Interim Results

16th Nov 2005 07:01

Scottish & Southern Energy PLC16 November 2005 Scottish and Southern Energy plcNr-5296 16 November 2005 INTERIM RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2005 Statement by Chief Executive, Ian Marchant "Scottish and Southern Energy has delivered another very good financial andoperational performance, building on the opportunities that have been createdover the past few years. We have, therefore, continued to meet our coreobjective, which is to deliver sustained real growth in the dividend. Insummary: • The Board is declaring an interim dividend of 13.8p per share, anincrease of 13.1%. This follows the 14.8% increase in the final dividend for2004/05 and completes the re-basing of SSE's dividend announced in May 2005. • Adjusted profit before tax** grew by 25.5%, from £267.9m to £336.3m. • Adjusted earnings per share*** increased by 21.9%, from 23.3p to28.4p. • The acquisition of the Scotland and the Southern gas networks byScotia Gas Networks, in which SSE has a 50% stake, was completed in June. • SSE's balance sheet strength has been maintained, giving it thefreedom to exploit its investment opportunities in the second half of thisdecade. • SSE plans to invest around £225m in the installation of flue gasdesulphurisation (FGD) equipment at its coal-fired generation plant. • Consent was secured for the development of what will be Scotland'ssecond largest conventional hydro-electric scheme, at Glendoe near Loch Ness. • SSE's energy supply business is the third largest in the UK, growingto 6.5 million customers at the end of October - a gain of 400,000 since thestart of April and of two million since 2002. • The progress of SSE's claim on the administration of TXU businessescontinued successfully, with a second distribution of £48.7m being received fromthe administrator, which includes a share of the distribution to Barking PowerLtd. This is an exceptional item. SSE's focus has always been, and remains, the delivery of sustainable long-termreal dividend growth. We have consistently sought to achieve this by maintainingand investing in energy networks, adding to our generation portfolio, growingour energy supply business and developing further our presence in contracting,connections, gas storage and telecoms. We will maintain this approach, and ouremphasis on strong operational performance, for the rest of this financial yearand beyond. The prospects for sustained real growth in the dividend remainexcellent." \* This interim results statement describes adjusted operating profit beforeexceptional items, net finance income from pension assets (IAS 19), the impactof IAS 32 and IAS 39, and after the removal of taxation and interest on profitsfrom jointly controlled entities and associates. *\* This interim results statement describes adjusted profit before tax beforeexceptional items, net finance income from pension assets (IAS 19), the impactof IAS 32 and IAS 39 and after the removal of taxation on profits fromjointly-controlled entities and associates. **\* This interim results statement describes adjusted earnings and earnings pershare before exceptional items, net finance income from pension assets (IAS 19),the impact of IAS 32 and IAS 39 and deferred tax. FINANCIAL OVERVIEW These are the first results that SSE has reported under International FinancialReporting Standards and the comparative results for the six months to 30September 2004 have been re-stated in line with the new standards. SSE will,however, continue to focus on profit before tax before exceptional items, netfinance income from pension assets (IAS 19), the impact of IAS 32 and IAS 39,and after the removal of taxation on profits from jointly controlled entitiesand associates. Sept 05 Sept 04 £m £m Statutory Profit before Tax 386.4 270.5 Fair value gains & losses 3.1 0.0Exceptional items -48.7 0.0Tax on JV's and Associates 0.2 3.1Interest on convertible debt 1.8 0.0Return on pension scheme assets -57.5 -51.5Interest on pension scheme liabilities 51.0 45.8Adjusted Profit before Tax 336.3 267.9 Tax charge -92.6 -67.9 Adjusted Profit after Tax 243.7 200.0 Statutory profit after tax 265.3 197.1Number of shares for basic and adjusted eps 858.3 857.0 Adjusted EPS 28.4p 23.3p Basic EPS 30.9p 23.0p Adjusted profit before tax** grew by 25.5%, from £267.9m to £336.3m. SSE'sstatutory operating profit benefited from IAS 39 revaluations from operatingderivatives of £46.6m, offset by SSE's share of the loss of joint venturefinancing derivatives (£7.8m), giving a total of £38.8m. There was, however, aloss of £41.9m arising from financial instruments used by Treasury. This meansthe net impact of IAS 39 revaluations ('Fair value gains and losses') was acharge of £3.1m. There was profit growth in all parts of SSE's business. The most significantgrowth continues to be achieved in Generation and Supply, following theexpansion of SSE's electricity generation portfolio and the increase in thenumber of energy supply customers over the past four years. To monitor financial performance over the medium-term, SSE continues to focus onadjusted earnings per share***, which increased by 21.9%, from 23.3p to 28.4p. The Board is declaring an interim dividend of 13.8p, compared with 12.2p in theprevious year, an increase of 13.1%. This follows the 14.8% increase in thefinal dividend for 2004/05 and completes the re-basing of SSE's dividendannounced in May 2005. It establishes the base from which the interim dividendcan grow in the future and ensures that it remains a similar proportion of thefull-year dividend as in previous years. SSE expects to achieve its overalltarget for the full year dividend of at least 4% real growth in 2005/06. Longer term, the progress achieved by SSE's businesses in the first six monthsof this financial year, and the clear opportunities that have been created inEnergy Systems, Generation and Supply and in other businesses such as GasStorage, means SSE is on course to achieve its target of at least 4% real growthin the dividend payable to shareholders in each of the years to March 2008, withsustained real growth thereafter. ENERGY SYSTEMS Energy Systems Overview Operating profit* in Energy Systems, including gas distribution, increased by18.3%, from £145.0m to £171.5m, contributing 42.5% of SSE's total operatingprofit in the first half of the year. The key responsibility of SSE's Power Systems businesses is to maintain safe andreliable supplies of electricity, and to restore supplies as quickly as possiblein the event of interruptions. In the five years to 31 March 2005, SSE invested£760m in its electricity networks. The Distribution Price Control Review for2005-10 resulted in significantly increased allowances for capital expenditureto maintain and improve the electricity networks, and this increased investmentprogramme is now under way, with a 12.4% increase in capital expenditure in thefirst half of the year. Southern Electric Power Distribution In the first half of 2005/06, Southern Electric Power Distribution's operatingprofit* increased by 10.4% to £95.5m. This reflects an increase in the number ofunits of electricity distributed compared with the previous year and follows theintroduction of the new Price Control for 2005-10. SEPD distributed 15.6TWh of electricity, an increase of 0.2TWh. The averagenumber of minutes of lost electricity supply per customer was 35.1, comparedwith 47.4 in the previous year. The number of supply interruptions per 100customers was 40.1, compared with 58.7 in the previous year. Performance inrespect of both minutes lost and interruptions was ahead of the targets set byOfgem under its Information and Incentives Project (IIP) which gives financialbenefits to distribution network operators that deliver good performance forcustomers. Scottish Hydro Electric Power Distribution and Scottish Hydro ElectricTransmission Operating profit* for Scottish Hydro Electric Power Distribution and ScottishHydro Electric Transmission increased by 13.5% to £66.4m. This follows theintroduction of the new Price Control for 2005-10. In the Scottish Hydro Electric area, 3.8TWh of electricity were distributedduring the first half of 2005/06, a similar amount to that distributed in theprevious year. The average number of minutes of lost electricity supply percustomer was 33.4, compared with 41.2 in the previous year. The number ofinterruptions per 100 customers was 41.4, compared with 44.4 in the previousyear. Performance in respect of both minutes lost and interruptions was ahead ofOfgem's IIP targets. Transmission Since BETTA was introduced on 1 April 2005, National Grid has been Great BritainSystem Operator, responsible for balancing the supply and demand of electricityacross Great Britain. Scottish Hydro Electric Transmission remains responsiblefor operating, maintaining and investing in the transmission network in itsarea, which covers around 70% of Scotland. These new arrangements are workingsuccessfully. During 2004, Ofgem stated that investment had been approved to allow thereplacement of the electricity transmission line connecting Beauly in theHighlands with Denny in the Central Belt of Scotland to go ahead. As thelicensed transmission company for the north of Scotland, SSE has to carry outthis work to ensure there is sufficient network capacity for those seeking togenerate electricity from renewable sources, in response to the RenewablesObligation. It is likely that the construction of the replacement line willrequire an investment by SSE of around £250m. SSE has now submitted applicationsto Scottish Ministers for consent to build the line, following 18 months ofpublic consultations. Subject to the timely progress of the planning applications, the replacementline could be operational in 2009. At the same time, this project has a highprofile, and there can be no certainty about the length of time it will take forthe applications to make their way through the planning process. Gas Distribution Networks On 1 June 2005, Scotia Gas Networks plc (SGN), in which SSE holds 50% of theequity, acquired the Scotland and the Southern gas distribution networks fromNational Grid. They comprise 73,000km of gas mains, delivering gas to around5.6m industrial, commercial and domestic customers. SGN funded the acquisitions through: £540m of shareholder subordinated debt;£427.6m of equity; and £2,191.7m of non-recourse bank borrowings. Theshareholders of SGN have also provided a loan facility of £112.4m, which hasbeen treated as contingent equity. All or part of it will be converted intoequity, depending on the outcome of the finalisation of the completion accountsprocess and the provision of working capital facilities. If SSE's share of theloan facility is fully converted into equity, then its investment, including theshareholder subordinated debt, will be £540m. The final investment may, however,in practice, be slightly lower than £540m. In return for this investment of up to £540m, SSE receives 50% of thedistributable earnings from the networks. SSE is also providing corporate andmanagement services for the gas networks. The acquisitions have made SSE thesecond largest energy distributor in the UK. In the first four months, SSE's share of SGN's operating profit* was £9.6m. Thefinancial performance of this business is heavily weighted towards the secondhalf of the financial year, because of the seasonality of gas consumption. Thiseffect was compounded this year by the fact that temperatures were above averagein each of the four months from June 2005. SGN estimates it would have earnedadditional revenue of almost £4m if temperatures had been normal. SGN's over-riding goal is to distribute gas safely and reliably. It has alsoembarked on the process of reforming procedures, processes and practices tosecure efficiencies and, where appropriate, combine with SSE activities such asprocurement to achieve economies of scale. It has also started a fundamentalreview of its investment and its mains replacement programme in order toidentify operational and financial benefits. On 21 October, the now-named Scotland Gas Networks plc and Southern Gas Networksplc allocated and priced a combination of fixed rate, floating rate andindex-linked bonds totalling £2.22bn, with an average maturity of 17 years. Thetransaction was heavily over-subscribed and was a benchmark transaction for theUK gas distribution sector. It was also the largest corporate financing inEurope in 2005 at the date of issue. The proceeds will be used by SGN to repay substantially the bank borrowings thatwere arranged to fund the purchase of the networks in June. With a rate ofinterest that is below that envisaged when the decision was made to acquire thetwo networks, the success of this transaction will give SGN significant andongoing financial benefits. GENERATION AND SUPPLY Generation and Supply Overview Operating profit* in Generation and Supply rose by 41.8%, from £134.0m to£190.0m, contributing 47.0% of SSE's total operating profit in the first half ofthe year. Within SSE's integrated business model, the use of generation assetssupports performance in energy supply and value in Generation and Supply is,therefore, assessed as a single value chain. Growth in operating profit resulted from five main factors. These were: ongoingbenefits from the acquisition in July 2004 of the Ferrybridge and Fiddler'sFerry power stations; increased output from hydro-electric stations qualifyingfor Renewable Obligation Certificates (ROCs); the successful deployment of SSE'sScottish power stations in the new British electricity market; the abolition ofthe Hydro Benefit subsidy previously paid by SSE; and sustained growth in energysupply customer numbers. These benefits were again offset by the impact of highwholesale energy and carbon prices. The issues of high and volatile wholesale energy prices are always accentuatedduring the winter period. SSE believes it has in place appropriate operationaland commercial arrangements to deliver secure supplies of energy in all likelycircumstances in the coming months. Since its launch in January 2005, the EU Emissions Trading Scheme (EU ETS) hasseen the price of carbon allowances rise from around 7 Euros a tonne to over 20Euros a tonne. SSE's emissions allowance, of around 20 million tonnes wasreasonable in comparison to the rest of the UK electricity generation sector,but was lower than the level of emissions that SSE requires in practice. As partof the cost of generating electricity, higher prices of emission allowances addupward pressure to electricity prices. Much uncertainty surrounds thelonger-term impacts of EU ETS, not least because the first phase has just twoyears left to run and the details of the second phase, due to start in 2008,have not yet been determined. Since the BETTA arrangements were introduced in April 2005, SSE has benefitedfrom its ability to deploy its flexible power stations in Scotland to meetdemand from the electricity market in England and Wales. This has contributedaround £6m to operating profit. The underlying financial performance of Generation and Supply has been reportedexcluding the impact of IAS 39 revaluations (see 'Financial Overview' above) asSSE does not believe this represents underlying business performance. Gas-fired Generation SSE owns 4,300MW of gas-fired electricity generation capacity, including itsshare of joint ventures. As with NETA, good performance in BETTA is dependent onplant reliability. Although the number of unplanned outages at SSE'swholly-owned gas-fired power stations at Keadby, Medway and Peterhead in thefirst six months of the year was lower than in 2004/05, the overall availabilityof plant to generate electricity was disappointing. In particular, the availability of the plant at Keadby and at Seabank (of whichSSE owns 50%) during the period was significantly less than expected. The causesof plant failure at the stations have been fully investigated and addressed,with the aim of ensuring their availability is maximised during the criticalwinter months. Seabank, however, is not expected to return to full service untilthe New Year. The launch of the EU ETS has underlined the need to develop new technologies toreduce and capture carbon dioxide emissions caused by the use of fossil fuelsand SSE is committed to looking for opportunities to participate in appropriatedevelopments. In June 2005, SSE and partners BP, ConocoPhillips and Shell,announced they are undertaking detailed front-end engineering design work on theworld's first industrial-scale project to generate 'de-carbonised' electricityfrom hydrogen. The planned project would convert natural gas to hydrogen andcarbon dioxide gases, then use the hydrogen gas as fuel for a 350MW power plantat Peterhead Power Station, and export the carbon dioxide to a North Sea oilreservoir for increased oil recovery and ultimate storage. The current phase of work is expected to be completed in the second half of2006, allowing a final investment decision to be taken. The full project couldrequire investment by SSE of up to £150m and is subject to the establishment ofan appropriate policy and regulatory framework which encourages the capture ofcarbon from fossil fuel-based electricity generation and its long-term storage. Coal and Biomass Generation SSE acquired the Ferrybridge and Fiddler's Ferry power stations, each with acapacity of almost 2,000MW, and associated coal stocks, for £136.0m on 30 July2004. This equated to around £20 per kilowatt of installed capacity. The £123.3mpaid by SSE for fuel in transit and contracts to supply fuel has now beenamortised. Both are flexible, mid-merit stations which have added to the diversity of SSE'sgeneration portfolio and help it to meet peak demand for electricity. They havealso allowed SSE to manage its exposure to changes in fuel prices by balancingits gas portfolio with a coal portfolio. In the first half of the year, the twopower stations contributed around £21m to operating profit, compared with £6m inthe previous year. During the period, both stations underwent major plannedmaintenance outages in order to maximise their availability to generate power inthe winter period, when their profitability is significantly greater. The stations also 'co-fire' fuels from renewable sources in order to displacefossil fuels, thus reducing impact of carbon emissions resulting from theiroperation. The resulting output of electricity qualifies for ROCs. In the firstsix months of the year, their output qualifying for ROCs was around 400GWh, anincrease of over 50% on the same period in the previous year. SSE expects to complete before the end of this financial year the investment ofaround £20m in the development of additional facilities to increase further theability to co-fire fuels from renewable sources at both power stations. Theinstallation of new 'direct injection' burners at the stations is expected togive them the ability to generate up to 1,500GWh per year of output qualifyingfor ROCs. SSE has today announced that it intends to opt in to the Large Combustion PlantDirective (LCPD) all of the capacity at Fiddler's Ferry and half of the capacityat Ferrybridge. To do this will require the installation of Flue GasDesulphurisation (FGD) equipment and an investment estimated to be around £225m. Following the installation of the FGD equipment, restrictions on the stations'ability to generate electricity between 2008 and 2015 will be lifted and theywill be able to remain open beyond 2015. The stations had been opted out of theLCPD by previous owners, which meant they were scheduled for full closure by2015. SSE believes that installing FGD represents a good investment opportunity and astep forward in environmental terms. It will also extend the contribution of itscoal-fired plant to the security of the UK's energy supplies and means that SSEwill continue to have the country's most diverse generation portfolio. Renewables Obligation (Wind and Hydro) Performance in Generation and Supply in the first half of 2005/06 benefited fromthe increase in SSE's electricity output qualifying for ROCs, which continued toattract a premium price of around £44/MWh. The increase was attributable to theincreased proportion of SSE's hydro-electric capacity which has beenrefurbished, so that its output qualifies for ROCs, to higher than average 'run-off' of water flowing into SSE's reservoirs and to the growth in SSE's windfarm capacity. The output of refurbished hydro-electric stations with capacity of up to 20MWqualifies for ROCs, and, in total, SSE has 397MW of capacity in its sub-20MWstations (including the recently-opened Kingairloch plant). The refurbishment ofthe final 24MW of capacity has now been completed. This represents a majorlandmark in SSE's £350m programme of investment in refurbishing its existinghydroelectric power stations and in developing new hydro capacity. Water running off into reservoirs in the six months to 30 September was 5% abovethe long-term average. As a result of this and of the investment in refurbishingcapacity, SSE's ROC-qualifying hydro output in the first half of the yearincreased to almost 600GWh, up from over 400GWh in the same period last year. The Tangy, Spurness and Artfield Fell wind farms also contributed around 30GWhof ROC-qualifying output in the first half of the year. Overall, increasedROC-qualifying output from wind farms, hydro-electric stations and co-firingbiomass contributed around £15m to SSE's operating profit. Assuming average 'run off' during the rest of this financial year, and typicalwind conditions, the ROC-qualifying output from hydro and wind generation for2005/06 as a whole is expected to be around 1,700GWh. Hydro Generation In July 2005, SSE received consent for, and decided to proceed with, theconstruction of what will be its second largest conventional hydro-electricstation at Glendoe, near Loch Ness. With an installed capacity of around 100MW,Glendoe will produce around 180 million units of electricity qualifying for ROCsin an average year. When synchronised, it will be able to start generatingelectricity in 30 seconds. The development of Glendoe will require investment ofaround £140m. If the project goes according to schedule, it will begingenerating electricity commercially from the winter of 2008/09. The development of the 7MW of ROC-qualifying capacity at Fasnakyle is well underway and is expected to be completed by the end of this financial year. Hydro Benefit was abolished on 1 April 2005 and was replaced by a separatescheme to assist customers with the high costs of distributing electricity inthe north of Scotland. This contributed £16m to SSE's profit from its generationactivities in the first half of the year. The profitability of its distributionbusinesses was unaffected. Wind Generation The Renewables Obligation Order 2005 came into force on 1 April 2005 andincreases the UK's target for electricity generated from renewable sources to15.4% by 2015/16. This confirms the important part that wind generation willhave to play in the future, and the framework for investment in renewable energyremains positive. SSE's first wind farm, at Tangy in Argyll, has been operating successfully foralmost three years and SSE has received consent to add another 6MW (Tangy 2) toits capacity. Its second wind farm, at Spurness on the Orkney Islands, wasofficially opened in March 2005, and its third wind farm, Artfield Fell (20MW)in Wigtownshire, was officially opened in July 2005, taking SSE's operationalwind farm capacity to 42MW. Construction work at the 120MW wind farm at HadyardHill in Ayrshire, is continuing to progress well and it should begin to generateelectricity before the end of this financial year. The process for considering other applications for consent to build wind farms,including those proposed by SSE, is proving to be arduous and prolonged. Theapplications to build wind farms at Drumderg (32MW) and Gordonbush (87MW) haveboth been in the planning process for well over two years, but have yet to befinally determined - a rate of progress which is slow and disappointing. These seven developments comprise the first phase of SSE's wind energydevelopment plans and £107m has now been invested at Tangy, Spurness, ArtfieldFell and Hadyard Hill. An additional £103m will be required to complete HadyardHill and to develop Tangy 2, Drumderg and Gordonbush. SSE is also continuing to develop plans for the second phase of its investmentin wind energy and has now submitted applications for consent to develop afurther 387MW of capacity at five sites in Scotland. The development of thesefive sites, if consented, will require investment of around £300m over the nextfew years. As a result of its ongoing programme of investment in wind energy and in hydro,SSE is aiming to have around 1,000MW of ROC-qualifying wind and hydro generatingcapacity by 2008, although this depends on the progress of planningapplications. Of this, it already has in place, or has secured consent todevelop, 672MW of capacity (439MW in operation and 233MW in development orconstruction). Beyond this programme of investment, other opportunities are also beingexamined. In line with that, SSE and Viking Energy, the company formed torepresent Shetland Island Council's interests in large-scale wind energydevelopment in Shetland, have signed a Memorandum of Understanding which isexpected to lead to the establishment of a joint venture aimed at developing onthe Shetland Islands a wind farm with a capacity of up to 600MW. Viking Energy'sinvolvement would make the scheme the largest community-backed wind farmdevelopment in the world. The proposal is subject to, amongst other things,being able to demonstrate to Ofgem the viability of a subsea cable from Shetlandto the mainland of Scotland. New Technologies Investment in the research, development and demonstration of new technologiesfor generating electricity from renewable sources is a key part of thegovernment's energy policy, and is part of SSE's strategy to remain the UK'sleading generator of electricity from renewable sources. It is investing £7.5m in a project, with Talisman Energy UK, to construct a 10MWdemonstrator wind farm in deep water in the Moray Firth. Electricity from thedemonstrator project should begin to be generated by 2007. In addition,Renewable Technology Ventures Ltd (RTVL), the marine energy venture in which SSEis a partner, has almost completed the design of a 2.4MW tidal power generatingdevice. Attention is now focusing on deciding whether or not to move on to thesecond phase - the manufacture, installation and testing of a full-scaleprototype tidal turbine. SSE's investment in the project to generate 'de-carbonised' electricity fromhydrogen at Peterhead Power Station (see 'Gas-fired Generation' above) fullycomplements SSE's diverse interests in generating electricity from renewablesources. With growing interests in emerging technologies, including micro generationtechnologies (see 'Energy Services' below), allied to its established capabilityin generating electricity from the more mature technologies of hydro, onshorewind and biomass, SSE has confirmed its position as a pan-renewables company. Energy Supply SSE's energy supply business had 6.5m customers as at 31 October 2005, a netgain of 400,000 since the start of this financial year. Overall, SSE now has twomillion more customers than at the start of 2002, an increase of 44%. Within theoverall total, SSE's business customers now cover 400,000 sites throughout GreatBritain. Over the last three years, SSE has increased prices for domestic customers moreslowly than competitors. In March 2005, it gave a commitment to holdelectricity prices at their current levels until at least the start of 2006. SSEsaid it aimed to do the same with gas prices, but that its ability to do sowould be determined by trends in wholesale gas prices. Winter gas prices are now around 26% higher than they were last year. SSEannounced on 9 November 2005 that it will be able to absorb this highercommodity cost until the end of the calendar year, but thereafter will have tointroduce a 13.6% increase in gas prices for domestic customers from 1 January2006. Winter electricity prices are now around 38% higher than they were at thestart of the year, and so SSE has decided to proceed with an increase of between8.9% and 12% in electricity prices for domestic customers, also from 1 January2006. The outlook for gas and electricity prices remains difficult. In its evidence tothe Trade and Industry Committee's current inquiry into the security of gassupply, SSE has again pointed out that there is a fundamental lack of liquidityin, and upstream information about, the offshore gas market and has urged theCommittee to recommend that a more formal investigation be mounted into it. Inthe meantime, SSE will continue to apply a responsible approach to pricing, inorder to minimise as much as possible the effect on customers of high andvolatile wholesale energy prices. Customer Service Equally important to success in Energy Supply is maintaining the highestpossible standards of customer service. The leading annual independent study, byJD Power, published on 1 November, found that SSE has the highest level ofcustomer satisfaction among UK electricity suppliers and the second highestamong gas suppliers. Despite the significant growth in customer numbers, SSE secured during the firsthalf of 2005/06 a reduction across all brands of 16% in the number of customercomplaints sent to energywatch for resolution, to 975. This follows thesignificant reductions achieved during each of the previous two years. In thestatistics published by energywatch in October 2005, SSE had the lowest rate ofcomplaints in respect of account and billing matters and transfers betweencompanies and the second lowest rate of complaints in respect of direct selling. SSE believes that a high quality of service will become an increasinglyimportant part of its customer proposition - and that customers' expectations ofthe service that their energy supplier should provide will increase. As aresult, it is now undertaking a performance improvement programme in itsCustomer Service division. In summary, this involves a major re-organisation andsimplification of the division, around the customer lifecycle, which will reducethe number of processes, duplication, transfers and hand-offs. Amongst otherthings, it requires over 30 process re-designs, including the introduction ofcomputer-telephony integration (CTI), all of which should be implemented by theend of next year. Product Development SSE has continued to look at options for new products, given the importance ofdevelopments in this field as a key contributor to long-term success in energysupply. In line with this, it has launched energyplus pulse. For every customerwho switches gas and electricity supply to energyplus pulse, SSE donates £10 ayear to the British Heart Foundation. SSE is also introducing a capped price offer for dual fuel customers payingtheir bills by direct debit. Under the offer, customers pay a 4% increase onthe January 2006 electricity prices and a 7% increase of the January 2006 gasprices. Their prices are then capped until February 2008. The energyplus care package of products and services is now available for SSE'smost vulnerable customers, and enables a qualifying family living in athree-bedroom, semi-detached house to reduce their total energy bills by around30% a year. To encourage take-up of the tariff, SSE is identifying an initialgroup of 50,000 of its most vulnerable customers and is writing directly to themto tell them about it and to invite them to get in touch with the company toestablish their eligibility for it. Overall, SSE believes that its work on product development, emphasis on customerservice and its policy of responsible pricing means that its Energy Supplybusiness should be able to extend further the period of growth which began atthe start of 2002. Energy Services An increasing number of supply customers are likely to seek a wider range ofenergy-related services, covering renewable, sustainable and energy efficientproducts. For example, an increasing number of developments in London arerequired to generate at least 10% of their energy needs from renewable sources. SSE is very well-positioned to capture a significant proportion of thisdeveloping market over the remainder of this decade because it combinesestablished Contracting, Connections and Appliance Retail businesses with aportfolio of micro-generation technologies. In line with that, SSE Energy Services Networks has won a major contract toinstall, own and operate the electrical infrastructure for the regeneration ofDagenham Docks.This project has been negotiated with the London DevelopmentAgency, working in accordance with the Office of the Deputy Prime Minister'sSustainable Communities Plan for the Thames Gateway. Site works will commence inMarch 2006. The project further demonstrates SSE's capability to provide energynetworks to customers across the whole of the UK. In addition, the investments made by SSE in Swift Turbines Ltd and solarcenturyduring 2004/05 are providing new opportunities. A significant milestone wasachieved earlier this year when SSE's contracting business carried out its firstinstallation of Swift rooftop wind turbines, for Berwickshire HousingAssociation. The potential of solar power was illustrated by solarcentury'ssuccess in being identified as one of the UK's fastest-growing technologycompanies in September 2005. SSE and solarcentury will shortly launch and marketa solar energy product for domestic customers. The establishment by SSE of an Energy Services Unit anticipated a growing demandfor services 'beyond the meter'. Its ability to provide these services is anatural long-term complement its existing businesses which are geared todistributing and supplying energy to the meter. CONTRACTING AND CONNECTIONS Contracting and Connections delivered operating profit* of £23.3m during thefirst six months of the year, compared with £19.6m in the previous year. The Contracting businesses have made significant progress following the majordevelopments which occurred in 2004/05. • Southern Electric Contracting (SEC) acquired the electric contractingdivision of what was previously Eastern Contracting in January 2005, in atransaction with a value of around £2m. The integration of the Eastern businesswith SEC is now finished and the focus now is on growing its order book. • SEC's and Interserve's joint venture, 'PriDE', has now completed the 'mobilisation' period following the award of the Ministry of Defence's 'Prime'contract covering London and the south-east of England. The contract, to providemechanical and electrical maintenance for over 100 MoD sites, is worth around£400m over an initial seven years and is now fully up and running andprofitable. • SEC also has contracts worth around £350m to replace and maintainstreetlights for three local authorities in England under the Private FinanceInitiative, in partnership with the asset finance division of The Royal Bank ofScotland. These contracts are going well and SEC aims to secure furthersuccesses in street lighting PFIs. Thermal Transfer is the most specialised of SSE's contracting businesses,focusing on the design, installation and maintenance of mechanical andelectrical services for industrial, commercial, pharmaceutical, medical device,food and micro-electronics applications. It has secured a number of importantnew contracts in the past few months, including the installation of anenvironmentally-friendly heating and power system at Aberdeen University. The Connections business completed 21,000 electrical connections during thefirst half of 2005/06. In addition, it has continued to expand its portfolio ofelectricity networks outside the Southern Electric and Scottish Hydro ElectricPower Distribution areas. SSE's Connections business now owns and manages 19electricity networks outside SSE's two electricity distribution areas. It is also a licensed gas transporter, owning and operating gas mains andservices in many parts of the country. The rate of connecting new premises toits gas networks continued to grow, and during the first half of the year, itconnected a further 4,100 premises, up 52% on the previous year, taking thetotal number of connections to more than 31,000. GAS STORAGE Gas Storage delivered an operating profit* of £13.6m, an increase of 52.8%compared with the previous year. The value of, and demand for, gas storagefacilities in the UK remains high and, in a volatile gas market, SSE hascontinued to enter into new contracts to provide storage at a significantlyhigher value than the contracts they replace. The onshore gas storage facility at Hornsea, which SSE acquired in 2002, iscurrently the largest in the UK and has a good record of reliability. SSE'sjoint venture with Statoil (UK), in which SSE is investing £150m, to developwhat will become the UK's largest onshore gas storage facility at Aldbrough, iscontinuing to make good progress. With a total new capacity of around 420million cubic metres, of which SSE will have the ownership interest in 280million cubic metres, Aldbrough will provide essential additional gas storagefor the UK energy industry. Consent was received in March 2005 from DEFRA to begin 'leaching' the ninecaverns that will be used to store gas. Leaching at five caverns is now wellunder way, as is the drilling of the seventh well. The process will take aroundfour years to complete, with the first cavern expected to be ready to store gasin 2007. TELECOMS SSE's combined Telecoms business (SSE Telecom and Neos) achieved an operatingprofit* of £6.1m in the first six months of the year, compared with £4.8m in theprevious year, an increase of 27.1%. The business offers customers a nationaltelecoms network, and has a UK-wide sales force and a competitive range ofproducts targeted at commercial and public sector customers. As a subsidiary ofSSE, it is also able to position itself as one of the UK's most financiallysecure telecoms network operators, which gives a significant competitiveadvantage. The improvement in performance in the first half of the year is mainly theresult of higher sales, and important contracts have recently been signed with adiverse range of major organisations, such as AT&T, Cable and Wireless, FranceTelecom and Learning Network South East (LeNSE). EXCEPTIONAL ITEM TXU Europe Group plc On 2 August 2005, SSE received its second net distribution payment, of £41.6m,from the administrators of TXU Europe Group plc and certain of its subsidiaries, with regard to its claim of £294.2m in respect of a 14-year contract originallyentered into in 1997. To this has been added SSE's share (£7.1m) of thedistribution paid by the administrator to Barking Power Ltd, the operators ofBarking Power Station. This follows the first net distribution payments of £159.1m to SSE and £22.3m toBarking Power Ltd, which were received from the administrator on 31 March 2005.Following the second payment, SSE expects to receive further distributions ofaround £60m by the spring of next year and that, in total, over 85% of its claimwill be settled. CAPITAL EXPENDITURE Investment and capital expenditure, excluding acquisitions, totalled £244.0mduring the first half of 2005/06, compared with £160.7m in the previous year. Capital expenditure in Power Systems was £84.5m, compared with £75.2m in theprevious year. The increase follows the Distribution Price Control Review for2005-10. A major part of the programme is focused on the replacement of partsof the electricity network that date back to the 1960s. Over the five year period Ofgem's valuation of SSE's transmission, distributionand metering businesses (the Regulated Asset Base) is expected to grow in realterms by around £120m, excluding any major transmission investment, and it grewby £49m (nominal) in the first half of the year. In addition, there was investment of £57.2m for growth in Generation in thefirst half of the year, with the refurbishment work being carried out at hydroelectric power stations and the development of new hydro electric and windenergy schemes leading to the production of ROC-qualifying electricity. As well as Power Systems and Generation, £23.0m was invested in the ongoingdevelopment of the new gas storage facility at Aldbrough. Within the overall total, capital expenditure for growth was £154.8m during thefirst half of 2005/06. This mainly comprised renewable energy and gas storage.As previously stated, capital expenditure will continue to be significant in thesecond half of the decade, with investment in generation, including FGDinstallation, electricity networks and gas storage. All investments are expectedto achieve returns which are greater than the cost of capital and are expectedto enhance earnings. FINANCIAL MANAGEMENT Net Debt and Cash Flow During the first six months of 2005/06, SSE's net debt increased by £540.7m to£1,989.5m, before IAS 32, following acquisitions totalling £540.0m and capitalexpenditure for growth, principally in renewable energy and gas storage,totalling £154.8m. Borrowings and Facilities At 30 September 2005, 86.1% 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 4.4 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 2005 was 9.7 years, compared with 11.7 years as at 30September 2004. Net Finance Costs The basis of the presentation of net finance costs has changed under IFRS andthe table below reconciles published net finance costs to adjusted net financecosts. In line with that, SSE's adjusted net finance costs in the first sixmonths of 2005/06 was £67.6m, compared with £46.1m in the previous year. Sept 05 Sept 04 £m £m Published net finance costs (Note 4) 24.0 31.5add/(less) Share of JCE*/Associate interest 38.9 8.9 Convertible debt IAS 32 adjustment (1.8) - Interest on pension plan liabilities (51.0) (45.8) Return on pension plan assets 57.5 51.5 Adjusted net finance costs 67.6 46.1 *Jointly Controlled Entities The average interest rate for SSE, excluding JCE/Associate interest, during theyear was 5.72%, compared with 6.15% in the previous year. Underlying interestcover was 6.1 times, compared with 6.8 times the previous year. TAX The adjusted current tax charge is calculated as follows: Sept 05 Sept 04 £m £m Published tax charge 121.1 73.4add back: Share of JCE/Associate tax 2.5 3.1 Share of JCE/Associate tax re IAS 39 (2.3) -less: Deferred tax (14.1) (8.6) Exceptional tax (14.6) - Adjusted current tax charge 92.6 67.9 The effective adjusted underlying current tax rate, based on adjusted profitbefore tax, was 27.5%, compared with 25.3% in the previous year. The headlinetax charge was 31.3%, compared with 27.1% in the previous year. BALANCE SHEET SSE continues to maintain one of the strongest balance sheets in the globalutility sector, which continues to give it significant competitive advantage interms of cost of funding and supporting new developments. In line with the IAS 19 treatment of pension scheme assets, liabilities andcosts, pension scheme liabilities of £334.5m and a pension scheme asset of£116.1m are recognised in the balance sheet at 30 September 2005, gross ofdeferred tax. Overall, this represents an improvement of £9.2m compared with theposition at March 2005. During the first six months of 2005/06, employer cash contributions to theScottish Hydro Electric scheme amounted to £4.6m and £2m was contributed to thescheme for employees at Ferrybridge and Fiddler's Ferry. Contributions to theSouthern Electric pension scheme amounted to £20m during the first six months.This includes a contribution towards the deficit of £12.3m that was agreed inMarch 2005, in addition to an ongoing contribution rate of 19.9% of salaries. Aspart of the Distribution Price Control for 2005-2010, it was agreed thatallowances for 76% of deficit repair contributions should be included in pricecontrolled revenue. At 30 September 2005, there was a net asset arising from IAS 39 of £119.0m,before tax, compared with a net asset of £31.8m, before tax, at 1 April 2005. PURCHASE OF OWN SHARES The Directors of SSE have not exercised their authority to purchase, in themarket, the company's own shares so far during this financial year. TheDirectors did, however, secure renewal of their authority to purchase, in themarket, the Company's own shares at the Annual General Meeting on 28 July 2005.It remains the policy of the Board of SSE to take opportunities to return valueto shareholders through the purchase of the Company's own shares should theconditions be appropriate. SAFETY AND THE ENVIRONMENT SSE aims to create value for shareholders by running the business with a strongemphasis on safety and on caring for the environment. During the first sixmonths of the year, the number of lost time and reportable accidents within thecompany was 8, compared with 10 in the previous year. The number of serious, orpotentially serious, road traffic accidents involving employees driving companyvehicles fell from 0.14 per 100 vehicles to 0.08 in the first six months of theyear. SSE's target for any given year is zero reportable environmental incidents.There were no such incidents during the first six months of 2005/06. SSEpublished 12 environmental targets in its Sustainability Report 2005 and is oncourse to deliver improved environmental performance in many key activitiesduring 2005/06. For example, its 'green' travel programme has led to a reductionof 6% in the number of business flights undertaken in the first half of the yearand an increase of 152% in the number of rail business journeys. STRATEGY AND OUTLOOK SSE remains focused on enhancing and creating value for shareholders from itsexisting energy and energy-related businesses in the UK. The businesses havebeen expanded in recent years through investment and the incremental acquisitionof assets, and they are well-placed to deliver further growth. Securing this growth from existing businesses, through the delivery ofoperational excellence in all activities, remains SSE's top priority. There aresignificant opportunities to expand these businesses further through the majorinvestment programme planned for the rest of this decade, which will addsignificantly to SSE's asset base. Operational excellence and sound investmentwill remain SSE's key means of delivering sustained real growth in the dividend. Investor TimetableInterim results 16 November 2005Ex-dividend date 22 February 2006Record date 24 February 2006Payment date 24 March 2006Preliminary results 31 May 2006AGM 27 July 2006 Enquiries to: Scottish and Southern Energy plcAlan Young - Director of Corporate Communications + 44 (0)870 900 0410Denis Kerby - Investor and Media Relations Manager + 44 (0)870 900 0410 Financial DynamicsAndrew 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 Telephone conference call: Wednesday, 16 November 2005 UK Dial in: 0845 146 2004 International dial in: +44 (0) 1452 569 393 Replay facility (for one week) UK local rate no: 0845 245 5205 UK International no: +44 (0) 1452 550 000 UK PIN (access) no: 2109264 # Consolidated Interim Statement for the period 1 April 2005 to 30 September 2005 Group Income StatementFor the period 1 April 2005 to 30 September 2005 Before Exceptional exceptional itemsSix months ending 30 September items (note 3) Total Total Note 2005 2005 2005 2004 £m £m £m £m Revenue 2 3,881.3 - 3,881.3 2,705.1Cost of sales (3,297.3) - (3,297.3) (2,219.1)Gross profit 584.0 - 584.0 486.0Distribution and administration costs (209.2) - (209.2) (195.1)Other operating income - 41.6 41.6 -Fair value gains on operating derivatives 9 46.6 - 46.6 -Operating profit before jointly controlled 421.4 41.6 463.0 290.9entities and associatesJointly controlled entities and associates:Share of operating profit 29.1 7.1 36.2 23.1Share of fair value loss on financing (7.8) - (7.8) -derivativesShare of interest (38.9) - (38.9) (8.9)Share of tax on operating activities (0.4) (2.1) (2.5) (3.1)Share of tax on fair value loss on financing 2.3 - 2.3 -derivativesShare of (loss) / profit on jointly (15.7) 5.0 (10.7) 11.1controlled entities and associatesOperating profit 2 405.7 46.6 452.3 302.0Finance income 4 78.8 - 78.8 58.7Finance costs 4 (102.8) - (102.8) (90.2)Fair value loss on financing derivatives 9 (41.9) - (41.9) -Profit before taxation 339.8 46.6 386.4 270.5Income tax expense (108.6) (12.5) (121.1) (73.4)Profit for the period 231.2 34.1 265.3 197.1 Attributable to:Equity holders of the parent 231.2 34.1 265.3 197.2Minority interest - - - (0.1) 231.2 34.1 265.3 197.1 Interim dividend per share 6 13.8p 13.8p 12.2p Basic earnings per share 8 26.9p 30.9p 23.0pDiluted earnings per share 8 26.5p 30.3p 23.0p Dividends paid in the period 6 260.0 - 260.0 226.1 Group Income StatementFor the Year ended 31 March 2005 Before Exceptional exceptional items items (note 3) Total Note £m £m £m Revenue 2 7,424.6 - 7,424.6Cost of sales (6,257.2) (61.0) (6,318.2)Gross profit 1,167.4 (61.0) 1,106.4Distribution and administration costs (407.6) - (407.6)Other operating income - 111.2 111.2Operating profit before jointly controlled entities and 759.8 50.2 810.0associatesJointly controlled entities and associates:Share of operating profit 50.8 22.3 73.1Share of interest (17.2) - (17.2)Share of tax on operating activities (8.6) (6.7) (15.3)Share of (loss) / profit on jointly controlled entities 25.0 15.6 40.6and associatesOperating profit 2 784.8 65.8 850.6Finance income 4 125.8 - 125.8Finance costs 4 (187.1) - (187.1)Profit before taxation 723.5 65.8 789.3 Income tax expense (209.1) (20.5) (229.6)Profit for the year 514.4 45.3 559.7 Attributable to:Equity holders of the parent 514.5 45.3 559.8Minority interest (0.1) - (0.1) 514.4 45.3 559.7 Final dividend per share 6 30.3p 30.3p Basic earnings per share 8 60.0p 65.3pDiluted earnings per share 8 59.3p 64.5p Dividends paid in the period 6 330.8 - 330.8 Group Balance SheetAt 30 September 2005 At 30 September At 30 At 31 March 2005 September 2005 2004 £m £m £m Assets 4,386.1 Property, plant and equipment 4,512.2 4,340.5 Intangible assets: 293.5 Goodwill 292.4 291.4 12.7 Other intangible assets 116.7 13.3 213.4 Investments under equity method 663.2 198.1 98.9 Employee benefit assets 116.1 87.1 97.9 Deferred tax assets 101.7 94.4 - Financial assets 25.7 - 5,102.5 Non-current assets 5,828.0 5,024.8 134.1 Inventories 184.0 136.5 1,077.0 Trade and other receivables 729.7 691.0 232.2 Cash and cash equivalents 36.1 13.4 - Financial assets 162.0 - 1,443.3 Current assets 1,111.8 840.9 6,545.8 Total assets 6,939.8 5,865.7 Liabilities 28.9 Loans and other borrowings 378.6 292.1 1,253.7 Trade and other payables 1,134.1 900.8 138.0 Current tax liabilities 146.5 76.7 13.0 Provisions 11.5 21.4 15.1 Deferred income 14.8 25.7 - Financial liabilities 17.0 - 1,448.7 Current liabilities 1,702.5 1,316.7 1,652.1 Loans and other borrowings 1,628.0 1,377.0 892.1 Deferred tax liabilities 944.4 859.4 98.3 Provisions 96.4 111.5 266.3 Deferred income 293.4 279.8 326.5 Employee benefit obligations 334.5 339.8 - Financial liabilities 51.7 - 3,235.3 Non-current liabilities 3,348.4 2,967.5 4,684.0 Total liabilities 5,050.9 4,284.2 1,861.8 Net assets 1,888.9 1,581.5 Equity: 429.4 Share capital 444.1 429.2 81.6 Share premium 82.3 77.7 13.7 Capital redemption reserve 13.7 13.7 - Hedge reserve 13.3 - 1,337.5 Retained earnings 1,335.5 1,061.3 1,862.2 Shareholders' equity 1,888.9 1,581.9 (0.4) Minority interest - (0.4) 1,861.8 Total equity 1,888.9 1,581.5 Group statement of recognised income and expenseFor the six months ended 30 September 2005 Year ended Six months Six months 31 March ended 30 ended 30 2005 September September 2005 2004 £m Note £m £m - Loss on effective cashflow hedges (10.5) - (16.5) Actuarial loss on retirement benefit (11.0) (34.7) - Loss on acquisition of minority interest (0.1) - (16.5) Net income / (expense) recognised directly (21.6) (34.7) in equity Transfers: - Transfer to profit or loss on cash flow 5.6 - hedges arising from ineffectiveness (net of tax) 559.8 Profit for the period 265.3 197.2 - Cumulative adjustment for the 14 36.8 - implementation of IAS 39 543.3 Total recognised income and expense for the 286.1 162.5 period Attributable to: 543.4 Equity holders of the parent 286.1 162.6 (0.1) Minority interest - (0.1) 543.3 286.1 162.5 Consolidated Cash Flow StatementFor the period 1 April 2005 to 30 September 2005 Year ended Six months Six months 31 ended 30 ended 30 March September September 2005 2005 2004 £m £m £m Cash flows from operating activities 559.7 Profit for the period after tax 265.3 197.1 229.6 Income tax expense 121.1 73.4 - Fair value loss on financing derivatives 41.9 - 61.3 Net finance costs 24.0 31.5 (40.6) Share of jointly controlled entities and 10.7 (11.1) associates (1.0) IAS 19 pension charge less contributions paid (14.0) 0.4 270.1 Depreciation, amortisation and revaluation 102.6 99.5 adjustments 1.7 Amortisation of intangible asset 1.0 0.8 (62.3) Deferred income released (53.7) (12.4) 9.5 (Increase)/Decrease in inventories (49.9) (7.5) (179.1) Decrease/(Increase) in debtors 297.3 215.7 339.4 (Decrease)/Increase in creditors (94.5) (6.3) (29.9) Decrease in provisions (3.4) (6.6) - Employee share awards 0.3 (0.7) (7.7) Profit on disposal of tangible fixed assets (2.6) (0.4) 1,150.7 Cash generated from operations 646.1 573.4 12.5 Dividends received from jointly controlled 8.0 3.7 entities (72.0) Finance costs net (52.3) (49.0) (152.9) Income taxes paid (103.7) (76.7) 938.3 Net cash from operating activities 498.1 451.4 1.7 Cash flows from Investing activities (345.0) Purchase of property, plant and equipment (262.9) (141.6) 3.1 Deferred income received (net) 2.3 3.6 19.5 Proceeds from sale of property, plant and 15.8 0.7 equipment 2.9 Proceeds from sale of "available for sale" - - investments (1.0) Loans to jointly controlled entities (0.4) (0.3) - Investment in Scotia Gas Networks (540.0) - 10.8 Loans repaid by jointly controlled entities 5.4 6.2 2.7 Loans repaid by associates 0.4 - (339.0) Purchase of businesses and subsidiaries (0.1) (338.0) (646.0) Net cash from investing activities (779.5) (469.4) Cash flows from financing activities 9.7 Proceeds from issue of share capital 0.7 5.5 (330.8) Dividends paid to company's equity holders (260.0) (226.1) 233.0 Net proceeds from borrowings 329.4 214.9 (88.1) Net cash from financing activities 70.1 (5.7) 204.2 Net (decrease)/increase in cash and cash (211.3) (23.7) equivalents 23.6 Cash and cash equivalents at the start of 227.8 23.6 period (note 11) 204.2 Net (decrease)/increase in cash and cash (211.3) (23.7) equivalents (note 10) 227.8 Cash and cash equivalents at the end of period 16.5 (0.1) Notes to the Interim Statements 1. Basis of preparation This interim report contains the financial information of the Company and itssubsidiaries (together referred to as the "Group") for the six month periodended 30 September 2005. The interim financial information is unaudited but hasbeen formally reviewed by the auditors and their report to the company is setout on page 35. This interim report was authorised for issue by the directors on 15 November2005. As described below, this Interim Statement has been prepared in accordance withInternational Financial Reporting Standards ("IFRS"), and the comparativefigures have been restated in accordance with applicable IFRS, excepting IAS 32and IAS 39. The comparative figures for the financial year ended 31 March 2005 are not theCompany's statutory accounts for that financial year but are a restatement ofthose accounts. Those accounts, which were prepared under UK Generally AcceptedAccounting Practices ("UK GAAP"), have been reported on by the Company'sauditors and delivered to the registrar of companies. The report of the auditorswas unqualified and did not contain statements under section 237(2) or (3) ofthe Companies Act 1985. EU law (IAS Regulation EC 1606/2002) requires that the next annual consolidatedfinancial statements of the Company, for the year ending 31 March 2006, beprepared in accordance with IFRS adopted for use in the EU ("adopted IFRS"). This Interim Statement has been prepared on the basis of the recognition andmeasurement requirements of IFRS that are either endorsed by the EU andeffective (or available for early adoption) at 30 September 2005 or are expectedto be endorsed and effective (or available for early adoption) at 31 March 2006,the Group's first annual reporting date at which it is required to use adoptedIFRS. Based on these adopted and unadopted IFRS, the directors have madeassumptions about the accounting policies expected to be applied, when the firstannual IFRS financial statements are prepared for the year ending 31 March 2006. As required by IFRS 1 First-time Adoption of International Financial ReportingStandards, the impact of the transition from UK GAAP to IFRS is explained innote 13. The directors have assumed that IAS 19 Employee Benefits (as amended in December2004) issued by the International Accounting Standards Board ("IASB") will beadopted by the EU in sufficient time that it will be available for use in theannual IFRS financial statements for the year ending 31 March 2006. In accordance with IAS 1 Presentation of Financial Statements, the Group hasdisclosed additional information in respect of jointly controlled entities andassociates and exceptional items to aid understanding of the Group's financialperformance on the face of the Income Statement. An item is treated asexceptional if it is considered unusual and of such significance that separatedisclosure is needed if the financial statements are to give a true and fairview. The additional information is included in note 3 to this report. IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 FinancialInstruments: Recognition and Measurement, as permitted by IFRS 1, have beenapplied in preparing an opening IFRS balance sheet at 1 April 2005 for thepurposes of transition to IFRS and prospectively thereafter. Details areincluded in note 14 to this statement. The reconciliations and explanations of key accounting changes from UK GAAP toIFRS basis for the income statement and balance sheet at 30 September 2004 and31 March 2005, respectively, are included in note 13 to this report. On the 28September 2005, the Group issued a statement that presented and explained theconsolidated results of the Group restated from UK GAAP onto an IFRS basis forthe year ended 31 March 2005 and the balances as at 1 April 2004. The statementwas neither audited nor reviewed. The European Emissions trading scheme ("carbon trading") has been in operationsince 1 January 2005. The IASB withdrew IFRIC 3 Emission Rights in June 2005 andit has not yet been replaced with definitive guidance or interpretation forcarbon trading. The Group recognises carbon allowances granted as an intangibleasset and carbon emission liabilities incurred as a current liability. Any netliability is measured at the market price of allowances ruling at the balancesheet date. In addition to the above, the adopted IFRSs that will be effective (or availablefor early adoption) in the annual financial statements for the year ending 31March 2006 are still subject to change and to additional interpretations andtherefore cannot be determined with certainty. Accordingly, the accountingpolicies for that annual period will be determined finally only when the annualfinancial statements are prepared for the year ending 31 March 2006. Notes to the interim statements continued 2. Segmental information All revenue and profit before taxation arise from operations within GreatBritain and Ireland. The Group's principal business is the generation, distribution and supply ofelectricity and sale of gas in Great Britain and Ireland and the transmission ofelectricity in the north of Scotland. The Group also has a 50% equity share inScotia Gas Networks plc (see note 7) and this is shown as a segment whereapplicable. The primary segments are as reported for management purposes.Analysis of revenue and operating profit by segment is provided below: a) Revenue by segment Six months Six months ended ended Year ended 30 September 30 September 31 March 2005 2004 2005 £m £m £m Power Systems 258.9 Scotland 120.1 119.8 369.2 England 186.5 170.4 628.1 306.6 290.2 6,766.1 Generation and Supply 3,492.2 2,403.7 645.5 Other businesses 357.7 287.8 8,039.7 4,156.5 2,981.7 (615.1) Less inter segment revenue (275.2) (276.6) 7,424.6 3,881.3 2,705.1 b) Operating profit by segment (i) The adjusted operating profit of the Group is reported after adjustment forthe impact of changes in the fair value of operating derivatives and the removalof the Group's share of interest, fair value movements on financing derivativesand tax from jointly controlled entities and associates. (ii) Unallocated expenses comprise corporate office costs which are not directlyallocable to particular segments. Six months ended Six months ended to 30 September 2005 30 September 2004 (restated) IAS 39, Before Exceptional Total Adjusted Tax and Total Tax and exceptional item Interest Interest items share (i) Adjusted share(i) £m £m £m £m £m £m £m £m Power Systems Scotland 66.4 - 66.4 - 66.4 58.5 - 58.5 England 95.5 - 95.5 - 95.5 86.5 - 86.5 161.9 - 161.9 - 161.9 145.0 - 145.0Scotia Gas 9.6 (34.0) (24.4) - (24.4) - - -NetworksEnergy Systems 171.5 (34.0) 137.5 - 137.5 145.0 - 145.0 Generation and 190.0 35.8 225.8 46.6 272.4 134.0 (13.0) 121.0SupplyOther businesses 46.5 - 46.5 - 46.5 38.8 1.0 39.8 408.0 1.8 409.8 46.6 456.4 317.8 (12.0) 305.8Unallocated (ii) (4.1) - (4.1) - (4.1) (3.8) - (3.8)expenses 403.9 1.8 405.7 46.6 452.3 314.0 (12.0) 302.0 Notes to the interim statements continued 2. Segmental information continued b) Operating profit by segment continued Year ended 31 March 2005 (restated) Tax and Before Exceptional Total Interest exceptional item share items Adjusted (i) £m £m £m £m £m Power Systems Scotland 135.2 - 135.2 - 135.2 England 201.6 - 201.6 - 201.6Energy Systems 336.8 - 336.8 - 336.8 Generation and 388.6 (26.5) 362.1 65.8 427.9SupplyOther businesses 93.6 0.7 94.3 - 94.3 819.0 (25.8) 793.2 65.8 859.0Unallocated (ii) (8.4) - (8.4) - (8.4)expenses 810.6 (25.8) 784.8 65.8 850.6 3. Exceptional items. On 2 August 2005 a net dividend of £41.6m (March 2005, £159.1m, received 30March 2005) was received in relation to the administration of TXU Europe EnergyTrading Limited which had been placed into administration in 2002. The netreceipt of £41.6m (March 2005, £111.2m after extinguishing debtor balances) hasbeen shown separately in the income statement. 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, amounting to £7.1m, (March 2005,£22.3m) is shown separately within share of operating profit from jointlycontrolled entities and associates. The accounts to 31 March 2005 also included an exceptional impairment charge inrespect of Peterhead Power Station of £61.0m. 4. Net Finance costs Six Six months months ended 30 Year ended ended 30 September 31 March September 2004 2005 2005 (restated) (restated) £m £m £m Finance income: 106.1 Return on pension scheme assets 57.5 51.5 (ii) 3.2 Interest income from short term 2.5 0.8 deposits 16.5 Other interest receivable (i) 18.8 6.4 125.8 Total Finance income 78.8 58.7 Finance expense: (33.6) Bank loan and overdrafts (17.8) (16.6) (60.2) Other loans and charges (33.8) (28.3) (93.7) Interest on pension scheme (51.0) (45.8) liabilities (ii) - Convertible debt IAS 32 adjustment (1.8) - 3.4 Less: Interest capitalised 3.2 1.4 (3.0) Amortisation of discount (1.6) (0.9) (187.1) Total Finance expense (102.8) (90.2) (61.3) Net Finance costs (24.0) (31.5) (i) Included within other interest receivable are credits from jointlycontrolled entities of £16.7m (September 2004, £5.9m, and March 2005, £11.5m,respectively). (ii) Return on pension plan assets and Interest on pension scheme liabilitiesare offset against one another in the Earnings Per Share calculation (note 8) as"Net Pension Income". Notes to the interim statements continued 5. Taxation The income tax expense reflects the estimated effective rate on profit beforetaxation for the Group for the year ending 31 March 2006 and the movement in thedeferred tax balance in the period so far as it relates to items recognised inthe income statement. The unadjusted effective rate in the income statement is31.3% (September 2004 - 27.1%). The total effective adjusted rate on profit before tax excluding exceptionalitems, IAS 39 and 32 and adjusted for tax on associates and jointly controlledentities and net pension finance income for the period can be represented thus: Six months Six months ended 30 ended 30 Year September September 2004 ended 31 2005 March 2005 Effective adjusted rate: 25.3% Current tax 27.5% 25.3% 4.4% Deferred tax 4.1% 2.7% 29.7% Total effective adjusted rate 31.6% 28.0% The adoption of IFRS alters the reported effective tax rates for the comparativeperiods from previously published rates. Current tax payable for the current andprior periods is classified as a current tax liability to the extent that it isunpaid. 6. Dividends The final dividend of 30.3 pence per ordinary share (2004 - 26.4p) was declaredon 17 May 2005, approved at the Annual General Meeting on 28 July 2005 and waspaid to shareholders on 23 September 2005. An interim dividend per ordinary share of 13.8p (2005 - 12.2p) will be paid on24 March 2006 to those shareholders on the Scottish and Southern Energy plcshare register on 24 February 2006. 7. Acquisition of Scotia Gas Networks At 1 June 2005, Scotia Gas Networks plc ("SGN"), an entity of which the Groupholds 50%, acquired the Scotland and the South of England gas distributionnetworks from National Grid Transco. The total value of the acquisition was £3,159.3m, of which £2,191.7m wasinitially funded by non-recourse borrowings with the balance funded by theshareholders. At 9 September 2005 the shareholders of SGN provided a loanfacility of £112.4m. The non-recourse funding of this transaction was replacedby the issue of listed debt on 21 October 2005. Details of this will beincluded in the Group's Annual Report. The Group has invested £540.0m in SGN at 30 September 2005 consisting of £270.0mof subordinated loans and £270m of equity and contingent equity. The contingentequity relates to the Group's share of the 9 September 2005 loan facility(£56.2m) of which all or part may be converted into equity depending on theoutcome of the finalisation of the completion accounts process and provision ofworking capital facilities. In the four months from acquisition, the jointly controlled entity hascontributed £9.6m to the Group's underlying operating profit (note 2b). SGNentered into a contingent interest rate swap on 30 August 2004 subject to theacquisition of the gas networks in Scotland and the South of England beingcompleted. From 1 April 2005, 50% of the fair value of the swap has beenreflected in the Group's accounts including SSE's share of the fair value losson financing derivatives up to 1 June 2005, when the transaction was concluded.Since 1 June 2005, the Group's share of this loss has been reflected as part ofthe share of losses on financing derivatives of jointly controlled entities andassociates, which is shown as £7.8m (£5.5m, net of tax) on the Income Statement. The combined investment in SGN at 30 September 2005 is £451.0m consisting of the£540.0m invested less the share of the interest rate swap (£68.1m) and the lossafter interest and tax inclusive of actuarial movements on the pension scheme(£20.9m). The jointly controlled entity is accounted for using the equity method. Thetransactional values noted are provisional. Notes to the interim statements continued 8. Earnings per Share Basic earnings per share The calculation of basic earnings per share at 30 September 2005 is based on thenet profit attributable to ordinary shareholders and a weighted average numberof ordinary shares outstanding during the period ended 30 September 2005. Allearnings are from continuing operations. The calculations are shown below: 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 Year ended Six months Six months Six months Six months 31 31 ended 30 ended 30 ended 30 ended 30 March March September September September September 2005 2005 2005 2004 2005 2004 Earnings Earnings per Earnings Earnings Earnings per Earnings per share share share £m pence £m £m pence pence (restated) (restated) (restated) (restated) 559.7 65.3 Basic 265.3 197.1 30.9 23.0 (45.3) (5.3) Exceptional items (34.1) - (4.0) - 514.4 60.0 Basic excluding exceptionals 231.2 197.1 26.9 23.0 Adjusted for: 35.7 4.2 Deferred tax 14.1 8.6 1.6 1.0 (12.4) (1.4) Net pension income (note (6.5) (5.7) (0.7) (0.7) 4) - - Fair value gains on (46.6) - (5.4) - operating derivatives - - Fair value losses on 41.9 - 4.9 - financing derivatives - - Share of loss on financing 7.8 - 0.9 - derivatives - - Convertible debt IAS 32 1.8 - 0.2 - adjustment 537.7 62.8 Adjusted 243.7 200.0 28.4 23.3 559.7 65.3 Basic before convertible 265.3 197.1 30.9 23.0 debt 3.3 0.4 Convertible debt interest 5.3 - 0.6 - (net of tax) - (1.2) Dilutive effect of - - (1.2) - convertible debt 563.0 64.5 Diluted 270.6 197.1 30.3 23.0 (45.3) (5.2) Exceptional items (34.1) - (3.8) - 517.7 59.3 Diluted excluding 236.5 197.1 26.5 23.0 exceptionals The weighted average number of shares used in each calculation is as follows: 31 30 30 March September September 2005 2005 2004 Number of Number of Number of shares shares shares(millions) (millions) (millions) 857.2 For basic and adjusted earnings per 858.3 857.0 share 1.9 Effect of exercise of share options 2.8 1.6 859.1 861.1 858.6 14.2 Effect of dilutive convertible debt 33.3 - 873.3 For diluted earnings per share 894.4 858.6 Notes to the interim statements continued 9. Financial Assets / Liabilities The Group adopted IAS 39 (and IAS 32) prospectively from 1 April 2005. Detailsof the conversion are included at Note 14. Net Gains / Net Gains / (Losses): Income (Losses): Hedge At Statement Reserve At 1 April Transfer 30 September 2005 (i) 2005 £m £m £m £m £m All stated gross of tax Operating derivatives 130.1 46.6 (20.9) - 155.8Financing derivatives (98.3) (41.9) 13.9 89.5 (36.8) Total 31.8 4.7 (7.0) 89.5 119.0 (i) Represents previously contingent SGN interest rate swap transferred and nowincluded in investment in SGN from 1 June 2005. 10. Reconciliation of net movement in net cash and cash equivalents Year ended Six months ended Six months ended 31 March 30 September 30 September 2004 2005 2005 £m £m £m 204.2 (Decrease)/increase in cash and cash equivalents in the (211.3) (23.7) financial period (233.0) Net cash (inflow) from (decrease) in debt and borrowings (329.4) (214.9) (28.8) Movement in net debt in the financial period (540.7) (238.6) (1,420.0) Net debt at start of financial period (before IAS 32) (1,448.8) (1,420.0) (1,448.8) Net debt at end of financial period (before IAS 32) (1,989.5) (1,658.6) 11. Analysis of net debt At Convertible At 30 1 April Decrease (Increase)/ Net Debt debt equity September 2005 in cash Decrease excluding IAS 32 2005 (after and cash in Debt impact of adjustment £m IAS 32) Equivalents IAS 32 £m £m £m £m £m Cash and cash equivalents 232.2 (196.1) - 36.1 - 36.1Bank overdraft (i) (4.4) (15.2) - (19.6) - (19.6) 227.8 (211.3) - 16.5 - 16.5 Current loans and borrowings (28.9) (15.2) (334.5) (378.6) - (378.6)Bank overdraft (i) 4.4 15.2 - 19.6 - 19.6 (24.5) - (334.5) (359.0) - (359.0) Non current loans and borrowings (1,652.1) - 5.1 (1,647.0) 19.0 (1,628.0) Net debt (1,448.8) (211.3) (329.4) (1,989.5) 19.0 (1,970.5) (i) Bank overdrafts are reported on the balance sheet as part of current loansand borrowings. For cash flow purposes, these have been included as cash andcash equivalents. Notes to the interim statements continued 12. Reconciliation of movements in shareholders' funds Year Six months Six months ended 31 ended 30 ended 30 March September September 2005 2005 2004 £m £m £m 559.8 Profit for the period 265.3 197.2 (330.8) Dividends (260.0) (226.1) 229.0 5.3 (28.9) (16.5) Net expense recognised directly in equity (21.6) (34.7) 9.7 Share capital issued 0.7 5.5 - Transfer to profit or loss on cash flow hedges 5.6 - arising from ineffectiveness (net of tax) - Cumulative adjustment for the implementation of IAS 36.8 - 39 - Credit in respect of employee share awards 0.3 - 222.2 Net addition/(reduction) in shareholders' funds 27.1 (58.1) 1,639.6 Opening shareholders' funds 1,861.8 1,639.6 1,861.8 Closing shareholders' funds 1,888.9 1,581.5 Notes to the interim statements continued 13. Reconciliation of previously reported financial statements under UK GAAP toIFRS The Group has prepared the interim financial statements under IFRS. The UK GAAPto IFRS reconciliation of the statements listed below are included in thefollowing pages: • Income statement for the period to 30 September 2004;• Income statement for the year to 31 March 2005;• The balance sheet at 30 September 2004; and• The balance sheet at 31 March 2005. An explanation of the reclassification and re-measurements applied on adoptionof IFRS follows on pages 31 and 32. In addition to these changes, the Group has adopted IAS 32 and IAS 39prospectively from 1 April 2005. Details of the impact of adoption at that dateare included on pages 33 and 34. Notes to the interim statements continued 13. Reconciliation of previously reported financial statements under UK GAAP toIFRS continued Reconciliation of the group profit and loss account under UK GAAP to the groupincome statement under IFRS for the period to 30 September 2004 UK GAAP IAS 12 IFRS IAS IAS 19 IAS 38 IAS 36 IAS 28 Reclassification IFRS Deferred 2 16 Pensions Intangibles Goodwill and 31 tax PPE £m £m £m £m £m £m £m £m £m £m Revenue 2,705.1 2,705.1Cost of sales (2,219.1) (2,219.1)Gross profit 486.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 486.0Distributionandadministrativecosts (203.0) 0.7 (0.5) (0.2) 7.9 (195.1) OperatingProfit beforejointlycontrolledentities andassociates 283.0 0.0 0.7 (0.5) 0.0 (0.2) 7.9 0.0 0.0 290.9 Jointlycontrolledentities andassociates:Share ofoperatingprofit 23.1 23.1Share ofinterest - (8.9) (8.9)Share of taxon operatingactivities - (3.1) (3.1)Share ofjointlycontrolledentities andassociates 23.1 0.0 0.0 0.0 0.0 0.0 0.0 (12.0) 0.0 11.1 Operatingprofit 306.1 0.0 0.7 (0.5) 0.0 (0.2) 7.9 (12.0) 0.0 302.0 Net financecosts (37.2) 5.7 (31.5)Interest:Joint Ventures/ Associates (8.9) 8.9 -Other financeincome 6.2 (0.5) (5.7) -Profit beforetaxation 266.2 0.0 0.7 (0.5) (0.5) (0.2) 7.9 (3.1) 0.0 270.5 Income taxexpense (76.1) (0.4) 3.1 (73.4)Profit aftertaxation 190.1 (0.4) 0.7 (0.5) (0.5) (0.2) 7.9 0.0 0.0 197.1 Equityminorityinterests insubsidiaryundertakings 0.1 0.1Profit for theperiod 190.2 (0.4) 0.7 (0.5) (0.5) (0.2) 7.9 0.0 0.0 197.2 Notes to the interim statements continued 13. Reconciliation of previously reported financial statements under UK GAAP toIFRS continued Reconciliation of the group profit and loss account under UK GAAP to the groupincome statement under IFRS for the year to 31 March 2005 UK GAAP IAS 12 IFRS IAS IAS 19 IAS 38 IAS 36 IAS 28 Reclassification IFRS Deferred 2 16 Pensions Intangibles Goodwill and 31 tax PPE £m £m £m £m £m £m £m £m £m £m Group andshare of jointventures 7,482.8 (58.2) 7,424.6Joint ventures (58.2) 58.2 - Revenue 7,424.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 7,424.6Cost of salesbeforeexceptionalitem (6,256.1) (1.1) (6,257.2)Exceptionalitem (61.0) (61.0)Cost of sales (6,317.1) (1.1) (6,318.2) Gross profit 1,107.5 0.0 0.0 (1.1) 0.0 0.0 0.0 0.0 0.0 1,106.4 Distributionandadministrativecosts (429.0) 6.4 (0.4) 15.4 (407.6)Exceptionalitem 111.2 111.2 Operatingprofit beforejointlycontrolledentities andassociates 789.7 0.0 6.4 (1.1) 0.0 (0.4) 15.4 0.0 0.0 810.0 Jointlycontrolledentities andassociates:Share ofoperatingprofit beforeexceptionals 50.8 50.8Exceptionalitem 22.3 22.3Share ofinterest - (17.2) (17.2) Share of taxbeforeexceptionalitem - (8.6) (8.6)Tax onexceptionalitem - (6.7) (6.7)Share ofjointlycontrolledentities andassociates 73.1 0.0 0.0 0.0 0.0 0.0 0.0 (32.5) 0.0 40.6 Operatingprofit 862.8 0.0 6.4 (1.1) 0.0 (0.4) 15.4 (32.5) 0.0 850.6 Net financecosts (73.7) 12.4 (61.3)Interest:Joint Ventures/ Associates (17.2) 17.2 -Other financeincome 13.4 (1.0) (12.4) -Profit beforetaxation 785.3 0.0 6.4 (1.1) (1.0) (0.4) 15.4 (15.3) 0.0 789.3 Taxationexcludingimpact ofexceptionalitems (215.0) (2.7) 8.6 (209.1)Tax impact ofexceptionalitems (27.2) 6.7 (20.5)Income taxexpense (242.2) (2.7) 15.3 (229.6)Profit aftertaxation 543.1 (2.7) 6.4 (1.1) (1.0) (0.4) 15.4 0.0 0.0 559.7 Equityminorityinterests insubsidiaryundertakings 0.1 0.1Profit for thefinancial year 543.2 (2.7) 6.4 (1.1) (1.0) (0.4) 15.4 0.0 0.0 559.8 Notes to the interim statements continued 13. Reconciliation of previously reported financial statements under UK GAAP toIFRS continued Reconciliation of the group balance sheet under UK GAAP to IFRS as at 30September 2004 IFRS IAS IAS Re- 12 IAS IAS 38 class- De- 10 IAS 19 In- IFRS 3 IAS UK ifica- ferred Divi- IFRS 16 Pen- tan- IFRS 3 Acqu- 31 GAAP tions tax dends 2 PPE sions gibles Goodwill isitions JVs IFRS £m £m £m £m £m £m £m £m £m £m £m £m AssetsProperty,plant &equipment 4,337.6 2.9 4,340.5Intangibleassets- goodwill 284.3 7.9 (0.8) 291.4- otherintangibleassets 8.6 4.7 13.3Investmentsunder equitymethod 198.5 (0.4) 198.1Employeebenefit - 87.1 87.1Deferred taxasset - 94.4 94.4 Non-currentassets 4,829.0 0.0 0.0 0.0 0.0 2.9 181.5 4.7 7.9 (0.8) (0.4) 5,024.8 CurrentassetsInventories 136.5 136.5Trade andotherreceivables 688.5 2.5 691.0Current assetinvestments 13.4 (13.4) -Cash and cashequivalents - 13.4 13.4 Current 838.4 0.0 0.0 0.0 2.5 0.0 0.0 0.0 0.0 0.0 0.0 840.9assets Total assets 5,667.4 0.0 0.0 0.0 2.5 2.9 181.5 4.7 7.9 (0.8) (0.4) 5,865.7 LiabilitiesLoans andotherborrowings (292.1) (292.1)Trade andother payables (1,006.5) 104.9 0.8 (900.8)Current taxliabilities (76.7) (76.7)Deferredincome (25.7) (25.7)Short-termprovisions - (21.4) (21.4) Currentliabilities (1,401.0) (21.4) 0.0 104.9 0.0 0.0 0.0 0.0 0.0 0.8 0.0 (1,316.7) Non-CurrentliabilitiesLoans andotherborrowings (1,377.0) (1,377.0)Deferred taxliabilities (521.0) (313.2) 1.0 (26.2) (859.4)Long-termprovisions (132.9) 21.4 (111.5)Deferredincome (279.8) (279.8)Employeebenefitobligations (169.3) (170.5) (339.8) Non-currentliabilities (2,480.0) 21.4 (313.2) 0.0 1.0 0.0 (196.7) 0.0 0.0 0.0 0.0 (2,967.5) Totalliabilities (3,881.0) 0.0 (313.2) 104.9 1.0 0.0 (196.7) 0.0 0.0 0.8 0.0 (4,284.2) Net assets 1,786.4 0.0 (313.2) 104.9 3.5 2.9 (15.2) 4.7 7.9 0.0 (0.4) 1,581.5 EquityShare 429.2 429.2capital Share 77.7 77.7premiumCapitalredemptionreserve 13.7 13.7Retainedearnings 1,266.2 (313.2) 104.9 3.5 2.9 (15.2) 4.7 7.9 (0.4) 1,061.3 Equityattributableto equityholders ofthe Group 1,786.8 0.0 (313.2) 104.9 3.5 2.9 (15.2) 4.7 7.9 0.0 (0.4) 1,581.9Minorityinterest (0.4) (0.4) Total equity 1,786.4 0.0 (313.2) 104.9 3.5 2.9 (15.2) 4.7 7.9 0.0 (0.4) 1,581.5 Notes to the interim statements continued 13. Reconciliation of previously reported financial statements under UK GAAP toIFRS continued Reconciliation of the group balance sheet under UK GAAP to IFRS as at 31 March2005 IFRS IAS IAS Re- 12 IAS IAS 38 class- De- 10 IAS 19 In- IFRS 3 IAS UK ifica- ferred Divi- IFRS 16 Pen- tan- IFRS 3 Acqu- 31 GAAP tions tax dends 2 PPE sions gibles Goodwill isitions JVs IFRS £m £m £m £m £m £m £m £m £m £m £m £m AssetsIntangibleassets- goodwill 260.6 15.4 17.5 293.5- otherintangibleassets 8.2 4.5 12.7Property,plant &equipment 4,383.8 2.3 4,386.1Investmentsunder equitymethod 213.8 (0.4) 213.4Employeebenefit - 98.9 98.9Deferred taxasset - 97.9 97.9 Non-currentassets 4,866.4 0.0 0.0 0.0 0.0 2.3 196.8 4.5 15.4 17.5 (0.4) 5,102.5 CurrentassetsInventories 134.1 134.1Trade andotherreceivables 1,073.7 3.3 1,077.0Current assetinvestments 218.5 (218.5) 0.0Cash and cashequivalents 13.7 218.5 232.2 Current 1,440.0 0.0 0.0 0.0 3.3 0.0 0.0 0.0 0.0 0.0 0.0 1,443.3assets Total 6,306.4 0.0 0.0 0.0 3.3 2.3 196.8 4.5 15.4 17.5 (0.4) 6,545.8assets LiabilitiesLoans andotherborrowings - (28.9) (28.9)Trade andother payables (1,700.8) 182.0 260.0 5.1 (1,253.7)Current taxliabilities - (138.0) (138.0)Deferredincome - (15.1) (15.1)Short-termprovisions - (19.7) (19.7) Currentliabilities (1,700.8) (19.7) 0.0 260.0 5.1 0.0 0.0 0.0 0.0 0.0 0.0 (1,455.4) Non-CurrentliabilitiesLoans andotherborrowings (1,918.4) 266.3 (1,652.1)Deferred taxliabilities (530.4) (314.5) (29.7) (17.5) (892.1)Long-termprovisions (111.3) 19.7 (91.6)Deferredincome - (266.3) (266.3)Employeebenefitobligations (143.6) (182.9) (326.5) Non-currentliabilities (2,703.7) 19.7 (314.5) 0.0 0.0 0.0 (212.6) 0.0 0.0 (17.5) 0.0 (3,228.6) Totalliabilities (4,404.5) 0.0 (314.5) 260.0 5.1 0.0 (212.6) 0.0 0.0 (17.5) 0.0 (4,684.0) Net assets 1,901.9 0.0 (314.5) 260.0 8.4 2.3 (15.8) 4.5 15.4 0.0 (0.4) 1,861.8 EquityShare 429.4 429.4capitalShare 81.6 81.6premiumCapitalredemptionreserve 13.7 13.7Retainedearnings 1,199.1 (311.8) 226.1 2.0 3.4 (14.8) 4.9 1,108.5 -current 178.5 (2.7) 33.9 6.4 (1.1) (1.0) (0.4) 15.4 (0.4) 229.0yearEquityattributableto equityholders ofthe Group 1,902.3 0.0 (314.5) 260.0 8.4 2.3 (15.8) 4.5 15.4 0.0 (0.4) 1,862.2Minorityinterest (0.4) (0.4)Total 1,901.9 0.0 (314.5) 260.0 8.4 2.3 (15.8) 4.5 15.4 0.0 (0.4) 1,861.8equity Notes to the interim statements continued 13. Reconciliation of previously reported financial statements under UK GAAP toIFRS continued Certain income statement and balance sheet items, previously reported under UKGAAP, have been reclassified to comply with the Group's format for reportingunder IFRS. In addition to this, certain other balances have been remeasured by applying theGroup's new accounting policies in accordance with IFRS from 1 April 2004. Adescription of these accounting changes and their impact on the restatedfinancial statements at 30 September 2004 and 31 March 2005 follows. Note that, as permitted, IAS 32 and IAS 39 have not been applied to theserestatements and instead have been applied prospectively from 1 April 2005.Details on this are included at Note 14. i) Deferred Tax Under UK GAAP, deferred tax is provided on timing differences whereas, under IAS12 Income Taxes, provision must be made based on temporary differences betweencarrying values and the related tax base of assets and liabilities, except incertain circumstances. Under UK GAAP, the Group's policy was to recognise deferred tax on a discountedbasis. Under IFRS, this is not permitted and the deferred tax provision has beenrestated accordingly. The impact of these changes has been to reduce net assets at 30 September 2004and 31 March 2005 by £313.2m and £314.5m, respectively. Consequently, anadditional charge of £0.4m, for the six month period to 30 September 2004, and£2.7m, for the year to 31 March 2005, has been reflected in the respectiveIncome Statements. ii) Current Dividend Under UK GAAP, proposed dividends are recognised in the year in which theprofits to which they relate were earned. IAS 10 Events after the Balance SheetDate requires that dividends should not be accrued until the date at which theyare declared. As the Company normally declares its final dividend after itsresults are approved by its Board, final dividends are not accrued at the yearend. Consequently, this has the effect of increasing opening net assets at 1 April2004 by £226.1m and closing net assets at 30 September 2004 and 31 March 2005 by£104.9m and £260.0m, respectively. iii) Share Based Payments Under UK GAAP, Inland Revenue-approved "save as you earn schemes", such as SSE'sshare-save scheme, did not result in a charge being taken to the profit and lossaccount. Other employee share schemes were accounted for on an intrinsic valuebasis. Under IFRS 2 Share based payments, all grants of equity instruments arerequired to be measured at fair value, with an appropriate charge being made tothe income statement in the appropriate accounting period. SSE has elected to adopt the provisions of IFRS 1 which allow first timeadopters to apply the rules of IFRS 2 only to options granted after 7 November2002 and which had not vested by 1 January 2005. The Group's employee share schemes have been accounted for in accordance withIFRS 2. The impact of this is a credit to the Income Statement of £0.7m, for theperiod to 30 September 2004, and a credit of £6.4m, for the year to 31 March2005. iv) Property, Plant and Equipment The main change for the Group from the adoption of IAS 16 Property, Plant andEquipment relates to the hydro generation infrastructure network. Under UK GAAP, the hydro generation infrastructure network, including the dams,tunnels and other hydro civil engineering structures, was considered to have anindefinite life and was not subject to depreciation. Expenditure to maintain thehydro generation civil infrastructure was dealt with using the renewalsaccounting provisions of FRS 15 Tangible Fixed Assets. Under IAS 16 Property, Plant and Equipment, renewals accounting is prohibitedand all items of property, plant and equipment should be subject todepreciation, with the exception of land. As a result all aspects of accountingfor these assets and expenditures have been amended to be compliant with IFRS. Consequently, the Group identified the carrying value of the Hydro Civil Assetsacquired in 1990 on privatisation and rolled this balance forward for additionsand depreciation based on a useful economic life of 100 years. The overalleffect is to increase net assets by £3.4m at 1 April 2004, the date oftransition, with an additional net charge of £0.5m in the six month period to 30September 2004 and of £1.1m in the year ended 31 March 2005 being recognised.Qualifying expenditure on these assets will be capitalised and depreciated overthe useful life of the assets. v) Retirement Benefits Under UK GAAP, the Group fully adopted FRS 17 Retirement Benefits in 2002. TheGroup's revised policy is to account for retirement and other benefits inaccordance with the revised version of IAS 19 Employee Benefits. The method ofaccounting for pension scheme assets and liabilities, actuarial gains and lossesand income and charges associated with such schemes under IAS 19 is very similarto FRS 17 but some notable differences exist. The main remeasurement change under IAS 19 is the requirement for scheme assetsto be valued at a bid price rather than a mid market valuation. The effect ofthis change is the net asset balances at 30 September 2004 and 31 March 2005 arelower by £15.2m and £15.8m, respectively. This rebasing has increased otherfinance costs under IAS 19 by £0.5m in the six months to 30 September 2004 and£1.0m in the year to 31 March 2005. In addition to this, surpluses or deficits on the Group's schemes are reportedgross on the face of the Balance Sheet rather than net of deferred tax, as isthe practice under UK GAAP. Notes to the interim statements continued 13. Reconciliation of previously reported financial statements under UK GAAP toIFRS continued vi) Intangible Assets Under IAS 38 Intangible Assets, the Group has reclassified the software licenceand development costs incurred since 1 April 2000, which had been expensed underUK GAAP, as Intangible Assets. The Group's policy for amortisation of these assets is to amortise these over aperiod of 5 years. As a result, net assets at 30 September 2004 and 31 March2005 have been increased by £4.7m and £4.5m. vii) Business Combinations Under UK GAAP, goodwill is amortised over its estimated useful economic life.Under IFRS, this is prohibited by IFRS 3 Business Combinations which insteadrequires an annual impairment review in accordance with IAS 36 Impairment ofAssets to be carried out. At the transition date of 1 April 2004, the net balance of goodwill recognisedunder UK GAAP has been carried forward. This balance will thereafter be subjectto an impairment review which will be carried out on at least an annual basis. The goodwill amortisation charge under UK GAAP for the six month period to 30September 2004 and for the year ended 31 March 2005 of £7.9m and £15.4m,respectively, have been reversed in the Income Statement. viii) Associates and Joint Controlled Entities Under UK GAAP, the Group's share of the operating profit, interest and taxationof associates and joint ventures have been reported separately on the face ofthe profit and loss account. Under IFRS, the Group's share of profit after tax for its associates and jointlycontrolled entities is reported as a single line item within operating profit.To aid the comparability and understandability of the Group's results, the Groupdiscloses such additional information required to allow continued reporting ofoperating profit inclusive of the operating profit from associates and jointlycontrolled entities. In addition to this, an adjustment in relation to deferred taxation under IAS 12requires a £0.4m reduction to the opening carrying value of investments injointly controlled entities. The Group will continue to account for jointly controlled entities under equityaccounting rules as permitted by IAS 31 Interests in Joint Ventures. ix) Other Accounting Policies All other accounting policies which have not been specifically disclosed in thisdocument have not changed significantly from previous policies under UK GAAP. Notes to the interim statements continued 14. IAS 39 and IAS 32: Notes to the conversion In accordance with IFRS 1, the balance sheet at 31 March 2005 and the incomestatement for the year ended 31 March 2005 have not been restated to reflect theadoption of IAS 39 and IAS 32. The principal effect of the adoption of these standards at 1 April 2005 is torecord certain derivative financial instruments in the balance sheet at theirfair value. Operating Derivatives IAS 39 does not apply to commodity contracts that are held for the Group's "ownuse" requirements, although the definition of "own use" is narrow. Suchcontracts continue to be accounted for under accruals accounting. Outwith the exemption for own use contracts, all derivatives must be recognisedat fair value with changes in value being recognised in the income statement,with the exception of contracts which qualify for cash flow hedge accountingtreatment. Under cash flow hedge accounting, movements on the effective portion of thehedge are recognised through a special hedge reserve, while any ineffectivenessis taken to the income statement. The impact of this is to minimise the impactof fair value movements to the income statement and, hence, reduce potentialvolatility. The fair values applied to the contracts which require to be so treated arebased on forward price curves generated from a combination of published marketdata and, for periods where such data is not available, internal valuationtechniques. The values attributed to the balance sheet are based on the presentvalue of the differences between contract prices and these forward curves. The financial impact of this approach before associated deferred tax has been toincrease opening net assets at 1 April 2005 by £130.1m, comprising £49.2mcredited to the hedge reserve and £80.9m credited to retained earnings. Financing Derivatives IAS 39 also applies to the treatment of the Group's loans, borrowings andderivatives. Under IAS 39, loans and borrowings are carried at amortised cost. However,derivatives are recognised separately on the balance sheet at fair value withmovements in those fair values being reflected through the income statement. Qualifying interest rate derivatives are accounted for under "cash flow" hedgingrules, as described above, or under "fair value" hedge accounting rules. "Fairvalue" hedge accounting requires both the fair value of the hedged item and thehedging instrument to be recognised on the balance sheet, with movements on bothbeing recognised through the income statement. Furthermore, certain foreignexchange transactions are accounted for under the "cash flow" hedge accountingrules previously described. The financial impact of this approach before associated deferred tax has been toreduce opening net assets at 1 April 2005 by £43.6m, comprising £23.0m debitedto the hedge reserve and £20.6m debited to retained earnings. Convertible debt Under UK GAAP, the Group's convertible debt was accounted for as part of netdebt and was shown as a liability on the balance sheet. Under IAS 32, this compound instrument is required to be split into its debt andequity elements, with the debt element being measured at fair value atinception. This will increase interest charged to the income statement over theterm of the debt and has the impact of increasing net assets, by reducingborrowings, and increasing shareholder's equity, by £14.6m at 1 April 2005. Scotia Gas Networks The impact of the Group's share of the contingent interest rate swap held byScotia Gas Networks plc, of which the Group owns 50%, has been recognised at 1April 2005. The purchase by Scotia Gas Networks plc of gas networks in Scotland and theSouth of England from National Grid Transco completed at 1 June 2005. However,at 1 April 2005 the acquisition of the operating companies remained contingenton final approval by Ofgem and the Health and Safety Executive. As a result, atthat date, the interest rate swap was contingent on the success of theconsortium's proposed purchase. The Group's share of this contingent swap was £54.7m "out of the money" beforetax at the date of conversion. The swap does not qualify for hedge accountingand must therefore be marked to market through the income statement. Notes to the interim statements continued 14. IAS 39: Notes to the conversion continued Summary The impact of these adjustments to the balance sheet at 1 April 2005 can besummarised as follows: At 1 April 2005 Operating Financing Scotia Gas Convertible TOTAL Derivatives Derivatives Networks Debt £m £m £m £m £m IAS 39 asset / (liability) 130.1 (43.6) (54.7) 31.8Deferred tax liability / (asset) (39.1) 13.1 16.4 (6.2) (15.8)Borrowings 20.8 20.8 Total net assets / (liability) 91.0 (30.5) (38.3) 14.6 36.8 Fair value deferred in hedge 34.4 (16.1) 18.3reservesFair value deferred in retained 56.6 (14.4) (38.3) 3.9earningsShareholders' equity 14.6 14.6 Shareholders' funds 91.0 (30.5) (38.3) 14.6 36.8 Independent review report to Scottish and Southern Energy plc Introduction We have been engaged by the Company to review the financial information set outon pages 14 to 34 and we have read the other information contained in theinterim report and considered whether it contains any apparent misstatements ormaterial inconsistencies with the financial information. 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 ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the Company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted by law,we do not accept or assume responsibility to anyone other than the Company forour review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of and has been approved by the directors. The directors areresponsible for preparing the interim report in accordance with the ListingRules which require that the accounting policies and presentation applied to theinterim figures should be consistent with those applied in preparing thepreceding annual financial statements except where any changes, and the reasonsfor them, are disclosed. As disclosed in note 1 to the financial information, the next annual financialstatements of the group will be prepared in accordance with IFRSs adopted foruse in the European Union. The accounting policies that have been adopted in preparing the financialinformation are consistent with those that the directors currently intend to usein the next annual financial statements. There is, however, a possibility thatthe directors may determine that some changes to these policies are necessarywhen preparing the full annual financial statements for the first time inaccordance with those IFRSs adopted for use by the European Union. This isbecause, as disclosed in note 1, the directors have anticipated that certainstandards, which have yet to be formally adopted for use in the EU, will be soadopted in time to be applicable to the next annual financial statements. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4Review of interim financial information issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of makingenquiries of group management and applying analytical procedures to thefinancial information and underlying financial data and, based thereon,assessing whether the accounting policies and presentation have beenconsistently applied unless otherwise disclosed. A review is substantially lessin scope than an audit performed in accordance with Auditing Standards andtherefore provides a lower level of assurance than an audit. Accordingly, we donot express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 September 2005. KPMG Audit Plc Chartered Accountants Edinburgh 15 November 2005 This information is provided by RNS The company news service from the London Stock Exchange

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