeparticipates in three price control reviews in every five years, which gives itongoing involvement in price control issues in the UK. Over 90% of SGN's income is still derived via the gas distribution price controland updated proposals for the five-year period until April 2013, were publishedby Ofgem in September 2007. Those proposals included a comparison of efficiencyrankings in which Scotland Gas Networks was ranked the second most efficient ofthe eight distribution networks and Southern Gas Networks the third. Thiscompares with seventh and sixth respectively when the two networks were acquiredby SGN in 2005. The stated aim of Ofgem's proposals is to deliver 'a safe, modern gas networkwhile 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 moreefficiently over the next five years'. Final proposals are expected to bepublished in December 2007 and a significant amount of detailed work remains tobe done in advance of that to ensure there is an acceptable outcome to thisprocess. SGN's objective is to ensure that the final proposals provide: anadequate framework for operational, replacement and capital expenditure (withprogress on replacement expenditure being particularly important); opportunitiesto earn additional revenue through good performance; and an acceptable allowedcost of capital. GENERATION AND SUPPLY Generation and Supply Overview Operating profit* in Generation and Supply rose by 59.2%, from £298.0m to£474.3m, contributing 64.1% of SSE's total operating profit* in the first halfof the year. The underlying financial performance of Generation and Supply isreported excluding the impact of IAS 39 revaluations as SSE continues to believethat this does not represent underlying business performance. In May 2007, the Energy White Paper pointed out that the UK will needsubstantial investment in new generation capacity over the next two decades. Italso pointed out that the UK's diverse generation mix avoids exposure to therisks associated with heavy dependency on a single fuel or technology type,helps to maintain secure supplies of energy and provides the country'selectricity system with the flexibility to accommodate variations in demand andto 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 powerstations, available to generate electricity and support security of supply, withthe maximum possible efficiency, in response to customer demand and marketconditions, while complying fully with all safety standards and environmentalregulations. Future investment decisions in Generation will be consistent with theseobjectives and with the attainment of SSE's target to reduce by 20% over the 10years to 2016 the amount of carbon dioxide per kilowatt hour of electricityproduced at power stations in which it has an ownership or contractual interest. SSE has substantial involvement in a variety of developments designed toachieve lower carbon energy supplies and will maintain a balanced approach toreducing carbon intensity in the years ahead. In particular, it will strive tomaximise its investment in renewable sources of energy. It may also work withother parties to help secure the development of new nuclear power stations,through appropriate contractual support or investment. In its submission to therecent UK government consultation on the future of nuclear power, SSE said thereis value in the UK making available the nuclear option, along with a diverserange of other generation options, provided there is a stable framework in placefor investors and that an appropriate degree of public confidence in all aspectsof nuclear power is maintained. Within its integrated business model, SSE's power stations are used to supportperformance in energy supply. The electricity produced by SSE's own powerstations is supplemented by electricity acquired via bilateral contracts andthrough trading. This means that SSE has a balanced portfolio of assets,contracts and customers which functions as an integrated whole, is assessed as asingle value chain and which is therefore greater than the sum of its parts. In this context, the continuing growth achieved by SSE's integrated Generationand Supply business reflects the company's investment in, and acquisition andoperation 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 Centreto manage plant performance at all of its power stations through the delivery ofa best practice asset management policy and the development of an internalcapability to provide plant with specific engineering support services - therebyreducing reliance on external parties for business-critical engineering supportservices. In terms of the forthcoming winter period, SSE believes it has in placeappropriate operational and commercial arrangements to deliver secure suppliesof energy in all likely circumstances. Gas-fired Generation - Operations SSE owns 4,300MW of gas-fired electricity generation capacity, including itsshare of joint ventures. Good performance in BETTA (British Electricity Tradingand Transmission Arrangements) is dependent on plant reliability. During thefirst half of the year, SSE's principal wholly-owned gas-fired power stations(Fife, Keadby, Medway and Peterhead) achieved 96% of their maximum availabilityto 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 gasturbine (CCGT) plant in Southampton is now well under way, and the UK EnergyMinister visited the development in September 2007. Marchwood Power Ltd is a 50:50 joint venture between SSE and ESB International. The next key milestoneswill include the commencement of the installation of the heat recovery steamgenerators in the New Year. The 22km high pressure gas pipeline from Lockerleywill be ready for commissioning in the Spring of 2008. The plant is thereforeon course to be completed and in commercial operation in time for the winter of2009/10. With a net thermal efficiency in excess of 58%, it will be one of themost efficient in the UK. Barking Power Ltd, in which SSE has a 30.4% stake, is continuing to seek Section36 consent to develop a new 400MW CCGT. If consented, this would effectivelyadd around 120MW to the portfolio of generation assets owned by SSE and it ishoped that a decision on the proposed development will be made by UK Ministersin the coming months. CCGT technology is likely to remain the benchmark technology for some years tocome and, as stated on 1 October 2007, SSE has concluded that it should identifyan option for an additional CCGT plant, either at one of its existing powerstation sites or an alternative 'brown-field' site. In addition, SSE has identified the potential to substitute existing plant atPeterhead power station with new state-of-the-art equipment. This wouldincrease the modern CCGT capacity at Peterhead from 1,180MW to the station'seffective electricity grid limit of 1,520MW, delivering a higher thermalefficiency and annual savings of around 350,000 tonnes of CO2. The FEED (frontend engineering design) study is now under way and a decision on whether toproceed with the investment, in which transmission charges will be an importantfactor, will be made next year. Coal and Biomass Generation - Operations The Ferrybridge and Fiddler's Ferry power stations, each with a capacity ofalmost 2,000MW, achieved 90% of their maximum availability to generateelectricity, excluding planned outages, during the period, compared with 97% inthe same period last year. This reflected some operational issues arising atthe 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 todisplace fossil fuels, using the direct injection technology in which SSEinvested during 2005 and 2006. During the period, their output qualifying forROCs was 154GWh, compared with 238GWh in the same period in the previous year.This reflects outages relating to the installation of FGD and difficultiesrelating to the 'bioswirl' facility at Ferrybridge. In May 2007, the UK government published proposals for the reform of theRenewables Obligation which would result in biomass-related output being placedin 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 theavailability of the biomass material required for co-firing has proved to belower than expected, means SSE has recognised a charge of £12.2m in 2007/08 inrespect 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 atFiddler's Ferry and half of the capacity at Ferrybridge and as a result isinstalling FGD equipment in an investment expected to total around £225m. Theinstallation of FGD will allow a total of 3,000MW of capacity at the twostations to remain open after 2015. All of the civil works at the two siteshave been completed. Installation of the FGD equipment itself is now well underway and is currently expected to be complete in time to begin generatingelectricity through a 'de-sulphurised' process next year. A plasterboard factory is being developed at Ferrybridge by Lafarge PlasterboardLtd, creating around 70 new jobs. The factory building itself has beencompleted 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 toseparate the ash arising from electricity generation into constituent mineralparts for sale as cement substitute products and industrial minerals, followingthe agreement signed with RockTron Limited in February 2007. In May 2006, SSE established a partnership with Doosan Babcock Energy, Siemensand UK Coal with a view to the possible installation at Ferrybridge of a 500MWSupercritical Boiler and Steam Turbine, while re-employing existing coalhandling facilities and other major infrastructure. Against a background ofrising costs across the power equipment sector, SSE announced on 1 October thatit would not proceed with this project. At the same time, SSE has concluded that there is still likely to be a need toreplace that capacity at Ferrybridge which is scheduled to close in 2015. It isnow examining the options for doing this, focusing on an 800MW unit using theSupercritical Boiler technology. This would secure a significant improvement inthe 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 ofelectricity produced. Any plant would also be made 'capture ready', enabling itto be fitted with carbon capture and storage (CCS) technology. Key issues inconsidering the options will include the price of carbon emissions allowancesand the availability of turbines. As a result, any new coal plant is unlikelyto be commissioned before 2014, with a decision to be made around the turn ofthe decade. SSE has now started preparatory work on gaining consent for thisunit. In October 2007, the UK government announced that it intends to support a singlepost-combustion coal-fired project as the UK's first CCS plant, following acompetition which it expects to launch shortly. While the proposed designspecification for the competition seems very limiting, SSE remains keen toexplore CCS options and is working with a number of other stakeholders toestablish whether there is the scope to deliver a practical demonstrationproject 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 contractualshares), SSE will receive an allocation of 16.3 million tonnes per annum. Thiscan 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 around83%, compared with around 80% across the electricity sector as a whole. Under the Clean Development Mechanism (CDM) established under Article 12 of theKyoto Protocol, countries - and therefore companies - can meet their carbonemission 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 energycompanies) to support the development of four new wind farms in north eastChina. It will purchase around two million CERs over a period of five years fromthe start of 2008. It has also entered into an agreement to support therefurbishment of hydro electric stations in Brazil, with the purchase of around160,000 CERs over a period of six years. This investment in hydro and windmirrors SSE's strategy in the UK. The large majority of SSE's investment in reducing carbon emissions willcontinue to be in the UK. At the same time, climate change is a globalchallenge and supporting the development of clean sources of energy in otherparts of the world is a key means of addressing it. SSE is looking foropportunities to expand its activities in this area, with a focus ontechnologies 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 was1,192GWh during the period, compared with the 10-year average of 1,035GWh andwith 1,104GWh during the first half of 2006/07. As at 30 September 2007, theamount of water held in SSE's reservoirs which could be used to generateelectricity was 55% of the maximum, compared with 54% on the same date lastyear. The output of refurbished hydro-electric stations with capacity of up to 20MWqualifies for ROCs, and, in total, SSE has just over 400MW of capacity in thiscategory (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 30September 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 contributed122GWh of ROC-qualifying output in the first half of the year, compared with139GWh in the previous year. Assuming average 'run off' of water into SSE's reservoirs during the rest ofthis financial year, and typical wind conditions, the ROC-qualifying output fromhydro and wind generation for 2007/08 as a whole is expected to be just under2,000GWh. Hydro and Wind Generation - Investment SSE is still aiming to have around 1,000MW of hydro and wind generation capacityqualifying for Renewable Obligation Certificates (ROCs) by the end of thisdecade. The achievement of this will be subject to the progress of its variousdevelopments through the planning process, and SSE's ambitions in renewableenergy are being restrained by it. Nevertheless, it already has in place, orhas secured consent to develop, almost 750MW of ROC-qualifying capacity(comprising refurbished and new hydro electric stations and operational andconsented wind farms, including SSE's share of the Beatrice Wind FarmDemonstrator Project in the Moray Firth). The construction of SSE's new 100MW hydro electric station, at Glendoe near LochNess, is progressing well. This development is requiring investment of over£140m and it remains on course to be able to generate electricity in the firstpart of 2009. Having entered the hillside in the summer of 2006, the TunnelBoring Machine is set to complete the creation of 8km of tunnels at the schemeand re-emerge from under ground within the next few weeks, which will be aheadof schedule. SSE has six onshore wind farms in operation, under construction or with consentfor development. It has eight other wind farm proposals at various stages inthe 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 hasnow been completed; Blackcraig (69MW), which will be the subject of a PublicLocal Inquiry scheduled for February 2008; Harrow's Law (70MW), which will bethe 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 TheHighland 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 acquiresubject to planning consent being secured, was refused consent by ScottishMinisters in September 2007, although a scheme at this site with a capacitybelow 50MW could still be pursued via a planning application to the localauthority. The refusal of the 62MW proposal demonstrates the significantdifficulties and uncertainties associated with the process for considering windfarm applications. The construction phase of the SSE/Talisman Energy UK Beatrice Wind FarmDemonstrator Project in the Moray Firth is complete. Two 5MW turbines have beensuccessfully installed and the operational phase of the project has commenced.SSE and Talisman Energy UK have completed a major review of the project. Thishas indicated that large-scale wind farm developments in deeper water furtherfrom the shore could eventually be commercial and a development of up to 1,000MWof capacity may be viable. There are, however, significant technical andcommercial hurdles and the two companies are engaging with the UK government andother interested parties in an endeavour to overcome these. Following the signature of their partnership agreement in January 2007, SSE andViking Energy, the company formed to represent Shetland Islands Council'sinterests in large-scale wind energy development in Shetland, have continuedwith the extensive pre-planning work which must be completed before thesubmission of a planning application for the development on Shetland CentralMainland of a wind farm with around 600MW of capacity. In addition to beingsubject to planning consent, the proposal is dependent upon demonstrating toOfgem the viability of a sub-sea cable from Shetland to the mainland ofScotland. Emerging Technologies The need to bring forward emerging renewable energy technologies and to increasetheir deployment will be vital to the achievement of the UK's goals of improvingthe security of energy supplies, because they use indigenous natural resources,and reducing emissions of carbon dioxide. In support of these goals, SSE hasidentified 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 investin marine energy and to establish a position as a leading developer ofmarine-based electricity generation technologies, building on the work done byits subsidiary, Renewable Technology Ventures Ltd (RTVL). It has now mergedRTVL with Aquamarine Power Ltd, an Edinburgh-based company which specialises inmarine energy conversion and its commercial applications, to create an enlargedmarine energy company which has retained the name Aquamarine. The enlarged company, in which SSE is also making an initial investment of£6.3m, and in which it owns 50% of the issued share capital, is initiallyfocusing on delivering RTVL's Neptune tidal power device and Aquamarine's Oysterwave power device for comprehensive testing at the European Marine Energy Centrein Orkney. The Oyster device is expected to be deployed next year. In June 2007, SSE agreed to invest £10m in a new fund (the Sigma SustainableEnergy Fund II) to target sustainable, renewable and energy efficienttechnologies. The fund will be managed by a subsidiary of Sigma Capital Group,an AIM-listed fund management company that also owns Sigma TechnologyInvestments Limited, an investor in the fund. Bank of Scotland Corporate, WestCoast Capital and Consensus Business Group are also investing in the fund, whichhas a value of £45m. The fund will have an investment period of five years and has been establishedfor investment mainly in the UK but also throughout Europe. SSE expects thatits investment will yield business development opportunities in generation,storage and consumption technologies which have the potential to help the UKmeet its target for reducing emissions of carbon dioxide and also help to reducedependence on fossil fuels. SSE is already an investor in a separate £6m SigmaSustainable Energy Fund, which has made investments in three separate companies. In August 2007, SSE made a further £1.1m investment in Solarcentury Holdings Ltdas part of a new £13.5m round of financing to enable Solarcentury to fund itsproduct development and international expansion strategy. This leaves SSE witha 12.3% share in the company and implies that its initial investment of £1.0m inSolarcentury is now valued at £2.5m. Its further investment in the Solarcenturybusiness reflects the success of the existing relationship between the twobusinesses and confidence in the future of this sector. SSE's subsidiary,Southern Electric Contracting (SEC), is Solarcentury's preferred installer, andSSE has also developed a new tariff for householders and small businesses whichexport power to the electricity network generated via solar photovoltaic panelsinstalled 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 thecompany. In September 2007, SSE and Carbon Trust Enterprises entered into a joint ventureto support InSource Energy Limited - a bio-waste energy business created by theCarbon Trust. SSE has agreed to invest up to £2.7m to acquire up to 40% ofInSource Energy plus up to a further £10m to fund the company's projects as itenters the next phase of development. In total, in the first half of 2007/08, SSE has committed to investing up to£30m in emerging technologies, in recognition of the fact that the developmentof secure, reliable and cost-effective low carbon energy technologies is part ofits strategy to retain leadership in sustainable energy production. In September 2007, SSE advised the Chair of the Energy Technologies Institutethat it will not become a member now that the option of joining it in return forsupport of up to £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 withuniversities and other research establishments with a view to making appropriateinvestments in new technologies as an alternative to formal membership of theETI. It also hopes that it will be able to offer financial and other support tospecific ETI research themes. Energy Supply SSE's stated objective for its energy supply business in 2007/08 is tocapitalise further on its strong regional brands, best-in-sector customerservice, responsible pricing policy and range of value-adding offers to increasefurther its number of customers. It had 8.3 million energy supply-related customers at the start of November2007, a net gain of 800,000 in 12 months. This comprises: 5.125 millionelectricity customers; 2.995 million gas customers; 130,000 'talk with' telecomscustomers; and 50,000 'shield' gas boiler maintenance customers. Overall, SSE has achieved a net customer gain of 3.8 million since the start of2002, an increase of 84%. According to Datamonitor, it is now the UK's secondlargest supplier of electricity and gas to domestic customers. Within thetotal, SSE's business customers now cover 383,000 sites throughout Great Britainand over 1.6 million customers have 'loyalty' products such as 'energyplusArgos', which rewards customers with money off discount vouchers. In July 2007, Ofgem published its Domestic Retail Market Report, which confirmedthat SSE is the UK's most successful supplier in terms of the share of theelectricity supply market held by incumbent suppliers in the 14 regions of GreatBritain. It stated that SSE had 80% of the electricity customers in theScottish Hydro Electric area, 70% of the customers in the SWALEC area and 62% ofthe customers in the Southern Electric area. The next highest share of themarket 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 Disclosureinformation by electricity suppliers, enabling customers to see at a glance whatpercentage of electricity their supplier sources from renewable, nuclear,gas-fired or coal-fired plants. Of the UK's main energy suppliers, SSE suppliedcustomers with the highest proportion of electricity from renewable sources,with 10.2% of its electricity supplied coming from renewable sources, comparedwith a UK average of 4.7%. Customer Service Central to success in Energy Supply is the maintenance of the highest possiblestandards of customer service. Despite the significant growth in customernumbers, SSE secured during the first half of 2007/08 another reduction, of22.7%, in the number of customer complaints sent to energywatch for resolution,to 360. This follows the significant reductions achieved during each of theprevious four years. On 24 October, energywatch announced that SSE wasresponsible for the fewest number of complaints per 100,000 customers in theUK's energy supply industry. A month earlier, it was announced that SSE hadcome top in an energywatch survey of small business customers' satisfaction withtheir energy suppliers. On 31 October, uSwitch.com reported that SSE was ranked top for customersatisfaction for the fourth time in a row in its latest independent CustomerSatisfaction Report and it described SSE as 'simply the best'. In the results of the JD Power 2007 UK Electricity and Gas Customer SatisfactionStudy, announced on 1 November, SSE was ranked the top-performing supplier inboth electricity and gas. This was the first time one supplier had achieved thetop ranking in both sectors. In electricity, it was the only supplier toachieve overall customer satisfaction which was 'significantly better' thanaverage and in gas it was one of just two suppliers to deliver 'significantlybetter' than average customer satisfaction. More changes have been introduced within SSE's Customer Service division, inline with the performance improvement programme which started in 2006. InSeptember 2007, there was the implementation of the biggest-ever telephonychange in SSE. Telephony and billing systems were combined, so that they nowrecognise a customer's phone number and bring up their details on the screen infront of the customer service adviser. This saves an average of 30 seconds percall and adds the equivalent of around 100 extra people to take calls. Theprogramme 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 hasadopted a strategy around competitively priced energy and excellent customerservice, which benefits all of its customers, including those who are fuel poorand hard to reach' and concluded that SSE's fuel poor customers are around £40per annum better off as a result of its competitive pricing strategy. SSE'sapproach is to keep prices as low as possible for all customers and to target ameaningful 'social' tariff to the customers who need it most. It has set atarget to double the number of customers on its 'energyplus care' tariff, to25,000, by March 2008. Product Marketing Energy supply remains intensely competitive and, in addition to responsiblepricing, greater success in gaining and retaining customers' loyalty is key tolong-term success. The performance improvement programme in the CustomerService division is designed to achieve that, as is product development. In line with that, SSE has launched 'better plan'. The product, which isavailable under the Southern Electric, SWALEC and Scottish Hydro Electricbrands, 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 theUK to encourage customers to use less of its core products. The 'better plan'gives customers 10 different ways to earn cash credits, including reducing theirenergy consumption, which can then be used towards their SSE energy bills orfurther energy efficiency measures. Homes account for a quarter of the UK'scarbon emissions, so in addition to providing customers with a means of savingmoney, 'better plan' enables them to deliver direct environmental benefits. Ittherefore represents responsible product development. The launch of 'better plan' is a significant milestone for SSE's energy supplybusiness, the future progress of which will be based on continued responsiblepricing and ongoing improvements in customer service, in addition to effectiveand responsible product development and deployment. It should, therefore, beable 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 ofenergy-related services and supplying energy on an energy services basis helpsshift the focus of producers and customers from the supply of units ofelectricity and gas to the supply of the overall services for which energy isused. SSE began the phased introduction of a new domestic boiler installation andmaintenance and repair service for gas central heating systems during 2006. Theproduct features an annual inspection, full breakdown and emergency cover and a24-hour, 365-day manned customer helpline. It covers customers' entire gascentral heating system, including the boiler, pipe work, radiators, cylindersand tanks. By the end of October 2007, the service had already attracted 50,000customers. The number of postcode areas covered by the service has nowincreased from the original 13 to 40 and this will increase to 43 during therest of 2007/08. In June 2007, the Department for Business, Enterprise and Regulatory Reformannounced that around 40,000 households, including 28,000 SSE customers, wouldbe taking part in energy saving trials in a bid to cut household bills and helptackle climate change. The trials, which are administered by Ofgem, featurestate-of-the-art 'smart' meters and clip-on real-time display units which tellhouseholders how much energy they are using. They are intended to provide firmevidence about the benefits that smart meters and display units can bring. TheEnergy White Paper, published in May 2007, stated that subject to the results ofthese trials the UK government intends to work with energy companies to roll outsmart 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 £6m for a 30% share of the business, which is anestablished energy services contractor which specialises in the design, supplyand installation of Combined Heat and Power (CHP) and District Heating systemsin the commercial, industrial and residential sectors. The investment will allowVital to build on its existing position as the leading provider of communityenergy solutions in the UK. SSE recently reached an agreement with Berkeley Homes (East Thames) Ltd, toprovide the energy services requirements for its major development, The Warren,in south east London. Under the ESCO (Energy Services Company) Agreement, SSEwill be responsible for installing an energy centre, including a CHP plant,which will serve over 450 apartments, a nursery unit, primary care trust andcommercial units. SSE will also undertake all associated heat, electricity andgas infrastructure, metering and billing customer services, long-term operationsand maintenance services and all fuel procurement requirements. Vital Energi isSSE's main contractor on this development and is responsible for all elementsrelating to the installation of the required energy centre and the heatdistribution network. Slough Heat and Power Ltd SSE has entered into an agreement with SEGRO plc to acquire Slough Heat andPower Ltd, an integrated energy business, for a total cash consideration of£49.25m. The agreement is subject to a condition precedent which, oncesatisfied, should result in ownership transferring to SSE by the end of December2007. 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 ofaround 80MW, which produces electricity plus heat which is distributed via asteam and water distribution network; around 100km of underground electricitynetwork plus substatations; and around 3,000 industrial, commercial and domesticenergy customers. The CHP plant is the UK's largest dedicated biomass energyfacility. With its mix of assets and customers, Slough Heat and Power Ltd ishighly compatible with SSE's business model and SSE expects to secureefficiencies 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 enterinto and compete in the energy markets in Ireland. The Licences are owned,operated and managed by its subsidiary, SSE (Ireland) Ltd, which is registeredin Dublin. It has also secured 45MW of the 500MW of capacity on theinterconnector between Scotland and Ireland. SSE began actively trading in the Irish electricity market on 1 November, usingits Great Britain generation portfolio to provide power to it via theinterconnector. It intends to enter the electricity and gas supply marketssimultaneously next year, and will concentrate first on providing electricityand gas products for the industrial and commercial market before expanding intothe 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£24.2m to £29.3m during the first six months of the year. Contracting SSE's Contracting business, Southern Electric Contracting (SEC), has continuedto make significant progress during 2007/08, with its order book now exceeding£100m for the first time. The order book has been supported by significant newcontract wins with a number of leading organisations, such as VosperThorneycroft, Reading University and Marks & Spencer. This puts the business ina good position for future growth, as does the recruitment of almost 200apprentice electricians during the first half of the year. A major proportion of SEC's business is 'repeat' and so it is especiallyimportant that it delivers a high standard of service to customers in all of thesectors in which it operates. The benefits arising from this focus on customerservice can be demonstrated by the success of PriDE, SEC's joint venture withInterserve, which is responsible as the prime contractor for estate managementand construction at over 100 Ministry of Defence sites in south-east England, insecuring a £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 itspartnership with the asset finance division of The Royal Bank of Scotland, hasPrivate Finance Initiative (PFI) contracts to replace and maintain street lightsfor four local authorities in England. These and its other maintenancecontracts are performing well, and it is has submitted ISOS (invitation tosubmit outline solutions) documents in respect of four new PFI streetlightingschemes recently announced by the Department for Transport, Connections SSE's Connections business completed over 21,000 electrical connections duringthe first half of 2007/08. In addition, it has continued to develop itsportfolio of electricity networks outside the Southern Electric and ScottishHydro Electric Power Distribution areas. It now owns and manages 28 energisedelectricity networks outside these two areas, with development work ongoing at anumber of these, and a further 13 are under construction, including Thamesmeadin London, Western Harbour in Edinburgh and Leckwith Stadium in Cardiff. Intotal, SSE has 300MW of energised networks capacity, with networks totalling anadditional 100MW currently under construction. Key clients are from the UK landdevelopment sector and currently include the London Development Agency, TilfenLand, Land Securities, Hammersons, Cofton and St James Group. SSE's Connections business is also a licensed gas transporter, owning andoperating gas mains and services in many parts of the country. The number of newpremises connected to its gas networks continued to grow, and during the firsthalf of the year, it connected a further 4,000 premises, taking the total numberof connections to more than 48,000. On 3 October, Ofwat announced that SSE's subsidiary, SSE Water (SSEW), willbecome the first new company to offer both water and sewerage services sinceprivatisation in 1989. This followed the granting of an 'inset appointment' toSSEW, which allows for one supplier to be replaced by another for a definedgeographical area. SSEW will provide water and sewerage services to a housingdevelopment near Salisbury. Ofwat said 'SSE has a proven record for its highlevels of customer service. Ofwat expects SSEW to set a benchmark in the waterindustry for similar high levels of customer service.' The granting of the inset appointment will enable SSE to provide a morecomprehensive multi-utility solution to customers in the property developmentand housebuilding sectors, through being able to install, own, operate andsupply water and sewerage services alongside SSE's existing electricity and gasservices. SSE expects to make further applications for inset appointments inother 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 withcustomers in central southern England and the north of Scotland. It supplies,installs and maintains domestic meters and carries out metering work in thecommercial, industrial and generation sector. It also offers data collectionservices to the domestic and SME sectors. It has also expanded significantly during 2007/08, with the in-sourcing of meterreading operations in south west England and meter reading operations and meteroperator work in south Wales and central and southern Scotland. This hasresulted in the transfer of 158 employees to SSE, taking the total in theMetering business to over 600, and increasing its geographic coverage by 33%.The ongoing development of SSE's Metering business is designed to result in bothefficiency gains and in high standards of service for SSE's customers and tosupport the energy supply business. GAS STORAGE Gas Storage - Operations In the six months to 30 September 2007, Gas Storage delivered an operatingprofit* of £25.5m, a decrease of 12.1% compared with the previous year (whichSSE said in its Annual Report 2007 was a high point in gas storageprofitability) but an increase of 87.5% compared with September 2005. The endof September 2007 marked the fifth anniversary of SSE's entry into the GasStorage business, with the acquisition of the 325 million cubic metre (mcm)facility at Hornsea for £132m. In the five years since then, SSE's Gas Storageactivities have delivered a total operating profit* of £145m. Gas Storage - Investment SSE's joint venture with Statoil (UK) Ltd to develop at Aldbrough what willbecome the UK's largest onshore gas storage facility is continuing to progress.SSE is investing £150m in Aldbrough, out of a total of £225m. With a total newcapacity of around 420 million cubic metres, of which SSE will have theownership interest in 280 million cubic metres, Aldbrough will provide valuablegas storage for the UK energy industry. In its Interim Management Statement in July 2007, SSE said the commissioning ofthe 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 atAldbrough has started, with the next key milestone in this process beingdewatering and injection of gas into the first three of the nine caverns. Thisis subject to a number of factors and, as a result, is now most likely to takeplace in the Spring of 2008. The dewatering process takes a further threemonths before the caverns are fully operational. All of this means that thedevelopment as a whole is taking longer than was expected when it started in2004. In May 2007, SSE and Statoil (UK) Ltd secured consent from East Riding ofYorkshire Council to increase the storage capacity at the Aldbrough site beyondthat currently under development and the necessary agreement under Section 106of the Town and Country Planning Act has now been reached. They are now able todevelop a further nine gas storage caverns, taking the total to 18. Ifdeveloped in full, this would approximately double the amount of gas that can bestored, to over 800mcm. After the completion of the extension to its maximumcapacity, the Aldbrough facility would be able to provide enough gas in a day tosupply around 13 million homes. It is expected that each company wouldcontribute 50% of the cost of the extension in return for ownership of 50% ofthe additional capacity. Jacobs Engineering Group has been awarded the contractto provide programme management, design, and construction management servicesfor the extension. TELECOMS SSE's combined Telecoms business (SSE Telecom and Neos) achieved an operatingprofit* of £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, operatingprofit* was £6.0m, an underlying increase of 22.4%). The business offerscustomers a national telecoms network, and has a UK-wide sales force and acompetitive range of products targeted at commercial and public sectorcustomers. As a subsidiary of SSE, it is also able to position itself as one ofthe UK's most financially secure telecoms network operators, which gives animportant competitive advantage. In July 2007 it entered into an agreement with The Wireless InfrastructureCompany Limited under which it sold its telecoms sites assets, involving over220 tower sites, for a total consideration of £79m, excluding working capital,at a gain before tax of £55m. The assets disposed of contributed approximately0.3% of SSE's profit in 2006/07. The disposal reflected SSE's commitment tocomplete 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 networkfrom TeliaSonera International Carrier UK Ltd for a total consideration of£12.5m. The acquisition means that the network owned and operated by SSE'stelecoms subsidiary, Neos Networks, has increased to 3,500km and SSE's totaltelecoms network, including leased fibre optic, has increased to over 8,000km.The asset acquired by SSE comprises a duct containing fibre running betweenLondon, Bristol, Manchester and Leeds plus ten operational repeater sites. Itprovides SSE with owned fibre capacity throughout the UK, together with localconnectivity that could be integrated into its existing network. The enlargednetwork will enable Neos to reduce its costs and to provide a greater volume oflarge bandwidth services. CAPITAL AND INVESTMENT EXPENDITURE SSE's substantial capital and investment programme is continuing, with theobjective of upgrading existing assets and developing new assets and therebycontributing to the ongoing expansion of the scale and scope of its activities.Capital and investment expenditure (excluding SGN) totalled £363.3m during thefirst half of 2007/08, compared with £288.0m in the previous year. Capital expenditure in Power Systems was £115.6m, compared with £90.6m in theprevious year, in line with the investment focus described under 'ElectricityNetwork Investment'. The largest project currently in the programme is theinstallation of the two new 132kV underground cables between Bramley andBasingstoke. In addition, there was investment of £146.1m for growth in Generation in thefirst half of the year, with the Marchwood development, construction work atGlendoe, the installation of FGD equipment and other work such as theinstallation of re-designed high-pressure turbines and static blades atFiddler's Ferry and Ferrybridge and investments in emerging technologies. As well as Power Systems and Generation, £20.4m was invested in the new gasstorage facility at Aldbrough. Within the overall total, capital expenditure for growth was £225.5m during thefirst half of 2007/08. This mainly comprised electricity generation and gasstorage. Capital expenditure will continue to be substantial and for 2007/08 asa whole, it is on course to be around £850m. All investments are expected toachieve returns which are greater than the cost of capital, enhance earnings andcontribute to dividend growth. FINANCIAL MANAGEMENT Net Debt and Cash Flow As at 30 September 2007, SSE's net debt was £2.05bn, compared with £2.23bn at 31March 2007. Underlying cash generated from operations was very strong in thefirst half of the year, reflecting timely collections from electricity and gascustomers and the sale of the telecoms sites assets. This enabled SSE tofinance increased capital expenditure, the dividend payment and share buy backswhile reducing net debt. Net debt also benefited from the conversion of £133.6mof the Convertible Bond (see below). Borrowings and Facilities At 30 September 2007, 81.6% of SSE's borrowings were at fixed rates, aftertaking account of interest rate swaps. SSE had undrawn committed bank facilitiesof £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 andflexibility, with a range of maturity dates. Its average debt maturity profileas at 30 September 2007 was 14.9 years, compared with 13.5 years as at 30September 2006. Net Finance Costs The table below reconciles reported net finance costs to adjusted net financecosts, which SSE believes is a more meaningful measure. As in 2006/07, netincome associated with pension scheme assets and liabilities is no longerexcluded in arriving at adjusted net finance costs. In line with this, SSE'sadjusted net finance costs during the first half of 2007/08 were £75.1m,compared with £74.6m in the previous year. Sept 07 Sept 06 £m £m Reported net finance costs 17.0 31.9add/(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 theperiod 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 awhole is currently expected to be around eight times (including interest relatedto SGN), compared with 7.1 times in 2006/07. For the first six months it was8.6 times, compared with 6.4 times in the six months to 30 September 2006, andexcluding interest related to SGN it was 15.5 times (9.8 times in the six monthsto 30 September 2006). Within the adjusted net interest costs of £85.3m, the element relating to SGN'snet finance costs was £40.5m (compared with £31.8m in the previous year), afternetting loan stock interest payable to SSE. Its contribution to SSE's profitbefore tax* was, therefore, a profit of £0.6m, compared with a loss of £9.8m inthe previous year. The seasonal nature of SGN's business means that the keyperformance period is the second half of the financial year. TAX To assist the understanding of SSE's tax position, the adjusted current taxcharge is calculated as follows: Sept 07 Sept 06 £m £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. Theimpact of SSE's higher capital expenditure programme and the changes introducedin Budget 2007 are likely to have a positive impact on the effective current taxrate in future years. The reported tax charge was 19.0%, compared with 28.0% inthe previous year. This reflects the restatement of the deferred tax positionfollowing the corporation tax rate change introduced in Budget 2007. BALANCE SHEET In line with its core financial principles, SSE continues to maintain one of thestrongest balance sheets in the global utility sector. This continues to giveit significant competitive advantage. It enables SSE to pay interest at lowerrates than would otherwise be the case and also enables it to respond speedilyto opportunities which emerge to invest in, or acquire, assets. In addition,events in the capital markets over the past few months have again demonstratedthe risks associated with excessive debt. In line with the IAS 19 treatment of pension scheme assets, liabilities andcosts, pension scheme liabilities of £195.1m and a pension scheme asset of£177.1m are recognised in the balance sheet at 30 September 2007, gross ofdeferred tax. Overall, this represents a reduction in net liabilities of £73.9mcompared with the position at March 2007. During the first six months of 2007/08, employer cash contributions to theScottish Hydro Electric scheme amounted to £6.9m. Contributions to the SouthernElectric scheme, including deficit repair contributions of £17.7m, amounted to£26.1m. As part of the Distribution Price Control for 2005-2010, it was agreedthat allowances for 76% of deficit repair contributions should be included inprice controlled revenue. At 30 September 2007, there was a net asset arising from IAS 39 of £49.0m,before tax, compared with a net asset of £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 ownshares for cancellation, which contributed to the enhanced earnings per share inthe first half of the year. The weighted average price per share (before costs)was £14.30, with the purchase price ranging from £13.87 to £14.74. Theaggregate consideration was £230.5m and the purchases represented 1.86% of thecalled-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 approachadopted 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 October2009, which had an initial nominal value of £300m. To date, holders haveexcercised their option to exchange their bonds for Ordinary Shares in theCompany at £9 per share, in respect of bonds totalling £133.6m nominal value.New shares issued as a consequence of these conversions total 14.8 million. Anominal value of £166.4m or 55.5% of the original bond issue, remainsoutstanding. CORPORATE RESPONSIBILITY Risk Management SSE actively monitors the risk factors that may affect it. The principal risksand uncertainties, and SSE's approach to addressing them, were set out in theAnnual Report 2007. They are: the operation of assets, equipment and processes;financial risks, such as interest rate or commodity exposure; the impact ofpublic policy or regulatory developments in the areas of energy and theenvironment; and the impact of the weather on SSE's interests in the generationof electricity from renewable sources, in energy supply and in energydistribution. These remain the principal risks and uncertainties for the secondhalf of this financial year and beyond, and they are regularly considered by theBoard. In terms of transactions with related parties, there has been no change to thenature of these which has materially affected the financial position orperformance of SSE during the period. Safety and the Environment SSE aims to create value for shareholders by running the business with a strongemphasis on its six core values, which include safety and sustainability. During the first six months of the year, the number of lost time and reportableaccidents within the company was five, compared with six in the previous year.The number of serious, or potentially serious, road traffic accidents involvingemployees driving company vehicles was four, compared with six in the previousyear. 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. SSEpublished a series of environmental targets in its Corporate ResponsibilityReport 2007 and is on course to deliver improved environmental performance inmany key activities during 2007/08. STRATEGY AND OUTLOOK SSE's strategy is to deliver sustained real growth in the dividend payable toshareholders through the efficient operation of, and investment in, a balancedrange of regulated and non-regulated energy-related businesses. The day-to-dayimplementation of this strategy continues to be governed by the six keyfinancial principles set out in the Annual Report 2007. The Energy White Paper in May 2007 confirmed that there are two major challengesfacing the UK, and these set the context for SSE's future development. Thefirst is the need to tackle climate change by cutting greenhouse gas emissionsand the second is the need to ensure there are secure energy supplies as UKreserves of oil and gas decline and competition for energy resources increases. These challenges present SSE with major investment opportunities in electricitygeneration and in gas storage. There are also equally important investmentopportunities in ensuring that the country's electricity and gas networkscontinue 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 yearsahead. SSE also expects to enhance value through continuous improvement of itsoperations and thereby generate electricity, distribute and supply electricityand gas and provide other energy-related services with the maximum possibleefficiency and effectiveness and in a way which delivers clear benefits forcustomers and shareholders. This emphasis on operations and investment means SSE's assets in electricitygeneration, energy networks and energy supply, gas storage and other businesseswill increase significantly in the next few years, and so its recent increase inscale will continue. In this context, the successful completion of SSE'scurrent portfolio of major projects is of key importance. All of this means that while SSE is clearly the broadest-based UK energycompany, it is not yet the largest participant in any part of it, except in thegeneration of renewable energy. It has, therefore, substantial scope for futuregrowth. At the same time, SSE is complementing its existing programme of investment byidentifying opportunities in new areas such as the water sector and emergingtechnologies and in new markets such as Ireland. This will broaden its scope ina measured and controlled way while positioning it to identify additionalpotential for growth in new areas in the next few years. Where prices for appropriate assets have been commensurate with value creationand consistent with its financial principles, SSE has supplemented itsinvestment programme with acquisitions, and this will continue to be itsapproach. All of this means SSE continues to be in a very good position to expand itsbusinesses further and to deliver its core objective of sustained real growth inthe dividend. In May 2007, it set out its long-term ambition to again doublethe dividend and that is its over-riding priority for shareholders in the yearsahead. Investor Timetable Ex-dividend date 20 February 2008Record date 22 February 2008Payment date 25 March 2008Preliminary results 29 May 2008AGM (Bournemouth) 24 July 2008 Disclaimer This interim results statement contains forward-looking statements aboutfinancial and operational matters. Because they relate to future events and aresubject to future circumstances, these forward-looking statements are subject torisks, uncertainties and other factors. As a result, actual financial results,operational performance and other future developments could differ materiallyfrom 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 ofFinancial 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 Statementfor 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 £m £m £m £m £m £m Revenue 5 5,646.9 - 5,646.9 4,398.2 - 4,398.2Cost 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 2.9 760.8Operating costs (279.5) - (279.5) (261.1) - (261.1)Otheroperatingincome - 55.0 55.0 - 24.5 24.5 Operatingprofit beforejointlycontrolledentities andassociates 668.4 38.7 707.1 496.8 27.4 524.2 Jointlycontrolledentities andassociates:Share ofoperatingprofit 71.4 - 71.4 44.3 0.9 45.2Share ofinterest (63.1) - (63.1) (55.8) - (55.8)Share ofmovement onderivatives - 2.3 2.3 - 3.4 3.4Share of tax (5.1) 28.0 22.9 (0.3) (0.3) (0.6) Share ofprofit /(loss) onjointlycontrolledentities andassociates 3.2 30.3 33.5 (11.8) 4.0 (7.8) Operatingprofit 5 671.6 69.0 740.6 485.0 31.4 516.4Finance income 7 101.4 - 101.4 97.1 - 97.1Finance costs 7 (116.9) (1.5) (118.4) (117.9) (11.1) (129.0) Profit beforetaxation 656.1 67.5 723.6 464.2 20.3 484.5Taxation 8 (184.1) 46.8 (137.3) (130.5) (5.0) (135.5) Profit for theperiod 472.0 114.3 586.3 333.7 15.3 349.0 Attributable to: Equity holdersof 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 pershare (pence) 10 66.8p 39.5p Dividends paidin the period(£m) 9 345.5 281.3 The accompanying notes are an integral part of this interim statement. Consolidated Condensed Income Statementfor 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 £m £m £m Revenue 5 11,867.1 - 11,867.1Cost of sales (10,247.7) 61.3 (10,186.4)Gross profit 1,619.4 61.3 1,680.7Operating costs (557.5) - (557.5)Other operating income - 33.0 33.0Operating profit before jointly controlled entities and 1,061.9 94.3 1,156.2associatesJointly controlled entities and associates:Share of operating profit 169.2 0.9 170.1Share of interest (117.9) - (117.9)Share of movement on derivatives - 5.5 5.5Share of tax (31.8) (2.0) (33.8)Share of profit on jointly controlled entities and 19.5 4.4 23.9associatesOperating profit 5 1,081.4 98.7 1,180.1Finance income 7 193.4 - 193.4Finance costs 7 (230.9) (10.6) (241.5)Profit before taxation 1,043.9 88.1 1,132.0Taxation 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 96.5pDiluted earnings per share (pence) 10 93.9p Dividends paid in the year (£m) 9 411.3 Consolidated Condensed Balance Sheetas at 30 September 2007 At 31 At 30 At 30 March September September 2007 2007 2006 £m Note £m £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 Expensefor the period 1 April 2007 to 30 September 2007 Year Six months Six monthsended 31 ended 30 ended 30 March September2007 September 2007 2006 £m £m £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 Statementfor the period 1 April 2007 to 30 September 2007 Year Six months Six monthsended 31 ended 30 ended 30 March September September 2007 2007 2006 £m £m £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 Statementsfor the period 1 April 2007 to 30 September 2007 1. Condensed Financial Statements The financial information set out in these interim statements does notconstitute the Company's statutory accounts for the periods ended 30 September2007, 31 March 2007 or 30 September 2006 within the meaning of Section 240 ofthe Companies Act 1985. Statutory accounts for the year ended 31 March 2007,which were prepared in accordance with International Financial ReportingStandards as adopted by the EU (adopted IFRS), have been reported on by theCompany's auditors and delivered to the Registrar of Companies. The report of the auditors was (i) unqualified (ii) did not include reference toany matters to which the auditors drew attention by way of emphasis withoutqualifying their report and (iii) did not contain statements under section 237(2) or (3) of the Companies Act 1985. The interim financial information isunaudited but has been formally reviewed by the auditors and their report to theCompany is set out on page 38. The financial information set out in these interim statements has been preparedin 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 accountingpolicies and presentation that were applied in the preparation of the Company'sconsolidated financial statements for the year ended 31 March 2007. Thefollowing accounting standards and interpretations have been adopted by theGroup from 1 April 2007: • IFRS 7 Financial Instruments: Disclosures • IFRIC 8 Scope of IFRS 2 • IFRIC 9 Reassessment of Embedded Derivatives • Amendment to IAS 1 Presentation of Financial Statements - Capital Disclosures The adoption of these standards and interpretations does not have anysignificant effect on the policies applied in the preparation of theconsolidated financial statements for the year ended 31 March 2007. In the process of applying the Group's accounting policies, managementnecessarily makes judgements and estimates that have a significant effect on theamounts recognised in the condensed financial statements. Changes in theassumptions underlying the estimates could result in a significant impact to thestatements. The most critical of these accounting judgement and estimation areasare noted in the Company's consolidated financial statements for the year ended31 March 2007. 3. Basis of consolidation of the Group The interim statements consolidate the interim financial information of Scottishand Southern Energy plc and its subsidiaries together with the Group's share ofthe trade and net assets of its jointly controlled entities and associates. The results of subsidiary undertakings acquired or sold are consolidated fromthe date that control commences until the date control ceases using theacquisition method of accounting. Investments in jointly controlled entities areaccounted for under the equity method of accounting from the date that jointcontrol commences until the date joint control ceases. Jointly controlledoperations are businesses which use assets and liabilities that are separablefrom the rest of the Group. In these arrangements, the Group accounts for itsown share of property, plant and equipment, carries its own inventories, incursits own expenses and liabilities and raises its own finance. The Group's shareof the total recognised gains and losses of associates are included on an equityaccounted basis from the date that significant influence commences until thedate significant influence ceases. 4. Seasonality of operations Certain activities of the Group are affected by weather and temperatureconditions. In Energy Systems, the volumes of electricity and gas distributed ortransmitted across network assets are dependent on levels of customer demandwhich are generally higher in winter months. In Generation and Supply, notableseasonal effects include the impact on customer demand of warmer temperatures inthe first half of the financial year and also the related impact of demand onwholesale commodity prices and the timing of retail price changes. Otherbusinesses 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 managementpurposes and reflect the day-to-day management of the business. The Group'sprimary segments are the distribution and transmission of electricity in theNorth of Scotland, the distribution of electricity in the South of England(together referred to as Power Systems), the generation and supply ofelectricity 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 gasin Scotland and the South of England, is included as a separate segment whereappropriate due to its significance. Analysis of revenue and operating profit by segment is provided below. Allrevenue and profit before taxation arise from operations within Great Britainand Ireland. Notes on the Condensed Interim Statementsfor 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 £m £m £m £m £m £m £m £m £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 93.5 677.8 288.7 389.1 324.7 136.7 188.0 313.3 139.7 173.610,977.9 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 473.0 181.4 291.6 400.9 165.8 235.112,515.1 648.0 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'sshare being £135.6m (September 2006 - £113.4m, March 2007 - £297.3m), is notrecognised 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 £m £m £m £m £mPower Systems Scotland 67.0 - 67.0 - 67.0 England 97.5 - 97.5 - 97.5 164.5 - 164.5 - 164.5Scotia Gas Networks plc 41.1 (55.7) (14.6) 25.3 10.7Energy Systems 205.6 (55.7) 149.9 25.3 175.2Generation and Supply 474.3 (12.4) 461.9 (11.3) 450.6Other businesses 63.8 (0.1) 63.7 55.0 118.7 743.7 (68.2) 675.5 69.0 744.5Unallocated 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 £m £m £m £m £mPower Systems Scotland 66.6 - 66.6 - 66.6 England 95.9 - 95.9 - 95.9 162.5 - 162.5 - 162.5Scotia Gas Networks plc 22.0 (45.0) (23.0) 3.4 (19.6)Energy Systems 184.5 (45.0) 139.5 3.4 142.9Generation and Supply 298.0 (11.1) 286.9 28.0 314.9Other businesses 62.2 - 62.2 - 62.2 544.7 (56.1) 488.6 31.4 520.0Unallocated expenses (ii) (3.6) - (3.6) - (3.6) 541.1 (56.1) 485.0 31.4 516.4 Notes on the Condensed Interim Statementsfor 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 £m £m £m £m £mPower Systems Scotland 144.0 - 144.0 - 144.0 England 224.0 - 224.0 - 224.0 368.0 - 368.0 - 368.0Scotia Gas Networks plc 103.1 (122.2) (19.1) 3.8 (15.3)Energy Systems 471.1 (122.2) 348.9 3.8 352.7Generation and Supply 642.6 (27.1) 615.5 94.9 710.4Other businesses 125.2 (0.4) 124.8 - 124.8 1,238.9 (149.7) 1,089.2 98.7 1,187.9Unallocated 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 theGroup's share of interest, movements on financing derivatives and tax fromjointly controlled entities and associates. The share of Scotia Gas Networks plcinterest includes loan stock interest payable to the consortium shareholders.The Group has accounted for its 50% share of this, £17.6m (2006 - £18.0m, March2007 - £35.8m), as finance income (note 7). (ii) Unallocated expenses comprise corporate office costs which are not directlyallocable to particular segments. c) Capital additions to Property Plant and Equipment March September September 2007 2007 2006 £m £m £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 Statementsfor 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 WirelessInfrastructure Company Limited, for a total potential consideration of £79.0m.The gain recognised on this disposal at September was £55.0m. This gain has beendisclosed separately in the income statement. In previous periods, the Group financial statements included net dividendsreceived in relation to the administration of TXU Europe Energy Trading Limitedwhich had been placed into administration in 2002 (2006 - £24.5m, March 2007 -£33.0m). In addition to this, the Group's share of the net dividend from theadministration of TXU Europe Energy Trading Limited recognised as income by anassociate company, Barking Power Limited was also shown separately within theshare of operating profit from jointly controlled entities and associates. Theseamounts were 2006 - £0.9m and March 2007 - £0.9m, respectively. The Group has separately recognised the tax effect of the exceptional items andcertain re-measurments summarised. In addition to this, the Group has alsoseparately disclosed the effect of the announced change in the base corporationtax rate of 30% to 28%, which is effective from 1 April 2008. This has an impacton any temporary differences which will exist at 1 April 2008 (note 8). TheGroup's share of tax from jointly controlled entities and associates isrecognised in operating profit. ii) Certain re-measurements Certain re-measurements arising from IAS 39 are disclosed separately to aidunderstanding of the underlying performance of the Group. This category includesthe 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 £m £m £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 Statementsfor 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 £m 2007 2006 £m £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 £m 2007 2006 £m £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 Statementsfor the period 1 April 2007 to 30 September 2007 8. Taxation The income tax expense reflects the anticipated effective rate of tax on profitsbefore taxation for the Group for the year ending 31 March 2008, taking accountof the movement in the deferred tax provision in the period so far as it relatesto items recognised in the income statement. In the period, it has been confirmed that the corporation tax rate applicable tothe Group will change from 30% to 28% from 1 April 2008. Temporary differenceswhich exist at 1 April 2008 will reverse at 28% rather than 30%, which was thebasis at 31 March 2007. Consequently, the Group has recognised the followingcredits in respect of this in the period to 30 September 2007: £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 excludingexceptional items, IAS 39 and IAS 32; and adjusted for tax on associates andjointly controlled entities and net pension finance income for the period can berepresented: 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 yearended 31 March 2007 (2006 - 32.7p) was approved at the Annual General Meeting on26 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 proposedand 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 interimdividend has not been included as a liability in these financial statements. Notes on the Condensed Interim Statementsfor 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 thenet profit attributable to ordinary shareholders and a weighted average numberof ordinary shares outstanding during the period ended 30 September 2007. Allearnings are from continuing operations. Adjusted earnings per share Adjusted earnings per share has been calculated by excluding the charge fordeferred tax, net finance income relating to pensions, items disclosed asexceptional, and the impact of IAS 39. Year ended Six months ended Six months ended 31 March 2007 30 September 2007 30 September 2006Earnings Earnings Earnings Earnings Earnings Earnings per per per £m share £m share £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 Statementsfor the period 1 April 2007 to 30 September 2007 11. Loans and other borrowings March September September 2007 2007 2006 £m £m £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 £m £m £m £m Cash and cash equivalents 56.1 (28.9) - 27.2Bank 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 andborrowings. For cash flow purposes, these have been included as cash and cashequivalents. The non-cash movement in debt relates to the partial conversion ofthe convertible bond. ii. Repayment of borrowings In the period from 1 April 2007, the following short-term loans as at 31 March2007 have been repaid: At March 2007 £m US $100m bond repaid 1 May 2007 61.56.83% European Investment Bank repaid on 15 September 2007 25.0 The Group has no new long-term borrowings in the period other than an increaseof £16.4m in non-recourse borrowings in relation to the Group's Tay ValleyLighting 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 £300.0m incash. The bond entitles holders to convert the bond into ordinary shares at anytime up to 24 October 2009 at the applicable conversion share price of £9.00 perordinary share at the date of issue. The conversion price is subject toadjustment in certain circumstances set out in the offering circular includingpayment of dividends greater than amounts set out in the circular, capitalrestructuring and change of control. Conversion is at the option of the bondholder. At 30 September 2007, bond holders had converted debt with a nominal value of£133.6m at the £9.00 per share conversion price. Conversion took place in thefollowing periods: Nominal Number of Value of Shares Bond Converted £m Year to 31 March 2007 0.1 11,111Six 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 aliability element and an equity component, the liability element representingthe initial fair value of the debt excluding the option to convert the liabilityinto equity of the Group. At At 30 At 30 31 March September September 2007 2007 2006 £m £m £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 £125.4m was converted from debt toequity. 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 valueof the convertible bond less costs to issue is £129.3m. For the purpose of diluted Earnings per Share (EPS), convertible bond interestof £3.5m (2006 - £7.6m, March 2007 - £15.3m) is added back to earnings and thenumber of potential ordinary shares to be issued includes the following inrespect 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 £230.5m, including fees,which have been charged to equity. These shares were subsequently cancelled. Inaddition, the Company purchased 737,031 shares (2006 - 571,389, March 2007 -702,057) for a consideration of £10.6m (2006 - £6.8m, March 2007 - £8.2m) to beheld in trust for the benefit of employee share schemes. In the same period, theCompany issued 37,367 shares (2006 - 135,246, March 2007 - 1,651,166) undervarious employee share option schemes for a consideration received of £0.2m(2006 - £0.1m, March 2007 - £0.8m). As discussed in note 11, under the terms ofthe 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 fixedincome. The holders of ordinary shares are entitled to receive dividends asdeclared 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 financialinstruments into two categories, operating derivatives and financingderivatives. Operating derivatives relate to qualifying commodity contractswhich 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 flowforeign 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 summarisedthus: Year ended Six months Six months 31 March ended 30 ended 30 2007 September September 2007 2006 £m £m £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 totalamounts (charged) or credited to the income statement in respect of operatingand financial derivatives. (ii) Amounts settled in the year represent the result on derivatives transactedwhich have matured or been delivered and have been included within the totalresult on derivatives. The net financial assets / (liabilities) are represented as follows: March September September 2007 2007 2006 £m £m £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 enactedto manage these exposures remain as stated in the Group's Financial Statementsto 31 March 2007. 14. Retirement Benefit Obligations Defined Benefit Schemes The Group has two funded final salary pension schemes which provide definedbenefits based on final pensionable pay. The schemes are subject to independentvaluations at least every three years. The Group also has an Employer FinancedRetirement Benefit scheme and a Group Personal Pension Plan, details of whichwere 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 £m £m £m £m £m £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 Statementsfor 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 £m £m £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 withrelated parties were consistent with those reported in the Company'sconsolidated financial statements for the year ended 31 March 2007. Statement of directors' responsibilities in respect of the condensed interimfinancial statements The Directors confirm that this condensed set of financial statements has beenprepared in accordance with IAS 34 Interim Financial Reporting as adopted by theEuropean Union, and that the interim management report herein includes a fairreview of the information required by the Disclosure Rules and TransparencyRules 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'sAnnual Report for the year ended 31 March 2007, with the exception of DavidPayne, 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 financialstatements in the half-yearly financial report for the six months ended 30September 2007 which comprises the Consolidated Income Statement, theConsolidated Balance Sheet, the Consolidated Statement of Recognised Income andExpense, the Consolidated Cash Flow Statement and the related explanatory notes.We have read the other information contained in the half-yearly financial reportand considered whether it contains any apparent misstatements or materialinconsistencies with the information in the condensed set of financialstatements. This report is made solely to the company in accordance with the terms of ourengagement to assist the Company in meeting the requirements of the Disclosureand 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 thecompany those matters we are required to state to it in this report and for noother purpose. To the fullest extent permitted by law, we do not accept orassume responsibility to anyone other than the company for our review work, forthis report, or for the conclusions we have reached. Directors' responsibilities The half-yearly financial report is the responsibility of, and has been approvedby, the directors. The directors are responsible for preparing the half-yearlyfinancial report in accordance with the DTR of the UK FSA. As disclosed in note 2, the annual financial statements of the Company areprepared in accordance with IFRSs as adopted by the EU. The condensed set offinancial statements included in this half-yearly financial report has beenprepared in accordance with IAS 34 Interim Financial Reporting as adopted by theEU. Our responsibility Our responsibility is to express to the Company a conclusion on the condensedset of financial statements in the half-yearly financial report based on ourreview. Scope of review We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410 Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity issued by the AuditingPractices Board for use in the UK. A review of interim financial informationconsists of making enquiries, primarily of persons responsible for financial andaccounting matters, and applying analytical and other review procedures. Areview is substantially less in scope than an audit conducted in accordance withInternational Standards on Auditing (UK and Ireland) and consequently does notenable us to obtain assurance that we would become aware of all significantmatters that might be identified in an audit. Accordingly, we do not express anaudit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believethat the condensed set of financial statements in the half-yearly financialreport for the six months ended 30 September 2007 is not prepared, in allmaterial respects, in accordance with IAS 34 as adopted by the EU and the DTR ofthe 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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