Interim Results

15th Nov 2006 07:03

Scottish & Southern Energy PLC15 November 2006 15 November 2006 INTERIM RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2006 September 2006 September 2005 Change Interim Dividend 15.1p 13.8p +9.4%Adjusted Profit Before Tax* £455.4m £336.3m +35.4%Adjusted Earnings Per Share* 39.1p 28.4p +37.7%Investment and Capital Expenditure £288.0m £244.0m +18.0% Power Station Availability (Gas) 95% 83% +14.4%Power Station Availability (Coal) 97% 83% +16.8%Energy Supply Customer Numbers** 7.5m 6.5m +1mCustomer Complaints to energywatch 466 905 -49%Customer Minutes Lost (SHEPD) 33.56 33.44 + 0.12 minsCustomer Minutes Lost (SEPD) 34.24 35.05 - 0.81 mins Lost Time and Reportable Injuries 6 8 -25%Reportable Environmental Incidents 0 0 - ** As at date of interim results presentation. Sir Robert Smith, Chairman of Scottish and Southern Energy, said: "SSE has delivered another very strong financial and operational performance,with the gain of one million customers in the past 12 months being particularlysignificant. Our ongoing focus on the operational issues that matter to ourcustomers, and the continuing returns from the significant investments we havemade over the past few years, have delivered substantial increases in profitbefore tax and in the interim dividend. This, in turn, puts us in a position toimplement our major programme of investment in the future, which will contributesignificantly to the achievement of the UK's goal of more reliable and lowercarbon energy supplies. "Put simply, our core purpose is to provide the energy that people need in areliable and sustainable way. From that flows our ability to deliver our coreobjective of sustained real growth in the dividend. With our continuingemphasis on achieving operational excellence and with many outstandinginvestment opportunities in front of us, we are in an excellent position toenhance and create value in the future. The outlook for sustained real growthin the dividend is, therefore, very good indeed." \* 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. It also describes adjusted earningsand earnings per share before exceptional items, net finance income from pensionassets (IAS 19), the impact of IAS 32 and IAS 39 and deferred tax. In addition,it describes adjusted operating profit before exceptional items, net financeincome from pension assets (IAS 19), the impact of IAS 32 and IAS 39, and afterthe removal of taxation and interest on profits from jointly controlled entitiesand associates. KEY DEVELOPMENTS IN THE SIX MONTHS TO 30 SEPTEMBER 2006 ENERGY SYSTEMS • Operating profit* up 7.5% to £184.5m • Power Systems operating profit up 0.3% to £162.5m • Investment in electricity networks of £100.5m • Fewer Customer Interruptions in electricity in Scottish Hydro Electric PD and Southern Electric PD • Beauly-Denny Public Inquiry scheduled for February 2007 • Share of SGN's adjusted operating profit* up from £9.6m (4 months) to £22.0m (6 months) GENERATION AND SUPPLY • Operating profit* up 56.8% to £298.0m Generation • Gas-fired power station availability up from 83% to 95%; coal station availability up to 97% • Agreement to acquire 50% stake in Marchwood Power Ltd, a new 850MW gas-fired power station • Proposed 400MW extension to Barking Power Ltd • Plan for £20m ash separation plant at Fiddler's Ferry • Hadyard Hill became first UK wind farm to generate over 100MW of electricity • Planning permission secured for 32MW wind farm at Drumderg in Perthshire Supply • Net gain of one million energy supply-related customers in a year, following policy of responsible pricing • Lowest domestic prices for gas and dual fuel • Further reduction, of 49%, in complaints to energywatch • Ranked first in uSwitch.com customer satisfaction survey and top performer in JD Power Study • Abolition of extra charge levied on 'pay-as-you-go' (or pre-payment) electricity tariffs • 50,000 'talk with' telecoms customers achieved for first time • First 5,000 customers won by new domestic gas boiler installation, maintenance and repair business CONTRACTING, CONNECTIONS AND METERING • Operating profit* up 13.1%** to £24.2m • Eastern Contracting secured major contract at Colchester Barracks • Leeds City Council street lighting PFI launched • Continued expansion of out-of-area electricity networks • Pre-application discussions under way with Ofwat for water 'inset' appointments • In-sourcing of Metering work in SWALEC and SWEB areas GAS STORAGE • Operating profit* up 113.3% to £29.0m • Successful auction of five-year storage capacity in July 2006 • First new storage capacity at Aldbrough set to be commissioned in the autumn of 2007 • Planning permission sought to double size of Aldbrough development to over 800mcm TELECOMS • Operating profit* up 8.2% to £6.6m • Increased sales to major customers • £5m investment to upgrade ethernet platform EXCEPTIONAL ITEM - TXU Europe Group plc • Fourth distribution payment of £24.5m received (plus £0.9m in respect of Barking Power Ltd) • On course for recovery of over 95% of agreed claim ** Excluding Thermal Transfer business sold on 31 March 2006 FINANCIAL OVERVIEW These interim results for the six months to 30 September 2006 are reported underInternational Financial Reporting Standards. SSE's focus has been on profitbefore tax before exceptional items, net finance income from pension assets (IAS19), the impact of IAS 32 and IAS 39, and after the removal of taxation onprofits from jointly controlled entities and associates, and the interim resultscommentary has been prepared on this basis. From March 2007, however, and inline with emerging practice, SSE does not intend to make any adjustment inrespect of net finance income from pension assets (IAS 19). On this basis,profit before tax for the six months to 30 September was £466.5m, up from£342.8m in the year before. Sept 06 Sept 05 £m £m Reported Profit before Tax 484.5 386.4 Movement in derivatives 4.8 3.1Exceptional items (25.1) (46.6)Tax on JVs and Associates 0.3 (1.9)Interest on convertible debt 2.0 1.8 466.5 342.8Return on pension scheme assets (64.5) (57.5)Interest on pension scheme liabilities 53.4 51.0Adjusted Profit before Tax* 455.4 336.3 Adjusted current tax charge (118.6) (92.6) Adjusted Profit after Tax 336.8 243.7 Reported profit after tax 349.0 265.3Number of shares for basic and adjusted EPS(million) 860.3 858.3 Adjusted EPS* 39.1p 28.4p Basic EPS 40.6p 30.9p Adjusted profit before tax* Adjusted profit before tax grew by 35.4%, from £336.3m to £455.4m. There wasprofit growth in all parts of SSE's business. The most substantial growthcontinues to be achieved in Generation and Supply. This reflects thedevelopment and diversification of SSE's electricity generation portfolio, whichis now over 10,000MW, and the sustained increase in the number of energysupply-related customers, which now total 7.5 million. Adjusted Earnings per share* To monitor financial performance over the medium-term, SSE continues to focus onadjusted earnings per share, which increased by 37.7%, from 28.4p to 39.1p. Interim Dividend The Board is declaring an interim dividend of 15.1p, compared with 13.8p in theprevious year, an increase of 9.4%. This compares with a 9.0p interim dividendin 2000/01, since when the interim dividend has increased by 67.8%, whichrepresents a compound annual growth rate of 9.0%. SSE expects to achieve itsoverall target for the full year dividend in 2006/07 of at least 4% real growth. The progress achieved by SSE's businesses in the first six months of thisfinancial year, and the major opportunities that have been created in EnergySystems, Generation and Supply and in other businesses such as Gas Storage, meanSSE is also on course to achieve its target of at least 4% real growth in thedividend payable to shareholders in 2007/08, with sustained real growththereafter. ENERGY SYSTEMS Energy Systems Overview Operating profit* in Energy Systems, including gas distribution, increased by7.5%, from £171.5m to £184.5m, contributing 34.1% of SSE's total operatingprofit in the first half of the year. Growth in operating profit of 0.3%, to£162.5m, was achieved in power distribution despite a fall in the number ofunits of electricity distributed. While this fall reflected the warmer thannormal weather experienced in the first half of 2006/07, it appears thatunderlying demand for electricity stopped growing during the period. This mayreflect the impact of higher prices for electricity and customers' growingawareness of the need for greater energy efficiency. Southern Electric Power Distribution Southern Electric Power Distribution's operating profit* increased by 0.4% to£95.9m. During the period, SEPD distributed 15.56TWh of electricity, comparedwith 15.63TWh in the previous year. This reduction in the number of unitsdistributed was more than offset by changes in the price of units distributed. The average number of minutes of lost electricity supply per customer was 34.24,compared with 35.05 in the previous year. The number of supply interruptions per100 customers was 36.43, compared with 40.08 in the previous year. Performancein respect of both minutes lost and interruptions was ahead of the targets setby Ofgem under its Quality of Service Incentive Scheme (QSIS), which givesfinancial benefits to distribution network operators that deliver goodperformance for customers. Scottish Hydro Electric Power Distribution and Scottish Hydro ElectricTransmission Operating profit* for Scottish Hydro Electric Power Distribution and ScottishHydro Electric Transmission increased by 0.3% to £66.6m. In the Scottish HydroElectric area, 3.78TWh of electricity were distributed during the period,compared with 3.83TWh distributed in the previous year. This reduction in thenumber of units distributed was more than offset by changes in the price ofunits distributed. The average number of minutes of lost electricity supply per customer was 33.56,compared with 33.44 in the previous year. The number of supply interruptions per100 customers was 38.66, compared with 41.42 in the previous year. Performancein respect of both minutes lost and interruptions was, however, ahead of Ofgem'sQSIS targets. Electricity Network Investment 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. The Distribution Price Control Review for 2005-10resulted in substantially increased allowances for capital expenditure tomaintain and improve the electricity networks. This increased investmentprogramme is now well under way, with capital expenditure in the first half ofthe year 18.9% higher than in the first half of the previous year, and 33.8%higher than in the same period in 2004/05. With 18 months of the five-year Price Control period completed, SSE forecaststhat the Regulated Asset Value (RAV) of its distribution and transmissionbusinesses is expected to grow by around £500m (or around £120m in real terms)during the 2005-2010 Price Control period, excluding any major transmissioninvestment. Future Transmission Developments Scottish Hydro Electric Transmission remains responsible for operating,maintaining and investing in the transmission network in its area, which servesaround 70% of Scotland. In September 2006, Ofgem published updated proposals in its consultation on theprice controls for the electricity transmission companies that will form part ofthe Transmission Price Control Review for 2007-12. Ofgem stated that itsproposals are designed to ensure the transmission companies 'are able to makethe investment needed to maintain the existing high level of performance fromtheir networks...and...can meet the investment needs emerging from the growth ofrenewable generation'. Overall, Ofgem's proposals represented a constructivestep forward, although there is much detailed work still to be done, includingin respect of the allowed cost of capital, before the final proposals arepublished on 4 December. As the licensed transmission company for the north of Scotland, SSE has toensure there is sufficient network capacity for those seeking to generateelectricity from renewable sources. The project to replace the electricitytransmission line connecting Beauly in the Highlands with Denny in the CentralBelt of Scotland is in line with that responsibility. It is likely that theconstruction of its part of the replacement line will require an investment bySSE of around £250m. SSE's applications to Scottish Ministers for consent to construct its part ofthe new line have been referred to a Public Inquiry. Pre-Inquiry meetings havebeen held and the Inquiry itself will start in February 2007. It is hoped thatthe report of the Inquiry will be submitted to Scottish Ministers by the end of2007 for a final decision. Scotia Gas Networks - Financial In 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. The networks comprise 73,000km of gas mains, delivering gas toaround 5.6m industrial, commercial and domestic customers. SSE's actualinvestment was £505.0m, including shareholder subordinated debt, in return forwhich it receives 50% of the distributable earnings from the networks. SSE isalso providing corporate and management services for SGN. SSE's share of SGN's adjusted operating profit was £22.0m during the period,compared with £9.6m for the four months from 1 June 2005. This partly reflectsimproving performance by SGN in its non-regulated activities and is despitehigher costs arising as a result of increased 'shrinkage' gas charges, resultingfrom the need to replace gas introduced into the distribution system but notdelivered to customers. Through efficient network management, however, SGN'sshrinkage volume is now lower than in the previous year, and the new pricecontrol for 2007/08 should provide a more appropriate incentive regime forshrinkage gas going forward. As previously stated, the financial performance of this business is heavilyweighted towards the second half of the financial year, because of theseasonality of gas consumption. This effect was compounded this year by the factthat temperatures were generally above average during the first half of theyear. SGN estimates it would have earned additional revenue of over £8m iftemperatures had been normal. Moreover, as in electricity, it appears thathigher prices for gas and a growing awareness of the importance of energyefficiency have had an impact on gas consumption during the period, which waslower than normal even allowing for weather-related variations in demand. Scotia Gas Networks - Operational SGN's medium term objective is to be at the frontier for safety, customerservice and efficiency in gas distribution. During the period, it madesignificant progress towards the achievement of these goals. In September 2006,the trade unions' ballot produced a substantial vote in favour of SGN's pay andproductivity offer for the three years until 2009, which will allow theintroduction of much more flexible working patterns. The implementation of the new structure for the business is virtually completed,and replaces the previous functionally-based arrangement with ageographically-based organisation operating out of 24 depots. Thisreorganisation is intended to improve SGN's effectiveness in its customer-facingactivities such as emergency response, repairs, metering work and streetworks. During the first half of 2006/07, this focus on customer service helped SGNdeliver a reduction in the number of complaints about it sent to energywatch forresolution of 76%, to 26. Good progress has also been made with theintroduction of new front office management systems, reducing the total numberfrom over 50 to 11. This is scheduled for completion in this financial year. During the period, SGN invested around £50m in capital expenditure projects andaround £80 in mains replacement expenditure works, under its 30:30 mainsreplacement programme. This is the replacement of all iron gas mains within 30metres of domestic properties within a 30 year timeframe. Future SGN developments In addition to its core gas distribution activities, SGN has establishedConnections, Contracting and Commercial Services businesses. Amongst otherthings, these new businesses carry out work previously done by contractors andthey will provide the scope for SGN to enhance revenue from non-regulatedactivities in future years. As a result of this, SGN now employs over 4,000people. Initial proposals for the gas distribution one-year price control review, untilApril 2008, were published by Ofgem in September 2006. They include a newmechanism for providing allowances in relation to shrinkage gas and proposalsfor the treatment of pension deficits. Other issues include the calculation ofoperating cost allowances, treatment of the additional investment in the gasdistribution network incurred in previous years and the cost of capital.Detailed discussions are continuing and Ofgem's final proposals will bepublished on 4 December. GENERATION AND SUPPLY Generation and Supply Overview Operating profit* in Generation and Supply rose by 56.8%, from £190.0m to£298.0m, contributing 55.1% of SSE's total operating profit in the first half ofthe year. The underlying financial performance of Generation and Supply has beenreported excluding the impact of IAS 39 revaluations (see 'Financial Overview'above) as SSE does not believe this represents underlying business performance.The result includes contract and impairment provisions totalling £15m relatingto SSE's Combined Heat and Power activities. Within its integrated business model, SSE's power stations are used to supportperformance in energy supply. The electricity produced by SSE's own powerstations is supplemented by electricity acquired via bilateral contracts andthrough trading. Performance in Generation and Supply is assessed as a singlevalue chain. In this context, the continuing growth achieved by SSE's integrated Generationand Supply business is the outcome of the company's investment in andacquisition of a diverse range of electricity generating assets and a growth of66% in the number of energy supply customers over the past five years. Morespecifically, it also reflects the fact that SSE's power stations delivered agreater level of availability to generate electricity in the first half of theyear compared with the same period last year. There was also much more outputof wind energy during the period. In addition, SSE has continued to performwell in the wholesale electricity balancing mechanism. Sensitivities in respect of energy availability and prices are always greatestduring 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. Gas-fired Generation - Operations SSE owns 4,300MW of gas-fired electricity generation capacity, including itsshare of joint ventures. Good performance in BETTA is dependent on plantreliability. During the first half of the year, SSE's principal wholly-ownedgas-fired power stations (Fife, Keadby, Medway and Peterhead) achieved 95% oftheir maximum availability to generate electricity, excluding planned outages, asignificant improvement on the 83% availability in the same period last year. Gas-fired Generation - Investment In January 2006, SSE acquired an additional 8.35% stake in Barking Power Ltd for£14.7m, giving SSE a total stake of 30.4% in the 1,000MW combined cycle gasturbine (CCGT) station. During August 2006, Barking Power Ltd submitted aSection 36 application for consent to develop a new 400MW CCGT. If consented,this would effectively add around 120MW to the portfolio of generation assetsowned by SSE. In July 2006, SSE entered into an agreement with ESBI (Ireland's ESBInternational) to acquire 50% of the shares in Marchwood Power Ltd, inanticipation of the construction of a new gas-fired power station nearSouthampton, with an installed capacity of around 850MW, for which consent underSection 36 of the Electricity Act has already been granted. The favourablelocation of the power station means it will actually receive payments under thecurrent arrangements for charging generators for use of the electricitynetworks. When operational, SSE will supply all of the fuel for the power station and takefrom it all of the electricity generated. The power plant will be constructedunder a turnkey contract and a long-term maintenance agreement entered into withSiemens, the preferred gas turbine supplier. It will have one of the highestthermal efficiencies of any power station in the UK and in a typical year willmeet the electricity requirements of around one million homes. SSE and ESBI will each have 50% of the shares in Marchwood Power Ltd. It will befinanced on the basis of a likely debt/equity ratio of 80%/20%. The totalproject cost is estimated to be around £400m, which means that SSE's equityinvestment in the venture is likely to be around £40m. SSE will provide 50% ofthe project debt requirements (other than the VAT and Working Capitalfacilities) as a lender. The development is subject to the securing of non-recourse finance and thefinalisation of a power purchase agreement, which will determine issues such ashow the plant is to be operated and how it is to be remunerated for beingavailable to generate electricity. SSE and ESBI aim to achieve financial closeshortly. Construction work is expected to start in 2007, with the power station beingfully commissioned before the winter of 2009/10. Upon completion, the stationwill be jointly operated by SSE and ESBI. SSE and its partners BP, are on course to complete by the end of this financialyear the detailed front-end engineering design work on the world's firstindustrial-scale project to generate 'de-carbonised' electricity from hydrogen.The planned project would convert natural gas to hydrogen and carbon dioxidegases, then use the hydrogen gas as fuel for a 475MW power plant at SSE'sPeterhead Power Station, and export the carbon dioxide to a North Sea oilreservoir for increased oil recovery and ultimate storage. SSE's interest inthe project is limited to its onshore aspects. The full project could require investment by SSE of around £150m and is subjectto the establishment of an appropriate policy and regulatory framework whichencourages the capture of carbon from fossil fuel-based electricity generationand its long-term storage. Following the government's consultation on carboncapture and storage earlier this year, a further statement is expected at theforthcoming Pre Budget Report. A final investment decision will be taken in thelight of the progress of the government's policy-making, during 2007. Coal and Biomass Generation - Operations The Ferrybridge and Fiddler's Ferry power stations, each with a capacity ofalmost 2,000MW, achieved 97% of their maximum availability to generateelectricity, excluding planned outages, during the period, compared with 83% inthe same period last year. The stations also 'co-fire' fuels from renewable sources (biomass) in order todisplace fossil fuels, thus reducing the impact of carbon emissions resultingfrom their operation. The resulting output of electricity qualifies forRenewable Obligation Certificates (ROCs). During the period, their outputqualifying for ROCs was 237GWh, compared with 408GWh in the same period in theprevious year. This reduction followed the introduction of the regulatorychange which limits to 10% the amount that companies can use co-fired fuels tomeet their Renewables Obligation. It was also partly the result of newfacilities to 'co-fire' fuels from renewable sources undergoing commissioningduring the period, including the need to ensure the quality of fuel for thestation was of the required standard. Coal and Biomass Generation - Investment SSE has opted in to the Large Combustion Plant Directive all of the capacity atFiddler's Ferry and half of the capacity at Ferrybridge and as a result isinstalling Flue Gas Desulphurisation (FGD) equipment in an investment estimatedto be around £225m. This will extend the stations' contribution to the securityof the UK's energy supplies and means that SSE will continue to have thecountry's most diverse electricity generation portfolio. The civil works atboth sites are now well under way and the installation of FGD is expected to becompleted in time for the power stations to begin generating electricity througha 'de-sulphurised' process during 2008. The installation work will requireoutages at both stations during 2007/08. To complement the investment in FGD, SSE is investing £16m in installingre-designed high-pressure turbines and static blades at all four units atFiddler's Ferry and at two units at Ferrybridge. This will increase theirthermal efficiency by around 1.4%, thereby reducing the amount of coal consumedand the amount of CO2 emitted per MWh of electricity generated compared withwhat it would have been after the installation of FGD. The turbines and thestatic blades have been installed at the first of the units at Fiddler's Ferry,and further installations will take place at both stations during 2007. SSE's partnership with Mitsui Babcock, Siemens and UK Coal is intended to leadto the installation of 'cleaner coal' technology at Ferrybridge, comprising a500MW Supercritical Boiler, with a thermal efficiency of over 45%, and thesubsequent deployment of post-combustion carbon capture equipment. Installationof the Supercritical Boiler and related plant to meet all establishedenvironmental standards would require investment by SSE of around £250m. Thefront-end engineering design study is on course for completion in the New Year,after which SSE expects to make a final decision on the investment. If itproceeds, it will take SSE's investment in cutting emissions from its coal-firedpower plant to over £500m. SSE and RockTron Limited have agreed to co-operate in the completion of aventure which is expected to lead to the construction, at Fiddler's Ferry, ofthe first plant in the UK to separate ash arising from electricity generationinto constituent mineral parts for sale as cement substitute products andindustrial minerals. By providing an alternative to the use of the limestonekilning process, it is estimated that this would help to reduce carbon emissionsby around 500,000 tonnes a year. Developing the plant would require investmentof around £20m. SSE and RockTron expect to make a final decision on whether toproceed with this development before the end of this financial year.Construction work would begin soon thereafter. EU Emissions Trading Scheme and BETTA The price of EU carbon emissions allowances reached a peak of €30 per tonne inApril, but for most of the period after then were in a range of around €15 pertonne. In August 2006, the UK government submitted its proposed NationalAllocation Plan for Phase II of the EU Emissions Trading Scheme. Across itselectricity generation portfolio (taking account of contractual shares), SSEwill receive an allocation of 16.3 million tonnes per annum. This can becompared with its Phase I allocation of 19.6 million tonnes per annum. SSE'sPhase II allocation as a percentage of its Phase I allocation is 83.2%, comparedwith 81.2% across the electricity sector as a whole. 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 positive impactfrom Scottish-based generation contributed around £14m to operating profitduring the first half of 2006/07. Hydro and Wind Generation - Operations SSE owns and operates over 1,500MW of renewable energy generating capacity,including pumped storage. Total output from SSE's hydro electric stations was1,104GWh during the period, compared with the 10-year average of 1,003GWh andcompared with output of 1,159GWh during the first half of 2005/06. As at 30September 2006, the amount of water held in SSE's reservoirs which could be usedto generate electricity was 54% of the maximum, compared with 60% on the samedate last year. The output of refurbished hydro-electric stations with capacity of up to 20MWqualifies for ROCs, and, in total, SSE has 404MW of capacity in its sub-20MWstations (including the new plant commissioned in the last few years at Culleig,Kingairloch and Fasnakyle). The refurbishment of all of the sub-20MW capacitywas completed during 2005. Of the total hydro output, 573GWh qualified forRenewable Obligation Certificates (ROCs). The Tangy, Spurness, Artfield Fell and Hadyard Hill wind farms also contributed139GWh of ROC-qualifying output in the first half of the year, compared with the30GWh of output produced by SSE's wind farms in the previous year. Thisincrease reflects the fact that Hadyard Hill was commissioned earlier this yearand so became the first wind farm in the UK to generate over 100MW ofelectricity. Assuming average 'run off' of water into SSE's reservoirs during the rest ofthis financial year, and typical wind conditions, the ROC-qualifying output fromhydro and wind generation for 2006/07 as a whole is expected to be over1,800GWh. Hydro and Wind Generation - Investment In its report on its review of energy policy in July 2006, the UK governmentstated that renewable energy is a 'vital and growing component of our diverseenergy mix' and that the UK can achieve 20% of its electricity coming fromrenewables by 2020. This confirms the important role that investment inrenewable energy has to play in helping to reduce carbon emissions and reducethe UK's reliance on imported fossil fuels. The construction of what will be SSE's second largest conventionalhydro-electric station at Glendoe, near Loch Ness is now well under way, withthe 200m long, 630 tonne Tunnel Boring Machine now cutting its way through therock under ground. With an installed capacity of around 100MW, Glendoe willproduce around 180 GWh of electricity qualifying for ROCs in an average year.When synchronised, it will be able to start generating electricity in 30seconds. The development of Glendoe will require investment of around £140m. Theproject remains on course for electricity to be generated commercially from thewinter of 2008/09. SSE's four operational wind farms have a total installed capacity of 162MW.This will increase to 200MW with the completion of the construction of the windfarms at Tangy 2 (6MW) and Drumderg (32MW). Drumderg finally received consentin September 2006, following a Public Inquiry. The Inquiry Report made an awardof expenses to SSE against the local planning authority, Perth and KinrossCouncil. SSE has stated that when the expenses are awarded it will invest theamount in energy- and environment-related projects for communities in theCouncil's area. In its review of energy policy, the UK government has stated that 'securingconsent for renewables and, in particular, onshore wind, can be an especiallydifficult process, with developers facing much uncertainty and significant risksof delay'. SSE's experience of the process bears this out. At the start of2006/07, it said it hoped that its applications in respect of seven wind farmsin Scotland would be determined and approved. While the application for one ofthe seven wind farms (Drumderg) has finally proved to be successful, SSE doesnot now expect that consent for all of the other wind farms will be receivedduring this financial year. Despite these issues, SSE is still aiming to have 1,000MW of ROC-qualifying windand hydro generating capacity by the end of the decade. It already has inplace, or has secured consent to develop, 704MW of capacity (566MW in operationand 138MW in development or construction). In addition, a 5MW wind turbine has been successfully installed 25km off thecoast in the Moray Firth in 45 metres of water. This was a key milestone in a£35m demonstrator project which has been funded by the European Union, ScottishExecutive and the Department of Trade and Industry, as well as Talisman Energy(UK) Ltd and SSE. Electricity generated by the turbine will be used to powerthe Beatrice oil platform, which, in turn, will provide a base from which tocarry out turbine maintenance and performance monitoring. A second turbine wasdue to be installed, but this did not take place before the onset of the autumnweather, and has been postponed until the summer of 2007. SSE and Viking Energy, the company formed to represent Shetland IslandsCouncil's interests in large-scale wind energy development in Shetland, havesigned a Memorandum of Understanding which is expected to lead to theestablishment of a joint venture aimed at developing on the Shetland Islands awind farm with a capacity of up to 600MW. Viking Energy's involvement wouldmake the scheme the largest community-backed wind farm development in the world.A planning application for consent to build the wind farm is expected to besubmitted during this financial year. In advance of that, RSPB has confirmedthat it is unlikely to raise objections in principle to the development. Theproposal is subject to, amongst other things, being able to demonstrate to Ofgemthe viability of a sub-sea cable from Shetland to the mainland of Scotland. The government is presently consulting on proposals to adapt the RenewablesObligation 'to provide greater support to emerging technologies and less supportfor established technologies' through a 'banding' system, while ensuring thatcurrent ROC rights for existing projects and for those built prior toimplementation of any changes are preserved. During this consultation, SSE'spriority is to ensure that any 'banding' system does not undermine its (andothers') current and planned investment in renewable energy. New Technologies The development of secure, reliable and cost-effective low carbon energytechnologies towards commercial deployment is a key priority for the UKgovernment and is part of SSE's strategy to remain the leading generator ofelectricity from renewable sources. Against this background, SSE has agreed tobecome a partner in the new Energy Technologies Institute. It will provide theInstitute with up to £2.5m a year for five years. The Chancellor of theExchequer said he welcomed 'the important role which it will play in theInstitute in supporting the identification of key energy technology solutions'. SSE's subsidiary Renewable Technology Ventures Ltd has continued with thedevelopment of an underwater tidal turbine demonstrator. It is keen to continueto invest in marine energy and is looking for investment opportunities in thisarea to establish a position as the UK's leading developer of tidal-basedelectricity generation technologies. Energy Supply SSE's energy supply business had 7.5 million energy supply-related customers atthe start of November, a net gain of one million in 12 months. This comprises:4.85 million electricity customers; 2.60 million gas customers; and 50,000 'talkwith' telecoms customers. Overall, SSE has achieved a net gain of three millioncustomers in the past five years, an increase of 66%. Within the overall total,SSE's business customers now cover 380,000 sites throughout Great Britain. In September, SSE confirmed that it will be introducing price increases of 9.4%(average) for domestic electricity customers and 12.2% for domestic gascustomers. These price rises will take effect on 1 January 2007. Even aftertheir implementation, SSE's prices for gas and for gas and electricity combinedwill remain the lowest in the UK. It is well-known that SSE has made fewer price increases than all the othermajor energy suppliers over the past three years and that it has passed on toits customers far less than the full extent of the increase in wholesale energyprices experienced in that period. The consequences of three years of highwholesale energy prices are, however, still being felt. In line with itsresponsible pricing policy, however, SSE has stated that if falls in wholesaleenergy prices continue and are sustained, it will move as quickly as it can toreverse the price rises of recent years. SSE's policy of responsible pricing is designed to help it build up a long-termcustomer proposition that attracts and retains customers. It represents,therefore, an investment in securing a larger, long-term customer franchise.With its integrated Generation and Supply business, this strategy is intended tostand SSE in good stead regardless of the direction in which wholesale energyprices move in the future. As part of the package of price changes being introduced in January, SSE willabolish the extra charge levied on all of its electricity 'pay-as-you-go' (orpre-payment) tariffs in England and Wales compared with its standard credittariffs, following the recent request to energy suppliers by Child PovertyAction Group, End Child Poverty, Disability Alliance, Help the Aged, AgeConcern, Citizens Advice, National Consumer Council, National Energy Action andenergywatch. There is no such extra charge on its electricity prepaymenttariffs in Scotland, which are already equalised with its standard credittariffs. SSE is already one of just two energy suppliers which does not levy 'back charges' for the period between a price increase being implemented and thepre-payment meter being adjusted to reflect the increase. Customer Service Central to success in Energy Supply is maintaining the highest possiblestandards of customer service. In August 2006, SSE secured the award for bestoverall customer service in the largest-ever customer satisfaction survey inenergy supply, organised by uSwitch.com. In the results of the JD Power 2006 UKElectricity and Gas Customer Satisfaction Study, announced on 2 November, SSE'scombined score for electricity and gas made it the top-performing energysupplier. Despite the sustained growth in customer numbers, SSE secured during the firsthalf of 2006/07 another reduction, of 49%, in the number of customer complaintssent to energywatch for resolution, to 466, as stated in energywatch's newsrelease of 31 October 2006. This follows the significant reductions achievedduring each of the previous three years. In the statistics published byenergywatch in October 2006, SSE had the lowest rate of complaints in respect ofall three categories: account and billing matters; direct selling; and transfersbetween companies. 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. In thesecond half of 2005, it embarked on a major performance improvement programme inits Customer Service division. This programme has already delivered a number ofimportant changes. These include a 'commitment-based' approach to general customer enquiries, sothat a much greater number of customer enquiries are dealt with at the firstpoint of contact. This has been achieved by broadening the role of customeradvisers and actively extending call times to ensure there is a fullunderstanding of customers' requirements. In addition, there has been a largeincrease in the number of customers receiving a minimum of two bills each yearbased on actual (as opposed to estimated) meter readings. Looking forward, in order to provide more of SSE's new customers with anaccurate opening bill, changes will be implemented before the end of this yearwhich will make much more use of point of sale meter readings, as well ascustomer telephone and text readings - all augmented by on outbound call teamfocused on contacting new customers where a meter reading has not been received. Overall, SSE believes that this work is having a positive impact on itscustomers' dealings with, and perceptions of, its Customer Service division. Product Marketing Energy supply remains intensely competitive and, in addition to responsiblepricing, key to long-term success will be greater success in gaining andretaining customers' loyalty. The performance improvement programme is designedto achieve that, as is product development. In line with that, SSE has a suite of energyplus 'loyalty' products, rangingfrom energyplus Argos, which rewards customers with money-off discount vouchers,to energyplus Pulse, which supports the British Heart Foundation. Of SSE's 7.5million customers, over 800,000 now have 'loyalty' products - an increase ofalmost 15% during the period. This progress, allied to its policy of responsible pricing and commitment toimproving further its customer service, means that SSE's Energy Supply businessshould be able to extend further the period of growth which began at the startof 2002. Energy Services An increasing number of supply customers are likely to seek a wider range ofenergy-related services and, in Budget 2006, the government said that supplyingenergy on an energy services basis helps shift the focus of energy producers andcustomers from the supply of units of electricity and gas to the supply of theoverall services for which energy is used. In line with this, in June 2006, SSE began the phased introduction of a newdomestic boiler installation and maintenance and repair service for gas centralheating systems. The product features an annual inspection, full breakdown andemergency cover and a 24-hour, 365-day manned customer helpline. It coverscustomers' entire gas central heating system, including the boiler, pipe work,radiators, cylinders and tanks. The first few months have gone well and theservice had already attracted over 5,000 customers by the end of September.This growth should continue and accelerate as the number of postcode areascovered by the service has now increased from 13 to 21. SSE has also decided to undertake an additional 50,000 home insulation measures,with over half being installed in 'priority' homes, by the end of 2007. Thisnew investment in energy efficiency is in addition to the 80,000 home insulationmeasures which SSE committed to install as part of an announcement in Budget2006. The additional measures planned for 2007 mean that SSE will install anadditional 130,000 cavity wall and loft insulation packages which otherwisewould not have been done until 2008. CONTRACTING, CONNECTIONS AND METERING Contracting, Connections and Metering delivered operating profit* of £24.2mduring the first six months of the year, compared with £21.4m in the previousyear (excluding the £1.9m operating profit from Thermal Transfer, thespecialised contracting business sold by SSE on 31 March 2006). Contracting SSE's Contracting business, Southern Electric Contracting (SEC), has madesignificant progress against its key priority for the year of completing theintegration of the Harrison Smith business, which was acquired in February 2006,and ensuring there continues to be good performance in the long-term contractswhich are central to its ongoing business development. • The integration of Harrison Smith has been completed and is already allowing SEC to offer its customers in the north of England a more comprehensive range of mechanical and electrical services. • SEC's Eastern Contracting division, acquired in 2005, has won the second phase of an infrastructure contract at the Colchester Barracks re-development, one of the UK's largest PFI projects to date, following the successful completion of phase one of Eastern Contracting's work. • SEC also has contracts worth over £700m to replace and maintain streetlights for four local authorities in England under the Private Finance Initiative, in partnership with the asset finance division of The Royal Bank of Scotland. This includes the largest-ever streetlighting PFI in the UK, agreed with Leeds City Council, which was officially launched in September 2006. It will see the majority of the 110,000 street lights, illuminated signs and bollards in the city replaced. The first 2,000 columns have already been installed. Connections SSE's Connections business completed 22,500 electrical connections during thefirst half of 2006/07. In addition, it has continued to develop its portfolioof electricity networks outside the Southern Electric and Scottish HydroElectric Power Distribution areas. It currently owns and manages 20 electricitynetworks outside these two areas, some of which are now being extended, and 15new networks, such as Western Harbour, Leith, The Shires, Leicester and CardiffLeckwith Stadium, are under construction, taking the total to 35. SSE's Connections business is also a licensed gas transporter, owning andoperating gas mains and services in many parts of the country. The number of newpremises connected to its gas networks continued to grow, and during the firsthalf of the year, it connected a further 4,800 premises, taking the total numberof connections to more than 40,000 for the first time. With interests in electricity, gas and telecoms connections, SSE has reviewedthe extent of its ability to offer 'multi-utility' services to larger customers.This ability is limited to a contracting role in providing water connectionsservices. SSE has concluded, therefore, that it should make formal applicationsto Ofwat for so-called 'inset' appointments which would allow it to install, ownand operate water services for end-user customers for the first time. Subjectto the progress of detailed discussions with Ofwat, which are now well underway, it intends to make such applications during 2007. Metering SSE's Metering business provides services to most electricity suppliers withcustomers in central southern England and the north of Scotland. It supplies,installs and maintains domestic meters and carries out metering work in thecommercial, industrial and generation sector. It also offers data collectionservices to the domestic and SME sectors. SSE's Metering activities will expand following the decision to in-source itsmeter reading operations in the SWEB and SWALEC electricity distribution areasand also the meter operator work for the SWALEC distribution area. This willresult in the transfer of over 150 employees from Western Power Distribution toSSE and is intended to result in both efficiency savings and high standards ofservice for SSE's customers in these areas. The transfer is expected to becompleted during 2007. GAS STORAGE Gas Storage - Operations Gas Storage delivered an operating profit* of £29.0m, an increase of 113.3%compared with the previous year. The value of, and demand for, gas storagefacilities in the UK remains high and SSE has continued to enter into newcontracts to provide storage at a significantly higher value than the contractsthey replace. This was demonstrated in July 2006, when SSE completed the auction of around 23%of the capacity (43.9 million Standard Bundled Units, or SBUs) at its gasstorage facility at Hornsea for a five-year term which will commence in May2007. The average price achieved per SBU was 41.7 pence per annum over each ofthe five years. In March 2006, SSE auctioned 54 million SBUs for the one yearterm which commenced in May 2006. The average price achieved per SBU then was54.2 pence per annum. Hornsea has 195 million Standard Bundled Units availablein total and each SBU provides capacity to inject gas into the facility, storegas there and withdraw gas from it. Gas Storage - Investment SSE's joint venture with Statoil (UK) to develop at Aldbrough what will becomethe UK's largest onshore gas storage facility is continuing to make goodprogress, with the first of the nine storage caverns expected to be commissionedin 2007. SSE is investing £150m in Aldbrough, out of a total of £225m. With atotal new capacity of around 420 million cubic metres, of which SSE will havethe ownership interest in 280 million cubic metres, Aldbrough will providevaluable gas storage for the UK energy industry. SSE and Statoil (UK) Ltd are jointly seeking consent to increase the storagecapacity at the Aldbrough. They have acquired land adjacent to the existingAldbrough site currently under development and consent is being sought from EastRiding of Yorkshire Council to develop a further nine gas storage caverns. Thiswould approximately double the amount of gas that can be stored, to over 800mcm.Once completed, the extended Aldbrough facility would be able to provideenough gas in a day to supply around six million homes. The extension would largely be under ground, and the intention is to use aboveground facilities already on site; however, some limited additional above grounddevelopment would be required. Construction of the extension to the Aldbroughfacility would help to ensure that the UK can meet gas demand during periods ofhigh energy usage. It is expected that it would cost less than the currentdevelopment. SSE would contribute 50% of the cost of the extension in returnfor ownership of 50% of the capacity. TELECOMS SSE's combined Telecoms business (SSE Telecom and Neos) achieved an operatingprofit* of £6.6m in the first six months of the year, compared with £6.1m in theprevious year, an increase of 8.2%. 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 an important 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 Opal Telecom and AT&T. Neos hasdecided to upgrade its ethernet platform (a frame-based technology connectingcomputer systems to form a network), with an investment of over £5m to be madeover five years. This will support future new business growth. EXCEPTIONAL ITEM TXU Europe Group plc SSE has received a fourth distribution payment of £24.5m from the administratorsof TXU Europe Group plc in respect of its agreed claim of £294.2m relating to a14-year contract originally entered into in 1997. This takes SSE's total directreceipt from the administration process to £275.7m (excluding its share of theseparate distributions paid to Barking Power). SSE expects to receive a furtherdistribution later in this financial year. When it received its firstdistribution in March 2005, SSE said it expected that over 75% of its agreedclaim would be settled. Following the subsequent distributions, it now expectsthat, in total, over 95% of its agreed claim will be settled. In addition, SSE received a share (£0.9m) of the distribution payment to BarkingPower Ltd, in which SSE now has a total stake of 30.4%. CAPITAL EXPENDITURE Investment and capital expenditure totalled £288m during the first half of 2006/07, compared with £244m in the previous year. Capital expenditure in Power Systems was £100.5m, compared with £84.5m 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. In addition, there was investment of £94m for growth in Generation in the firsthalf of the year, with the construction work being carried out at Glendoe andthe installation of FGD equipment and other work such as the installation ofre-designed high-pressure turbines and static blades at Fiddler's Ferry andFerrybridge. As well as Power Systems and Generation, £22m was invested in the ongoingdevelopment of the new gas storage facility at Aldbrough. Of its expected totalinvestment of around £150m, SSE has so far invested £102m at Aldbrough. Within the overall total, capital expenditure for growth was £175m during thefirst half of 2006/07. This mainly comprised electricity generation and gasstorage. Capital expenditure will continue to be substantial in the second halfof the decade, with investment in Generation, including FGD installation,Electricity Networks and Gas Storage. For 2006/07 as a whole, it is on courseto be over £600m. All investments are expected to achieve returns which aregreater than the cost of capital and are expected to enhance earnings. FINANCIAL MANAGEMENT Net Debt and Cash Flow As at 30 September 2006, SSE's net debt was £1.98bn, compared with £2.17bn at 31March 2006. This reflects a favourable movement in working capital arising frommore timely cash collections from electricity and gas customers, partly offsetby the increase in capital expenditure. Borrowings and Facilities At 30 September 2006, 90% of SSE's borrowings were at fixed rates, after takingaccount of interest rate swaps. SSE had undrawn committed bank facilities of£650m, with a weighted average period, until maturity, of 3.2 years. The objective for SSE is to maintain a balance between continuity of funding andflexibility, with a range of maturity dates. Its average debt maturity profileas at 30 September 2006 was 13.5 years, compared with 9.7 years as at 30September 2005. Net Finance Costs The basis of the presentation of net finance costs changed on adoption of IFRSand the table below reconciles published net finance costs to adjusted netfinance costs, which SSE believes is a more meaningful measure. In line withthat, SSE's adjusted net finance costs in the first six months of 2006/07 were£85.7m, compared with £67.6m in the previous year. Sept 06 Sept 05 £m £m Reported net finance costs (Note 6) 31.9 65.9add/(less) Share of JCE*/Associate interest 55.8 38.9 Convertible debt IAS 32 adjustment (2.0) (1.8) Interest on pension plan liabilities (53.4) (51.0) Return on pension plan assets 64.5 57.5 Movement on derivatives (11.1) (41.9) Adjusted net finance costs 85.7 67.6 *Jointly Controlled Entities The average interest rate for SSE, excluding JCE/Associate interest, during theperiod was 5.57%, compared with 5.72% in the previous year. Underlying interestcover was 9.8 times, compared with 8.6 times the previous year, and includinginterest related to SGN it was 6.4 times (6.1 times in the previous year). Within the adjusted net finance income of £85.7m, SGN's net finance costs were£31.8m (compared with £20.4m in the previous year), after netting loan stockinterest payable to SSE. Its contribution to SSE's profit before tax was,therefore, a loss of £9.8m. The seasonal nature of SGN's business means thatthe key performance period is the second half of the financial year. TAX To assist the understanding of SSE's tax position, the adjusted current taxcharge is calculated as follows: Sept 06 Sept 05 £m £m Reported tax charge 135.5 121.1add back: Share of JCE/Associate tax 0.3 0.4less: Deferred tax (12.2) (15.0) Exceptional tax (5.0) (13.9) Adjusted current tax charge 118.6 92.6 The effective adjusted current tax rate, based on adjusted profit before tax,was 26%, compared with 27.5% in the previous year. The reported tax charge was28.0%, compared with 31.3% 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 £294.1m and a pension scheme asset of£75.4m are recognised in the balance sheet at 30 September 2006, gross ofdeferred tax. Overall, this represents an increase in liabilities of £24.9mcompared with the position at March 2006. During the first six months of 2006/07, employer cash contributions to theScottish Hydro Electric scheme amounted to £4.7m. Contributions to the SouthernElectric scheme amounted to £25.3m, including a contribution of £17.1m towardsthe deficit, in addition to an ongoing contribution rate of 19.9% of salaries.As part 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 2006, there was a net liability arising from IAS 39 of £106.1m,before tax, compared with a net asset of £45.1m, before tax, at 1 April 2006. 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. At theAnnual General Meeting in July 2006, the Directors did, however, secure renewalof their authority to make such purchases. It remains the policy of the Board ofSSE to take opportunities to return value to shareholders through the purchaseof the Company's own shares should the conditions be appropriate. SAFETY AND THE ENVIRONMENT SSE aims to create value for shareholders by running the business with a strongemphasis on safety and on sustainability - achieving growth while safeguardingthe environment. During the first six months of the year, the number of losttime and reportable accidents within the company was six, compared with eight inthe previous year. The number of serious, or potentially serious, road trafficaccidents involving employees driving company vehicles was also six, comparedwith five in the previous year. SSE's target for any given year is zero reportable environmental incidents.There were no such incidents during the first six months of 2006/07. SSEpublished a series of environmental targets in its Corporate ResponsibilityReport 2006 and is on course to deliver improved environmental performance inmany key activities during 2006/07. STRATEGY AND OUTLOOK SSE's financial and operational performance in the first half of 2006/07 wasstrong, and this performance has continued into the second half of the year.Looking ahead, there are two fundamental and well-recognised issues facing theUK which set the context for SSE's future development. The first is the needfor secure supplies of energy, including electricity generation capacity and theprimary fuel with which to generate power. The second is the need to ensurethat there is a significant reduction in the amount of CO2 emitted per MWh ofelectricity produced, while securing sustained increases in the efficiency withwhich energy is used. These issues present SSE with major investment opportunities in electricitygeneration from coal, gas and renewable sources and in gas storage inparticular. SSE's long-term objective of providing a wider variety ofenergy-related services is also fully in line with the direction of publicpolicy in the UK. In this context, SSE's delivery of its twin objectives of adding to itsleading-edge electricity generation portfolio and growing its energy supplybusiness represents a balanced strategy which puts SSE in a position to achievefuture growth regardless of the direction of wholesale electricity and gasprices. SSE's investment in gas distribution networks in 2005 was explicitly designed tohelp maintain a good balance between its regulated and non-regulated activities.The UK government's report on its review of energy policy confirmed theimportance of energy networks, stating that 'we need significant new investmentin energy infrastructure'. The need for safe, reliable and efficient energynetworks in the UK has to be reflected in the setting of the various PriceControls that affect them. There is, and should continue to be, a significantprogramme of investment in electricity and gas networks for the rest of thisdecade and beyond, leading to substantial increases in their RAVs. All of this means that SSE's asset base in energy networks, electricitygeneration, energy supply and gas storage will increase significantly in thenext few years, and other new opportunities for growth will also emerge. Duringthis period of substantial growth, and in considering new opportunities, SSEwill retain its focus on continuous improvement and the delivery of operationalexcellence in all of its activities. Efficiency and financial strength willremain central to SSE's approach to business. Against this background, SSE remains in a very good position to expand itsbusinesses further through incremental growth in assets and, as a result, todeliver its core objective of sustained real growth in the dividend. Over thepast eight years, SSE has demonstrated that growth is the outcome of financialdiscipline and operational excellence and these remain central to its futurebusiness development and to the delivery of dividend growth. Investor Timetable Ex-dividend date 21 February 2007Record date 23 February 2007Payment date 23 March 2007Preliminary results 31 May 2007AGM 26 July 2007 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 then click on Investor Centre. Telephone conference call: UK Dial in: 0845 146 2010 International dial in: +44 (0) 1452 542 304 Replay facility (for one week) UK local rate no: UK dial-in: 0845 245 5205 UK International no: International dial-in:+44 (0) 1452 550 000 UK PIN (access) no: 1649603 Consolidated Income Statementfor the period 1 April 2006 to 30 September 2006 Six months ending 30 September 2006 2005 Before Exceptional Before Exceptional exceptional items and exceptional items and items and certain items and certain certain re-measure- certain re-measure re-measure- ments re-measure- ments ments (note 5) Total ments (note 5) Total Note £m £m £m £m £m £m Revenue 4 4,398.2 - 4,398.2 3,881.3 - 3,881.3Cost of sales (3,640.3) 2.9 (3,637.4) (3,297.3) 46.6 (3,250.7)Gross profit 757.9 2.9 760.8 584.0 46.6 630.6Operating costs (261.1) - (261.1) (209.2) - (209.2)Other operating income - 24.5 24.5 - 41.6 41.6Operating profit before jointly controlled entities and associates 496.8 27.4 524.2 374.8 88.2 463.0Jointly controlled entities andassociates:Share of operating profit 44.3 0.9 45.2 29.1 7.1 36.2Share of interest (55.8) - (55.8) (38.9) - (38.9)Share of movement on derivatives - 3.4 3.4 - (7.8) (7.8)Share of tax (0.3) (0.3) (0.6) (0.4) 0.2 (0.2)Share of profit / (loss) on jointly controlled entities and associates (11.8) 4.0 (7.8) (10.2) (0.5) (10.7)Operating profit 4 485.0 31.4 516.4 364.6 87.7 452.3Finance income 6 97.1 - 97.1 78.8 - 78.8Finance costs 6 (117.9) (11.1) (129.0) (102.8) (41.9) (144.7)Profit before taxation 464.2 20.3 484.5 340.6 45.8 386.4Taxation 7 (130.5) (5.0) (135.5) (107.2) (13.9) (121.1)Profit for the period 333.7 15.3 349.0 233.4 31.9 265.3 Attributable to:Equity holders of the parent 333.7 15.3 349.0 233.4 31.9 265.3 Basic earnings per share (pence) 9 40.6p 30.9pDiluted earnings per share (pence) 9 39.5p 30.3pDividends paid in the period (£m) 8 281.3 260.0 The accompanying notes are an integral part of this interim statement. Consolidated Income Statementfor the year ended 31 March 2006 Before Exceptional exceptional items and items and certain certain re-measure- re-measure- ments ments (note 5) Total Note £m £m £m Revenue 4 10,145.2 - 10,145.2Cost of sales (8,816.4) (14.4) (8,830.8)Gross profit 1,328.8 (14.4) 1,314.4Operating costs (482.4) - (482.4)Other operating income - 92.1 92.1Gain on disposal of subsidiary - 18.6 18.6Operating profit before jointly controlled entities and associates 846.4 96.3 942.7Jointly controlled entities and associates:Share of operating profit 167.1 16.7 183.8Share of interest (97.3) - (97.3)Share of movement on derivatives - (13.0) (13.0)Share of tax (28.8) (1.1) (29.9)Share of profit on jointly controlled entities and associates 41.0 2.6 43.6Operating profit 4 887.4 98.9 986.3Finance income 6 164.9 - 164.9Finance costs 6 (210.8) (43.5) (254.3)Profit before taxation 841.5 55.4 896.9Taxation 7 (244.3) (10.3) (254.6)Profit for the year 597.2 45.1 642.3 Attributable to:Equity holders of the parent 597.2 45.1 642.3 Basic earnings per share 9 74.7pDiluted earnings per share 9 72.9p Dividends paid in the year 8 378.8 Consolidated Balance Sheetas at 30 September 2006 At 31 At 30 At 30 March September September 2006 2006 2005 £m £m £m Assets 4,646.6 Property, plant and equipment 4,818.4 4,512.2 Intangible assets: 293.4 Goodwill 293.4 292.4 297.2 Other intangible assets 261.8 116.7 703.1 Investments in associates and jointly controlled entities 675.0 661.7 3.3 Other investments 5.0 1.5 90.2 Retirement benefit assets 75.4 116.1 86.0 Deferred tax assets 89.1 101.7 24.8 Derivative financial assets 47.5 25.7 6,144.6 Non-current assets 6,265.6 5,828.0 164.2 Inventories 247.4 184.0 1,662.9 Trade and other receivables 1,009.1 729.7 49.9 Cash and cash equivalents 52.6 36.1 157.6 Derivative financial assets 24.8 162.0 2,034.6 Current assets 1,333.9 1,111.8 8,179.2 Total assets 7,599.5 6,939.8 Liabilities 417.3 Loans and other borrowings 319.6 378.6 1,834.6 Trade and other payables 1,375.4 1,148.9 165.4 Current tax liabilities 206.9 146.5 2.8 Provisions 2.2 11.5 59.8 Derivative financial liabilities 134.2 17.0 2,479.9 Current liabilities 2,038.3 1,702.5 1,797.6 Loans and other borrowings 1,712.4 1,628.0 919.1 Deferred tax liabilities 882.5 944.4 79.0 Provisions 77.5 96.4 396.7 Trade and other payables 456.5 293.4 284.0 Retirement benefit obligations 294.1 334.5 77.5 Derivative financial liabilities 44.2 51.7 3,553.9 Non-current liabilities 3,467.2 3,348.4 6,033.8 Total liabilities 5,505.5 5,050.9 2,145.4 Net assets 2,094.0 1,888.9 Equity: 430.2 Share capital 430.2 429.5 90.7 Share premium 91.4 82.3 13.7 Capital redemption reserve 13.7 13.7 14.6 Equity reserve 14.6 14.6 6.6 Hedge reserve (59.8) 13.3 1,589.6 Retained earnings 1,603.9 1,335.5 2,145.4 Total equity attributable to equity holders of the parent 2,094.0 1,888.9 Consolidated Statement of recognised income and expensefor the period 1 April 2006 to 30 September 2006 Year Six months Six months ended 31 ended 30 ended 30 March September September 2006 2006 2005 £m £m £m (11.7) Losses on effective portion of cash flow hedges (net of tax) (66.3) (10.5) Actuarial loss on retirement benefit schemes (net of tax) (9.9) - Group (35.6) (11.0) - - Share of jointly controlled entities (14.5) - (0.4) Other movements - 5.5 (22.0) Net expense recognised directly in equity (116.4) (16.0) 642.3 Profit for the period 349.0 265.3 620.3 Total recognised income and expense for the period 232.6 249.3 36.8 Cumulative adjustment for the adoption of IAS 32 and 39 - 36.8 657.1 Total 232.6 286.1 Attributable to: 620.3 Equity holders of the parent 232.6 249.3 Consolidated Cash Flow Statementfor the period 1 April 2006 to 30 September 2006 Year Six months Six months ended 31 ended 30 ended 30 March September September 2006 2006 2005 £m £m £m Cash flows from operating activities 642.3 Profit for the period after tax 349.0 265.3 254.6 Taxation 135.5 121.1 57.9 Movement on financing and operating derivatives 8.2 41.9 210.8 Finance costs 117.9 102.8 (164.9) Finance income (97.1) (78.8) (43.6) Share of jointly controlled entities and associates 7.8 10.7 (18.6) Gain on disposal of subsidiary - - (22.3) Pension service charges less contributions paid (14.8) (14.0) 200.1 Depreciation and impairment of assets 117.2 102.6 3.9 Amortisation and impairment of intangible assets 1.5 1.0 (16.4) Deferred income released (98.9) (53.7) (30.8) (Increase) in inventories (84.0) (49.9) (585.1) Decrease/(Increase) in receivables 645.3 297.3 436.8 (Decrease)/Increase in payables (215.4) (94.5) (14.5) (Decrease) in provisions (2.1) (3.4) (9.5) Employee share awards share purchase (6.8) (0.9) 4.0 Charge in respect of employee share awards 3.4 1.2 (5.2) Profit on disposal of property, plant and equipment (0.7) (2.6) 5.2 Loss on disposal of replaced assets - - 904.7 Cash generated from operations 866.0 646.1 8.0 Dividends received from jointly controlled entities 14.3 8.0 51.4 Finance income received 32.6 22.6 (119.5) Finance costs paid (71.9) (74.9) (217.9) Income taxes paid (90.6) (103.7) 626.7 Net cash from operating activities 750.4 498.1 Cash flows from investing activities (529.4) Purchase of property, plant and equipment (299.2) (262.9) (1.2) Purchase of software (0.6) - 7.9 Deferred income received 12.3 2.3 16.3 Proceeds from sale of property, plant and equipment 9.6 15.8 17.3 Net proceeds from sale of subsidiary - - - Loans to jointly controlled entities - (0.4) (0.7) Loans to associates - - (505.0) Investment in Scotia Gas Networks plc (note 10) - (540.0) 10.8 Loans repaid by jointly controlled entities 5.4 5.4 7.3 Loans repaid by associates 0.2 0.4 (15.0) Investment in associates and jointly controlled entities (12.7) - (1.9) Increase in other investments (2.3) - (0.6) Purchase of businesses and subsidiaries - (0.1) (994.2) Net cash from investing activities (287.3) (779.5) Cash flows from financing activities 9.9 Proceeds from issue of share capital 0.6 0.7 (378.8) Dividends paid to company's equity holders (281.3) (260.0) 552.4 New borrowings - 359.0 - Repayment of borrowings (181.4) (29.6) 183.5 Net cash from financing activities (462.1) 70.1 (184.0) Net (decrease)/increase in cash and cash equivalents 1.0 (211.3) 227.8 Cash and cash equivalents at the start of period 43.8 227.8 (184.0) Net (decrease)/increase in cash and cash equivalents 1.0 (211.3) 43.8 Cash and cash equivalents at the end of period 44.8 16.5 Notes on the Interim Statementsfor the period 1 April 2006 to 30 September 2006 1. Financial Statements The financial information set out in this interim statement does not constitutethe Company's statutory accounts for the periods ended 30 September 2006, 31March 2006 or 30 September 2005 within the meaning of Section 240 of theCompanies Act 1985. Statutory accounts for the year ended 31 March 2006, whichwere prepared in accordance with International Financial Reporting Standards asadopted by the EU (adopted IFRS), have been reported on by the Company'sauditors and delivered to the Registrar of Companies. The report of theauditors was (i) unqualified (ii) did not include reference to any matters towhich the auditors drew attention by way of emphasis without qualifying theirreport and (iii) did not contain statements under section 237 (2) or (3) of theCompanies Act 1985. The interim financial information is unaudited but has beenformally reviewed by the auditors and their report to the Company is set out onpage 27. This interim statement was authorised by the Board on 14 November 2006. 2. Basis of preparation This interim financial information has been prepared applying the accountingpolicies and presentation that were applied in the preparation of the Company'sconsolidated financial statements for the year ended 31 March 2006. 3. Basis of consolidation of the Group The interim statements consolidate the interim financial information of Scottishand Southern Energy plc and its subsidiaries together with the Group's share ofthe trade and net assets of its jointly controlled entities and associates. The results of subsidiary undertakings acquired or sold are consolidated fromthe date that control commences until the date control ceases using theacquisition method of accounting. The Group's share of the total recognised gains and losses of associates areincluded on an equity accounted basis from the date that significant influencecommences until the date significant influence ceases. Investments in jointly controlled entities are accounted for under the equitymethod of accounting from the date that joint control commences until the datejoint control ceases. Jointly controlled operations are businesses which useassets and liabilities that are separable from the rest of the Group. In thesearrangements, the Group accounts for its own share of property, plant andequipment, carries its own inventories, incurs its own expenses and liabilitiesand raises its own finance. 4. Segmental information Primary reporting format - business segments The primary segments are as reported for management purposes and reflect theday-to-day management of the business. The Group's primary segments are thedistribution and transmission of electricity in the North of Scotland, thedistribution of electricity in the South of England (together referred to asPower Systems), the generation and supply of electricity and sale of gas inGreat Britain (Generation and Supply). The Group's 50% equity share in ScotiaGas Networks plc, a business which distributes gas in Scotland and the South ofEngland, is included as a separate segment where appropriate due to itssignificance. Analysis of revenue and operating profit by segment is provided below. Allrevenue and profit before taxation arise from operations within Great Britainand Ireland. a) Revenue by segment Year ended 31 March Six months ended 30 Six months ended 30 2006 September 2006 September 2005 Intra- Intra- Intra- Total segment External Total segment External Total segment External revenue revenue revenue revenue revenue revenue revenue revenue revenue £m £m £m £m £m £m £m £m £m Power Systems 261.1 (104.1) 157.0 Scotland 126.4 (46.3) 80.1 120.1 (47.5) 72.6 415.9 (204.0) 211.9 England 186.9 (93.4) 93.5 186.5 (93.4) 93.1 677.0 (308.1) 368.9 313.3 (139.7) 173.6 306.6 (140.9) 165.7 Generation 9,287.8 (27.4) 9,260.4 and Supply 4,001.7 (12.2) 3,989.5 3,492.2 (8.8) 3,483.4 Other 783.3 (267.4) 515.9 businesses 400.9 (165.8) 235.1 357.7 (125.5) 232.2 10,748.1 (602.9) 10,145.2 4,715.9 (317.7) 4,398.2 4,156.5 (275.2) 3,881.3 Revenue from the Group's investment in Scotia Gas Networks plc, the Group'sshare being £113.4m (2005 - £65.4m, March 2006 - £261.5m), is not recognised as revenue of the Group under equity accounting. Notes on the Interim Statements for the period 1 April 2006 to 30 September 2006 4. Segmental information (continued) b) Operating profit by segment Six months ended 30 September 2006 JCE / Before Associate exceptional Exceptional share of items and items and interest certain re- certain re- Adjusted and tax (i) measurements measurements Total £m £m £m £m £mPower Systems Scotland 66.6 - 66.6 - 66.6 England 95.9 - 95.9 - 95.9 162.5 - 162.5 - 162.5Scotia Gas Networks plc 22.0 (45.0) (23.0) 3.4 (19.6) Energy Systems 184.5 (45.0) 139.5 3.4 142.9Generation and Supply 298.0 (11.1) 286.9 28.0 314.9Other businesses 62.2 - 62.2 - 62.2 544.7 (56.1) 488.6 31.4 520.0Unallocated expenses (ii) (3.6) - (3.6) - (3.6) 541.1 (56.1) 485.0 31.4 516.4 Six months ended 30 September 2005 JCE / Before Associate exceptional Exceptional share of items and items and interest certain re- certain re- Adjusted and tax (i) measurements measurements Total £m £m £m £m £m Power Systems Scotland 66.4 - 66.4 - 66.4 England 95.5 - 95.5 - 95.5 161.9 - 161.9 - 161.9Scotia Gas Networks plc 9.6 (28.5) (18.9) (5.5) (24.4)Energy Systems 171.5 (28.5) 143.0 (5.5) 137.5Generation and Supply 190.0 (10.8) 179.2 93.2 272.4Other businesses 46.5 - 46.5 - 46.5 408.0 (39.3) 368.7 87.7 456.4Unallocated expenses (ii) (4.1) - (4.1) - (4.1) 403.9 (39.3) 364.6 87.7 452.3 Year ended 31 March 2006 JCE / Before Associate exceptional Exceptional share of items and items and interest certain re- certain re- Adjusted and tax (i) measurements measurements Total £m £m £m £m £mPower Systems Scotland 141.8 - 141.8 - 141.8 England 226.1 - 226.1 - 226.1 367.9 - 367.9 - 367.9Scotia Gas Networks plc 102.7 (97.9) 4.8 (9.1) (4.3) Energy Systems 470.6 (97.9) 372.7 (9.1) 363.6Generation and Supply 444.8 (28.2) 416.6 89.4 506.0Other businesses 106.0 - 106.0 18.6 124.6 1,021.4 (126.1) 895.3 98.9 994.2Unallocated expenses (ii) (7.9) - (7.9) - (7.9) 1,013.5 (126.1) 887.4 98.9 986.3 (i) The adjusted operating profit of the Group is reported after removal of theGroup's share of interest, movements on financing derivatives and tax fromjointly controlled entities and associates. The share of Scotia Gas Networks plcinterest includes loan stock interest payable to the consortium shareholders.The Group has accounted for its 50% share of this, £18.0m (2005 - £11.3m, March2006 - £28.8m), as finance income (note 6). The gas distribution networkbusinesses owned by Scotia Gas Networks plc were acquired on 1 June 2005. (ii) Unallocated expenses comprise corporate office costs which are not directlyallocable to particular segments. Notes on the Interim Statements for the period 1 April 2006 to 30 September 2006 5. Exceptional items and certain re-measurements i) Exceptional items During the period, net dividends of £24.5m (2005 - £41.6m, March 2006 - £92.1m)were received in relation to the administration of TXU Europe Energy TradingLimited which had been placed into administration in 2002. The receipts havebeen shown separately in the income statement. In addition to this, the Group'sshare of the net dividend from the administration of TXU Europe Energy TradingLimited recognised as income by an associate company, Barking Power Limited,amounting to £0.9m (2005 - £7.1m, March 2006 - £16.7m) is shown separatelywithin share of operating profit from jointly controlled entities andassociates. In the year ended 31 March 2006 a gain on disposal of Thermal Transfer Limited,a wholly owned subsidiary, of £18.6m was recognised. There was no tax effect onthis exceptional item. ii) Certain re-measurements Certain re-measurements arising from the adoption of IAS 39 from 1April 2005 aredisclosed separately to aid understanding of the underlying performance of theGroup. This category includes the movement on derivatives as described in note10. These transactions can be summarised thus: Year ended Six months Six months ended 30 ended 30 31 March September September 2006 2006 2005 £m £m £m Exceptional items 108.8 Distributions from TXU administrator 25.4 48.7 18.6 Disposal of Thermal Transfer - - 127.4 25.4 48.7 Certain re-measurements (14.4) Movement on operating derivatives (note 10) 2.9 46.6 (43.5) Movement on financing derivatives (note 10) (11.1) (41.9) (13.0) Share of movements on derivatives in jointly controlled 3.4 (7.8) entities (70.9) (4.8) (3.1) 56.5 Profit before taxation 20.6 45.6 (11.4) Taxation (i) (5.3) (13.7) 45.1 Impact on profit for the period 15.3 31.9 (i) Taxation includes £0.3m (2005 - £0.2m, March 2006 - £1.1m) recognised withinshare of associates and jointly controlled entities on the face of the IncomeStatement. Notes on the Interim Statements for the period 1 April 2006 to 30 September 2006 6. Net finance costs Year ended Six months Six months ended 30 ended 3031 March September September2006 2006 2005£m £m £m Finance income:115.7 Return on pension scheme assets 64.5 57.53.3 Interest income from short term deposits 1.7 2.545.9 Other interest receivable (i) 30.9 18.8 164.9 Total finance income 97.1 78.8 Finance costs:(40.1) Bank loans and overdrafts (16.8) (17.8)(71.1) Other loans and charges (50.3) (33.8)(100.0) Interest on pension scheme liabilities (53.4) (51.0)(3.6) Accretion of convertible debt component (2.0) (1.8)8.3 Less: interest capitalised 5.6 3.2(4.3) Notional interest arising on discounted items (1.0) (1.6) (210.8) Finance costs excluding movement on financing derivatives (117.9) (102.8)(43.5) Movement on financing derivatives (note 10) (11.1) (41.9) (254.3) Total finance costs (129.0) (144.7) (89.4) Net finance costs (31.9) (65.9) (i) Included within other interest receivable are credits from jointlycontrolled entities of £22.6m (2005 - £16.7m, March 2006 - £39.2m), whichincludes £18.0m (2005 - £11.3m, March 2006 - £28.8m) in respect of loan stockinterest receivable from Scotia Gas Networks plc. Adjusted net finance costs are arrived at after the following adjustments: Six months Six months Year ended ended 30 ended 30 31 March September September 2006 2006 2005 £m £m £m (89.4) Net finance costs (31.9) (65.9) (add)/less: (97.3) Share of interest from jointly controlled entities and (55.8) (38.9) associates 3.6 Accretion of convertible debt component 2.0 1.8 43.5 Movement on financing derivatives (note 10) 11.1 41.9 (115.7) Return on pension scheme assets (64.5) (57.5) 100.0 Interest on pension scheme liabilities 53.4 51.0 (155.3) Adjusted net finance costs (85.7) (67.6) 7. Taxation The income tax expense reflects the anticipated effective rate of tax on profitsbefore taxation for the Group for the year ending 31 March 2007, taking accountof the movement in the deferred tax provision in the period so far as it relatesto items recognised in the income statement. The reported effective rate in theIncome Statement is 28.0% (2005 - 31.3%, March 2006 - 28.4%). The total effective adjusted rate of tax on profits before taxation excludingexceptional items, IAS 39 and IAS 32; and adjusted for tax on associates andjointly controlled entities and net pension finance income for the period can berepresented: Six months Six months Year ended ended 30 ended 30 31 March September September 2006 2006 2005 Effective adjusted rate: 33.0% Current tax 26.0% 27.5% (3.2)% Deferred tax 2.5% 4.1% 29.8% Total effective adjusted rate 28.5% 31.6% Notes on the Interim Statementsfor the period 1 April 2006 to 30 September 2006 8. Dividends The final dividend of 32.7 pence per ordinary share declared in the financialyear ended 31 March 2006 (2005 - 30.3 pence) was approved at the Annual GeneralMeeting on 27th July and was paid to shareholders on 22 September 2006. An interim dividend of 15.1p per ordinary share (2005 - 13.8p) has been proposedand is due to be paid on 23 March 2007 to those shareholders on the Scottish &Southern Energy plc share register on 23 February 2007. The proposed interimdividend is subject to approval and has not been included as a liability inthese financial statements. 9. Earnings per share Basic earnings per share The calculation of basic earnings per share at 30 September 2006 is based on thenet profit attributable to ordinary shareholders and a weighted average numberof ordinary shares outstanding during the period ended 30 September 2006. Allearnings are from continuing operations. Adjusted earnings per share Adjusted earnings per share has been calculated by excluding the charge fordeferred tax, net finance income relating to pensions, items disclosed asexceptional, and the impact of IAS 39. Six months ended Six months ended Year ended 30 September 30 September 31 March 2006 2006 2005Earnings Earnings Earnings Earnings per per per £m share Earnings share Earnings share pence £m pence £m pence 642.3 74.7 Basic 349.0 40.6 265.3 30.9 (45.1) (5.2) Exceptional items and certain re-measurements (note 5) (15.3) (1.8) (31.9) (3.7) 597.2 69.5 Basic excluding exceptional items and certain re-measurements 333.7 38.8 233.4 27.2 Adjusted for: 41.6 4.8 Deferred tax 12.2 1.4 15.0 1.8 3.6 0.4 Accretion of convertible debt component 2.0 0.2 1.8 0.2 642.4 74.7 347.9 40.4 250.2 29.2 (115.7) (13.4) Return on pension scheme assets (64.5) (7.5) (57.5) (6.7) 100.0 11.6 Interest on pension scheme liabilities 53.4 6.2 51.0 5.9 626.7 72.9 Adjusted 336.8 39.1 243.7 28.4 642.3 74.7 Basic 349.0 40.6 265.3 30.9 10.5 1.2 Convertible debt interest (net of tax) 5.3 0.6 5.3 0.6 - (3.0) Dilutive effect of convertible debt - (1.7) - (1.2) 652.8 72.9 Diluted 354.3 39.5 270.6 30.3 (45.1) (5.0) Exceptional items and certain re-measurements (15.3) (1.7) (31.0) (3.6) 607.7 67.9 Diluted excluding exceptional items and certain re-measurements 339.0 37.8 239.6 26.7 The weighted average number of shares used in each calculation is as follows: Six months Six months Year ended ended 30 ended 30 31 March September September 2006 2006 2005 Number of Number of Number of shares shares shares (millions) (millions) (millions) 859.5 For basic and adjusted earnings per share 860.3 858.3 1.7 Effect of exercise of share options 2.3 2.8 861.2 862.6 861.1 33.3 Effect of dilutive convertible debt 33.3 33.3 894.5 For diluted earnings per share 895.9 894.4 Notes on the Interim Statementsfor the period 1 April 2006 to 30 September 2006 10. Financial Assets / Liabilities For financial reporting purposes, the Group has classified derivative financialinstruments into two categories, operating derivatives and financingderivatives. Operating derivatives include all qualifying commodity contractsincluding those for electricity, gas, oil, coal and carbon. Financingderivatives include all fair value and cash flow interest rate hedges, non-hedgeaccounted (mark-to-market) interest rate derivatives, cash flow foreign exchangehedges and non-hedge accounted foreign exchange contracts. Non-hedge accountedcontracts are treated as held for trading. The net movement reflected in the Interim Income Statement can be summarisedthus: Year ended Six months Six months 31 March ended 30 ended 30 2006 September September £m 2006 2005 £m £m Operating derivatives 176.1 Total result on operating derivatives (i) (16.9) 159.1 (190.5) Less: amounts settled in the period (ii) 19.8 (112.5) (14.4) Movement in unrealised derivatives 2.9 46.6 Financing derivatives (and hedged items) (47.3) Total result on financing derivatives (i) (18.2) (44.9) 3.8 Less: amounts settled in the period (ii) 7.1 3.0 (43.5) Movement in unrealised derivatives (11.1) (41.9) (57.9) Total (8.2) 4.7 (i) Total result on derivatives represents the total amount (charged) orcredited to the income statement in respect of operating and financialderivatives. (ii) Amounts settled in the period represent the result on derivativestransacted in the period which have matured or been delivered and have beenincluded within the column 'before exceptional items and certainre-measurements'. Notes on the Interim Statementsfor the period 1 April 2006 to 30 September 2006 11. Analysis of net debt Decrease At in cash (Increase)/ At 1 April and cash decrease 30 September 2006 equivalents in debt 2006 £m £m £m £m Cash and cash equivalents 49.9 2.7 - 52.6Bank overdraft (i) (6.1) (1.7) - (7.8) 43.8 1.0 - 44.8 Loans and borrowings (ii) (2,214.7) - 179.4 (2,035.3)Finance lease creditors (1.6) - 0.3 (1.3)Bank overdraft (i) 6.1 - 1.7 7.8 (2,210.2) - 181.4 (2,028.8) Net debt (2,166.4) 1.0 181.4 (1,984.0) (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. (ii) Loans and borrowings are adjusted for £6.8m debit (opening - £1.4m debit)relating to fair value adjustments to borrowings and for the impact of theaccretion of the equity component of the convertible bond and other non-cashitems (£2.2m). 12. Reconciliation of movements in shareholders' funds Year Six months Six months ended 31 ended 30 ended 30 March September September 2006 2006 2005 £m £m £m 642.3 Profit for the period 349.0 265.3 (378.8) Dividends (281.3) (260.0) 263.5 67.7 5.3 (22.0) Net expense recognised directly in equity (116.4) (16.0) 9.9 Share capital issued 0.7 0.7 36.8 Cumulative adjustment for the implementation of IAS - 36.8 39 (9.5) Investment in own shares (6.8) (0.9) 4.0 Credit in respect of employee share awards 3.4 1.2 282.7 Net addition/(reduction) in shareholders' funds (51.4) 27.1 1,862.7 Opening shareholders' funds 2,145.4 1,861.8 2,145.4 Closing shareholders' funds 2,094.0 1,888.9 Independent review report to Scottish and Southern Energy plc Introduction We have been instructed by the Company to review the financial information forthe six months ended 30 September 2006 which comprises the Consolidated IncomeStatement, the Consolidated Balance Sheet, the Consolidated Statement ofRecognised Income and Expense, the Consolidated Cash Flow Statement and therelated notes. We have read the other information contained in the interimreport and considered whether it contains any apparent misstatements or materialinconsistencies 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 bylaw, we do not accept or assume responsibility to anyone other than the Companyfor our 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 directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures should be consistentwith those applied in preparing the preceding annual financial statements exceptwhere any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the UK. A review consistsprincipally of making enquiries of group management and applying analyticalprocedures to the financial information and underlying financial data and, basedthereon, assessing whether the accounting policies and presentation have beenconsistently applied unless otherwise disclosed. A review excludes auditprocedures such as tests of controls and verification of assets, liabilities andtransactions. It is substantially less in scope than an audit performed inaccordance with International Statements on Auditing (UK and Ireland) 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 2006. KPMG Audit PlcChartered AccountantsEdinburgh14 November 2006 This information is provided by RNS The company news service from the London Stock Exchange

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