Preliminary Results

31st May 2007 07:03

Scottish & Southern Energy PLC31 May 2007 31 May 2007 PRELIMINARY RESULTS FOR THE YEAR TO 31 MARCH 2007 March 2007 March 2006 Change Full-Year Dividend 55p 46.5p +18.3%Adjusted Profit Before Tax* £1,079.3m £873.9m +23.5%Adjusted Earnings Per Share* 92.5p 74.7p +23.8%Investment and Capital Expenditure £663.4m £502.1m +32.1% Power Station Availability (Gas) 95% 87% +9.2%Power Station Availability (Coal) 92% 92% -Energy Supply Customer Numbers 7.75m 6.7m +15.6%Customer Complaints to energywatch 840 1,573 - 47%Customer Minutes Lost (SHEPD) 77 65 +12 minsCustomer Minutes Lost (SEPD) 72 71 +1 min Lost Time and Reportable Injuries 11 17 -35%Reportable Environmental Incidents 0 0 - Sir Robert Smith, Chairman of Scottish and Southern Energy, said: "SSE's strategy is to deliver sustained real growth in the dividend payable toshareholders through the efficient operation of, and investment in, a balancedrange of regulated and non-regulated energy-related businesses.The successfulimplementation of this strategy in 2006/07 delivered another year of excellentfinancial performance, with profit before tax exceeding £1 billion for the firsttime, and strong operational performance, with our policy of responsible pricinghelping us to gain more than one million additional customers. "In addition, there has been very good progress in our major investmentprogramme, with the result that our asset base in energy networks, electricitygeneration, energy supply and gas storage, which has grown substantially inrecent years, will again increase significantly in the coming years. "SSE's first responsibility to shareholders is to deliver sustained real growthin the dividend. With its operational and investment focus leading to valueenhancement and creation, SSE is in an excellent position to continue to deliververy good results in the years ahead, as a customer-serving, dividend-payingcompany. "Our enhanced dividend policy, starting with an 18.3% increase in the full-yeardividend for 2006/07, reflects this and our priority is to deliver the newtargets that we have set." \* This preliminary results statement describes adjusted profit before tax beforeexceptional items, the impact of IAS 32 and IAS 39 and after the removal oftaxation on profits from jointly-controlled entities and associates. It alsodescribes adjusted earnings and earnings per share before exceptional items, theimpact of IAS 32 and IAS 39 and deferred tax. In addition, it describesadjusted operating profit before exceptional items, the impact of IAS 32 and IAS39, and after the removal of taxation and interest on profits from jointlycontrolled entities and associates. KEY DEVELOPMENTS ENERGY SYSTEMS • Operating profit* of £471.1m, compared with £470.6m in previous year Electricity networks • Power Systems operating profit* of £368.0m, compared with £367.9m inprevious year • Investment in electricity networks up 18.8% to £204.5m • Additional revenue of £13m earned under Ofgem's Quality of Service andother incentive schemes • Agreement on Transmission Price Control Review 2007-12 • Beauly-Denny Public Inquiry commenced in February 2007 Gas Networks (10 months in 2005/06) • Share of SGN's adjusted operating profit* up from £102.7m to £103.1m • SGN capital expenditure up 10.3% to £120.4m and replacementexpenditure up 41.4% to £174.8m GENERATION AND SUPPLY • Operating profit* up 44.5% to £642.6m Generation • Gas-fired power station availability up from 87% to 95%; coal stationavailability unchanged at 92% • Acquisition of 50% stake in Marchwood Power Ltd, a new 840MW gas-firedpower station now under construction • Start of work on ash separation plant at Fiddler's Ferry • Fourth highest hydro output on record • Hadyard Hill became first UK wind farm to generate over 100MW ofelectricity • Planning permission secured for a further 68MW of new wind farmcapacity • Partnership Agreement signed with Viking Energy for 600MW wind farm onShetland • Target adopted to reduce carbon intensity of power generated by 20% by2016 Supply • Net gain of over one million energy supply customers, to 7.75m,following policy of responsible pricing • Implementation of lower energy prices from 1 March 2007; lowestdomestic prices for dual fuel • Further reduction, of 47%, in complaints reported by energywatch • Ranked first in uSwitch.com customer satisfaction surveys and topperformer in JD Power Study • 100,000 'talk' telecoms customers achieved for first time • First 20,000 customers won by new domestic gas boiler installation,maintenance and repair business • New energy programme rewarding customers for energy efficiency set forlaunch CONTRACTING, CONNECTIONS AND METERING • Operating profit* up 9.8% to £51.6m, excluding Thermal Transfer whichwas sold on 31 March 2006 • Leeds City Council street lighting PFI launched • Continued expansion of out-of-area electricity networks, with 38 nowin operation or under construction • New water business on track for launch • In-sourcing of Metering work in three areas of the UK GAS STORAGE • Operating profit* up 104.8% to £55.9m • Commissioning of first new storage capacity at Aldbrough set to startin the autumn of 2007 • Planning permission secured to double the size of Aldbroughdevelopment to over 800mcm TELECOMS • Operating profit* up 5.3% to £13.9m • £5m investment to upgrade ethernet platform EXCEPTIONAL ITEM - TXU Europe Group plc • Distribution payments totalling £33.0m received (plus £0.9m in respectof Barking Power Ltd) • On course for recovery of around 98% of agreed claim FINANCIAL OVERVIEW Introduction The management of SSE is governed by six key financial principles: delivery ofsustained real dividend growth; effective management of core businesses;rigorous analysis to ensure investments are well-founded and, where appropriate,innovative; maintenance of a strong balance sheet; deployment of a selective anddisciplined approach to acquisitions; and use of purchase in the market of thecompany's own shares as the benchmark against which financial decisions aretaken. Preliminary Financial Results for 2006/07 These preliminary results for the year to 31 March 2007 are reported underInternational Financial Reporting Standards. In previous results statements,SSE's focus was on profit before tax before exceptional items, net financeincome from pension assets (IAS 19), the impact of IAS 32 and IAS 39, and afterthe removal of taxation on profits from jointly controlled entities andassociates. In these preliminary results, however, in line with emergingpractice and as stated in the interim results in November 2006, SSE no longermakes any adjustment in respect of net finance income from pension assets (IAS19). Results for 2005/06 have been re-stated on this basis. March 07 March 06 £m £m Reported Profit before Tax 1,132.0 896.9Movement in derivatives (56.2) 70.9Exceptional items (33.9) (127.4)Tax on JVs and Associates 33.8 29.9Interest on convertible debt 3.6 3.6 Adjusted Profit before Tax* 1,079.3 873.9 Adjusted current tax charge (282.6) (231.5) Adjusted Profit after Tax* 796.7 642.4 Reported Profit after Tax 830.5 642.3Number of shares for basic and adjusted EPS 860.9 859.5(million) Adjusted EPS* 92.5 74.7Basic EPS 96.5 74.7 Adjusted Profit before Tax* Adjusted profit before tax grew by 23.5%, from £873.9m to £1,079.3m. The mostsubstantial growth continues to be achieved in Generation and Supply. Thisreflects the benefits from the development and diversification of SSE'selectricity generation portfolio, which is over 10,000MW, and the sustainedincrease in the number of energy supply-related customers, which now total 7.85million (including 100,000 'talk' telecoms customers). Adjusted Earnings per Share* To monitor financial performance over the medium-term, SSE continues to focus onadjusted earnings per share, which increased by 23.8%, from 74.7p to 92.5p. Dividend The Board is recommending a final dividend of 39.9p, compared with 32.7p in theprevious year, an increase of 22.0%. This will make a full year dividend of55p, compared with 46.5p last year, an increase of 18.3%. This increase is also designed to provide a significantly higher base for futuredividend growth. From this new, higher base, SSE's target will be to deliver atleast 4% annual real growth in the dividend paid to shareholders in respect of2007/08, 2008/09 and 2009/10. Thereafter, SSE expects to continue to deliver atleast sustained real growth in the dividend. This new policy replaces SSE'sexisting targets, which were to deliver at least 4% annual real growth in thedividend payable to shareholders in respect of 2006/07 and 2007/08, withsustained real growth thereafter. The expected full-year dividend in respect of 2006/07, of 55p, compares with32.4p for 2001/02, an increase of 69.8% in five years. This represents acompound annual growth rate of 11.2%. At 55p, it will also be double thedividend paid by SSE to shareholders for the financial year ending 31 March2000. The total full-year dividend payment to shareholders for 2006/07 is covered 1.68times by SSE's adjusted profit after tax, compared with 1.61 times in theprevious year. ENERGY SYSTEMS Energy Systems Introduction SSE owns Southern Electric Power Distribution, Scottish Hydro Electric PowerDistribution and Scottish Hydro Electric Transmission. These companies are thesubject of incentive-based regulation by the Office of Gas and ElectricityMarkets (Ofgem), which sets for periods of five years the prices they can chargefor the use of their electricity networks, their capital expenditure and theirallowed operating expenditure, within a framework known as the Price Control. Inbroad terms, Ofgem seeks to strike the right balance between attractinginvestment in electricity and gas networks, encouraging companies to operatethem as efficiently as possible and ensuring that prices ultimately borne bycustomers are no higher than they need to be. The current Distribution PriceControl runs until April 2010. A new five-year Transmission Price Control wasagreed during 2006/07 and came into effect on 1 April 2007. As at 31 March 2007, SSE estimates that Ofgem's valuation of the assets of itselectricity distribution and transmission businesses (the Regulated Asset Valueor 'RAV') was over £2.6bn, based on Ofgem's methodology. SSE also has an equity interest of 50% in, and provides corporate and managementservices to, Scotia Gas Networks (SGN), which owns Southern Gas Networks andScotland Gas Networks, companies which own and operate the medium and lowpressure gas distribution networks in their areas of the UK. They are thesubject of incentive-based regulation similar to that which applies inelectricity. The Price Control that had applied to gas distribution networksfrom 1 April 2002 expired on 31 March 2007, at which point a one-year PriceControl was put in place to run until 31 March 2008. A Price Control for a fullfive-year period from 1 April 2008 is now being determined. SGN estimates that the RAV of the networks it owns was around £3.2bn, based onOfgem's methodology, as at 31 March 2007. Energy Systems Overview Operating profit* in Energy Systems, including gas distribution, increasedslightly, from £470.6m to £471.1m, contributing 38.3% of SSE's total operatingprofit. The amount of electricity transmitted and distributed through SSE's networks andthe amount of gas distributed through SGN's networks is determined by theweather, by customers' demand for energy and by the availability of the networksthemselves. Variations in the volume of energy distributed have an impact onthe income earned by SSE's energy systems businesses. 2006/07 was marked by higher-than-normal temperatures throughout the year in allparts of the country. There was also a reduction in customers' use of bothelectricity and gas, even after allowing for weather-related variations indemand. This may reflect the impact of the higher energy supply prices whichprevailed during the year, and a growing awareness of the importance of energyefficiency. All of this means that Southern Electric Power Distribution, Scottish HydroElectric Power Distribution, Scottish Hydro Electric Transmission and SGN alldistributed fewer units of energy during the year, and this impacted on therevenue that they earned. If, in any year, regulated energy networks companies' revenue is greater (overrecovery) or lower (under recovery) than is allowed under the relevant PriceControl, the difference is carried forward and the subsequent prices thecompanies may charge are adjusted. Under this arrangement, the under recoveryof revenue from SSE's electricity distribution networks in 2006/07 means theywill receive a favourable revenue adjustment of £3.9m in 2007/08; similarly, SGNwill receive a favourable revenue adjustment of £21m in the 12 months followingthe tariff re-setting in October 2007. Southern Electric Power Distribution Southern Electric Power Distribution's operating profit* fell by 0.9%, from£226.1m to £224.0m. During the year, it distributed 33.9TWh of electricity,compared with 34.9TWh in the previous year, despite a growth in the number ofcustomers to whom electricity is distributed. This reduction in the number ofunits distributed was, however, partially offset by changes in their price. Ensuring the reliability of the electricity networks it owns and operates is oneof SSE's main priorities and the key measures of reliability are customerminutes lost and customer interruptions. The average number of minutes thatcustomers in the Southern Electric Power Distribution area were without supplywas 72, one more than in the previous year; and the number of supplyinterruptions per 100 customers was 76, compared with 78 in the previous year. Performance in respect of both minutes lost and interruptions was ahead of thetargets set by Ofgem under its Quality of Service Incentive Scheme (QSIS), whichgives financial benefits to distribution network operators that deliver goodperformance for customers. This, together with income earned in 2006/07 underother incentive arrangements, is expected to lead to SSE receiving additionalrevenue totalling £9m during the next two financial years. In January 2007, the Southern Electric Power Distribution area was affected by astorm which the Meteorological Office said was the most severe in its scale andimpact for 17 years. This led to additional costs of around £2m being incurred.It resulted in almost 200,000 customers having their electricity supplyinterrupted. Power was restored to around 180,000 customers within a day and toalmost all of the affected customers within 36 hours. Over 1,000 people in SSE,from across the country, were involved in dealing with the consequences of thestorm, from engineers out in the field to customer service advisers who spoke toover 50,000 affected customers who called in. It was an exercise in which firstclass teamwork was key. Following the event, SSE undertook a comprehensivereview to ensure that it is as well prepared as possible for storms in thefuture. Scottish Hydro Electric Power Distribution and Scottish Hydro ElectricTransmission Operating profit* for Scottish Hydro Electric Power Distribution and ScottishHydro Electric Transmission increased by 1.6%, from £141.8m to £144.0m. In theScottish Hydro Electric area, 8.5TWh of electricity were distributed during theyear, compared with 8.9 TWh distributed in the previous year. This reduction inthe number of units distributed was, however, offset by changes in their price. The average number of minutes that customers were without supply was 77,compared with 65 in the previous year (which was the best performance in thearea since records began) and 82 in 2004/05. This followed an increase of almost25% in the number of weather-related faults experienced on the 33kV networkduring January and February of 2007. The number of supply interruptions per 100customers was 79, one more than in the previous year. Performance in respect ofboth minutes lost and interruptions was, however, ahead of Ofgem's QSIS targets.This, together with income earned in 2006/07 under other incentivearrangements is expected to lead to SSE receiving additional revenue of justunder £4m during the next two financial years. Electricity Network Investment The key responsibility of SSE's electricity networks businesses is to maintainsafe and reliable supplies of electricity and to restore supplies as quickly aspossible in the event of interruptions. The Distribution Price Control Reviewfor 2005-10 resulted in substantially increased allowances for capitalexpenditure to maintain and improve the networks' performance. This will enableSSE to increase its revenue from its networks, and delivery of this enhancedinvestment programme was one of SSE's priorities for 2006/07. It is now wellunder way, with capital expenditure of £204.5m during the year, which was 18.8%higher than in 2005/06. In the course of the year, SSE added just over 1,000kmto the length of its networks, taking the total, including transmission, to over128,000km. An example of the type of project in which investment is being made is theinstallation of a 15km overhead 'BLX' line and 2.5km underground cable, whichwill improve the security of supply to customers at Marchington on the Dorset/Wiltshire border. The cables are being laid using directional drill techniques,which avoid the need for large open trenches, under sensitive woodland, tocomply with requests from English Nature and the National Trust. Rising demand for electricity in North Hampshire and South Berkshire has createdthe need for a reinforcement of the local electricity network. In line withthis, SSE has begun preliminary work on the installation of two 10km underground132,000 volt cables that will carry power from National Grid's substation atBramley to the SSE substation in Basingstoke. In the north of Scotland, 2007/08 will be marked by the replacement of no fewerthan four subsea cables, reinforcing the electricity supply to islands off thenorth and west coasts. With two years of the five-year Distribution Price Control period completed, SSEforecasts that the Regulated Asset Value (RAV) of its distribution andtransmission businesses is over £2.6bn. It is expected to grow by around £500mover the 2005-2010 Distribution Price Control period, based on Ofgem'smethodology, to around £3bn. This excludes any major transmission investment.In line with this, SSE expects to invest around £250m in its electricitynetworks in 2007/08. Future Transmission Developments One of SSE's priorities for 2006/07 was to secure a satisfactory outcome fromthe Transmission Price Control Review for 2007-12, and in December 2006 itdecided, on balance, to accept Ofgem's final proposals. While the allowed costof capital was, and remains, disappointing, SSE concluded, ultimately, thatthere was within Ofgem's detailed proposals for areas such as capital andoperational expenditure sufficient scope and incentive to secure an acceptablelevel of revenue from its transmission business. As the licensed transmission company for the north of Scotland, SSE is requiredto ensure there is sufficient network capacity for those seeking to generateelectricity from renewable sources. The project to replace the electricitytransmission line connecting Beauly in the Highlands 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 SSE to invest over£250m, and making progress with this project was another of SSE's prioritiesduring 2006/07. A Public Inquiry into the project began in February 2007, andwas still on schedule at the end of May. It is expected that the report of theInquiry will be submitted to Scottish Ministers for a decision during 2008. In December 2006, SSE published a consultation document on the possibledevelopment of a new high voltage transmission line capable of accommodatingpower from possible renewable energy developments on the Western Isles andconnecting this to the existing mainland transmission network at Beauly. Theconsultation document set out a preferred option for the new connection whichwould involve the construction of a subsea High Voltage Direct Current (HVDC)cable circuit and an underground HVDC cable. The development on this basiswould require investment by SSE broadly estimated at around £375m. Electricity Distribution and Transmission Priorities in 2007/08 During 2007/08, SSE's first objective in electricity distribution andtransmission will be to maintain safe and reliable supplies of power and torestore supplies as quickly as possible in the event of interruptions, soperformance in terms of customer minutes lost and customer interruptions willcontinue to be critical. This will be supported by delivery of continuousimprovement initiatives, following a fundamental review of internal processesand customer-facing operations that is now under way. Other key priorities willbe the efficient delivery of the next phase of the major programme of investmentin the networks, targeted at upgrading them so as to benefit the greatest numberof customers, and the successful completion of the Public Inquiry into theBeauly-Denny transmission line proposal. 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 around 74,000km of gas mains, deliveringgas to around 5.7m industrial, commercial and domestic customers. SSE'sinvestment was £505m, 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 £103.1m during 2006/07,compared with £102.7m for the ten months from 1 June 2005. This result reflectsthe major reduction in gas transportation volumes experienced during the year.SGN would have earned additional revenue if temperatures had been normal, ratherthan above average, and transportation volumes had also been normal, rather thanlower than average. This would have added £21.0m to SSE's share of SGN'sadjusted operating profit. Nevertheless, performance was supported by anongoing focus on underlying operating costs and by improving results from SGN inits non-regulated activities. Scotia Gas Networks - Operational During 2006/07, the gas transportation volume for SGN's network in Scotland was57,096GWh and for its Southern network the volume was 105,240GWh. This compareswith 61,637GWh and 123,632GWh respectively in the previous year. SGN's objective is to reach and remain at the frontier for safety, customerservice and efficiency in gas distribution. During the year, it madesignificant progress towards the achievement of this goal. In September 2006,following negotiations, the trade unions' ballot produced a substantial vote infavour of SGN's pay and productivity offer for the three years until 2009, whichwill allow the introduction of much more flexible working patterns. These willbe introduced while continuing to attach the highest priority to safety. Implementation of the new structure for the business is virtually complete. Theprevious functionally-based arrangement has been replaced with ageographically-based organisation operating out of 24 depots, thereby enablingSGN to secure significant efficiencies. This reorganisation is intended toimprove SGN's effectiveness in its customer-facing activities such as emergencyresponse, repairs, metering work and streetworks. As part of SGN's drive to deliver excellent customer service through this depotstructure, customer satisfaction indices have been introduced across the rangeof activities. Almost 6,000 customers were asked to rate their experience ofSGN undertaking work at their home across a range of metrics, and thisculminated in an overall score of 4.11 out of 5 (5 being very satisfied).During 2006/07, this focus on customer service helped SGN to deliver a reductionin the number of complaints about it sent to energywatch for resolution, by 56%to 75. Future performance will be supported by the introduction of new front officemanagement systems, the total number of which has been reduced from over 50 to11. The final stage of the implementation was completed in April and thesystems are bedding in well. During 2006/07, the number of lost time injuries in SGN fell, to 0.21 per100,000 hours worked. Scotia Gas Networks - Investment During the year, SGN invested £120.4m in capital expenditure projects, comparedwith £109.2m in the 10 months from June 2005. It also invested £174.8m in mainsand services replacement expenditure works, compared with £123.6m in the 10months from June 2005, under the 30:30 mains replacement programme. This is theGreat Britain-wide replacement of all iron gas mains within 30 metres ofdomestic properties in a 30-year timeframe, to improve the future reliabilityand safety of the network. Following this investment, SGN estimates that theRAV of the networks it owns was around £3.2bn as at 31 March 2007 - the same asthe total enterprise value paid when they were acquired in June 2005. In 2007/08, SGN expects to invest around £200m in capital expenditure projectsand around £190m in replacement expenditure works. With such high levels ofinvestment expected in future years, the RAV of SGN is on course to increasesignificantly. Future Scotia Gas Network developments SGN decided to accept Ofgem's final proposals for the gas distribution one-yearprice control for 2007-08. As in electricity transmission, the allowed cost ofcapital in gas distribution was disappointing and should not be seen as aprecedent for the forthcoming five-year review for 2008-13. Nevertheless, SGN'snetworks secured the highest increases in revenue amongst the eight gasdistribution networks. The policy frameworks for 'shrinkage' gas, pensionsdeficit and capital and replacement expenditure were all satisfactorily dealtwith in the context of what was a one-year review period. On 29 May 2007, Ofgem published its initial proposals for the 2008-13 pricecontrol. These proposals are comprehensive and detailed and require extensivescrutiny and ongoing dialogue with Ofgem. SGN's objective is to ensure thatOfgem's final proposals, which are expected to be published in November 2007,feature an acceptable cost of capital, opportunities to earn additional revenueand the correct incentives for dealing with operational, capital and replacementexpenditure. 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 3,500people - although, because of efficiencies achieved, the total number of peopleworking on SGN activities, including contractors, has fallen. Scotia Gas Networks Priorities in 2007/08 SSE's priority in gas distribution will continue to be to provide SGN with thecorporate and management services to support its ongoing reform of procedures,processes and practices which are designed to secure cost savings andefficiencies, and to support also the continued in-sourcing of servicescurrently provided by National Grid, which will yield further cost savings. Itwill also assist SGN in the delivery of its substantial capital and replacementexpenditure programmes. More specifically, SSE will help SGN in its work withOfgem on the Gas Distribution Price Control review for 2008-13 and in its driveto achieve a further improvement in its safety performance. GENERATION AND SUPPLY Generation and Supply Introduction SSE owns just over 10,000 megawatts (MW) of electricity generation capacity,including its share of joint ventures. This comprises almost 4,400MW ofgas-fired capacity, 4,000MW of coal-fired capacity (with biomass 'co-firing'capability), over 1,500MW of hydro and wind capacity and 150MW of oil-firedcapacity, giving SSE diversity in fuels and, as a result, greater optionality inthe overall management of its power stations. As at 31 March 2007, SSE suppliedenergy to over 7.75 million homes, offices and businesses within the UK'scompetitive electricity and gas supply market. A series of market reforms, culminating in the introduction of BritishElectricity Trading and Transmission Arrangements (BETTA) in 2005, means thatwholesale gas and wholesale electricity are transacted like any othercommodities. SSE purchases gas and, where appropriate, some electricity viabilateral contracts and through the wholesale market - the latter complementingthe electricity produced from its own generation portfolio. Within itsintegrated business model, SSE's power stations and fuel supply contracts areused to support performance in electricity supply, mainly through exploitingflexibility and optionality. Generation and Supply is, therefore, assessed as asingle value chain and this approach means, amongst other things, that moresustained value can be created from SSE's balanced portfolio of assets,contracts and customers than would be the case on a stand-alone basis. Generation and Supply Overview Operating profit* in Generation and Supply rose by 44.5%, from £444.8m to£642.6m, contributing 52.2% of SSE's total operating profit during the year.Total revenue for Generation and Supply was £10.98bn, which accounted for 88% ofSSE's total revenue in 2006/07, of which £5.0bn was in relation to sales ofelectricity and gas to industrial, commercial and domestic customers. Theunderlying financial performance of Generation and Supply has been reportedexcluding the impact of IAS 39 revaluations because SSE does not believe thisrepresents underlying business performance. During 2006/07, SSE generated 46.6TWh of electricity, including power stationsit wholly owns and in which it has a share. It also purchased 10.5TWh ofelectricity via long-term contracts with other generators, including BritishEnergy. In the year, it supplied 26.3TWh of electricity to its domestic andsmall business customers and 24.6TWh was supplied under contract to industrialand commercial customers. The net balance was sold in the wholesale electricitymarket. The continuing growth achieved by SSE's integrated Generation and Supplybusiness is the outcome of the company's investment in and acquisition of adiverse range of electricity generating assets and a growth of 74% in the numberof energy supply-related customers over the past five years. More specifically,it also reflects the fact that SSE's gas-fired power stations delivered agreater level of availability to generate electricity during 2006/07, comparedwith the previous year, which was a key priority. There was also much moreoutput of wind energy during the year, which contributed around £20m tooperating profit. Hydro output was the fourth highest on record and theadditional output contributed around £25m to operating profit, compared with anaverage year. 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 £25m to operating profitduring 2006/07. Operating profit reflects a charge of £18.9m in respect of the write-down ofCombined Heat and Power facilities and the expensing of costs associated withthe deep water offshore wind research, development and demonstration project inthe Moray Firth. Gas-fired Generation - Operations Good performance in BETTA is dependent on plant reliability. During 2006/07,SSE's principal wholly-owned gas-fired power stations (Fife, Keadby, Medway andPeterhead) achieved an average of 95% of their maximum availability to generateelectricity, excluding planned outages, a significant improvement on the 87%availability in the previous year. This followed an intensive programme ofengagement with the equipment suppliers to resolve technology and performanceissues. Gas-fired Generation - Investment During 2007/08, SSE expects to invest over £20m at its Medway, Keadby andPeterhead Power Stations to improve their availability and reliability and toincrease the overall performance capability of the plant. Within this, the mostsignificant investment will be in gas turbine efficiency and flexibilityimprovements at Peterhead, which are scheduled to begin in the autumn of thisyear. In December 2006, SSE and ESBI (Ireland's ESB International) completed all ofthe financial and legal agreements in respect of their 50:50 joint venture,Marchwood Power Ltd. This allowed work on the construction of the venture's new840MW combined cycle gas turbine (CCGT) power plant in Southampton to beginearly in 2007. The plant is expected to be constructed and in commercialoperation in time for the winter of 2009/10. On completion, it will take SSE'sownership interest in gas-fired power stations to almost 4,800MW and inelectricity generation capacity as a whole to almost 10,500MW. The plant will be operated by Marchwood Power Ltd, which will be responsible forensuring it is available to generate electricity as required by its customer,SSE. SSE will supply both the gas for conversion into electricity and the netcarbon emissions allowances, and will sell the resulting output into the UKelectricity market. In this respect, the arrangements are similar to thosewhich apply to Seabank Power Limited, in which SSE also has a 50% stake, andwhich operates a 1,140MW CCGT power station near Bristol. The plant is being built under a fixed price turnkey contract by Siemens plc,using gas turbines similar to those used at Seabank and at Peterhead. With anet thermal efficiency in excess of 58%, it will be one of the most efficient inthe UK and in a typical year will meet the electricity requirements of aroundone million homes. The favourable location of the plant, on the coast ofcentral southern England, means it will actually receive payments under thecurrent arrangements for charging electricity generators for use of theelectricity networks. The expected capital cost for Marchwood Power Ltd is around £400m. It is beingfinanced on a debt/equity ratio of 80:20. In line with the 50:50 joint venture,SSE's equity investment will be, therefore, around £40m and it is also providing50% of the project debt requirements (other than the VAT and Working Capitalfacilities) as a lender. On this basis, SSE has so far incurred £32.5m inrespect of the Marchwood development. During August 2006, Barking Power Ltd, in which SSE has a 30.4% stake, submitteda Section 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. During 2006/07, SSE and its partner BP delayed a decision on whether to investin the development of a 475MW carbon capture plant at SSE's power station atPeterhead. The companies had been working for almost two years on what wouldhave been the world's first industrial-scale project to generate 'de-carbonised'electricity from hydrogen, and they had completed the front end engineering anddesign study. The project was, however, always dependent on the governmentputting in place a policy framework which encourages the capture of carbon fromfossil fuel-based electricity generation, and its long-term storage. In May 2007, the Energy White Paper set out a timetable for a competition todetermine which carbon capture and storage project in the UK would be supportedby the government. This timetable was not compatible with the requirements ofthe participants in the project at Peterhead and BP announced it would take theproject no further. Nevertheless, SSE retains an interest in developments incarbon capture and storage technologies and has potential opportunities at itsgas-fired and coal-fired power stations. Coal and Biomass Generation - Operations The Ferrybridge and Fiddler's Ferry power stations, each with a capacity ofalmost 2,000MW, achieved 92% of their maximum availability to generateelectricity, excluding planned outages, during 2006/07, the same as in theprevious 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 electricity output qualifies for RenewableObligation Certificates (ROCs). During the year, their output qualifying forROCs was 741GWh, compared with 795GWh in the previous year. The total for 2006/07 was less than might have been expected following the recent development ofthe new 'co-firing' facilities at the sites. It reflects the introduction ofthe regulatory change which limits to 10% the amount that companies can useco-fired fuels to meet their Renewables Obligation. Output was also affected bythe fact that the new facilities to 'co-fire' fuels from renewable sourcesunderwent commissioning during the period, which included the need to ensure thequality of fuel for the station was of the required standard. Nevertheless, the new facilities mean that SSE is now the UK's leading user ofbiomass co-firing. It is now considering the impact of the proposed new ROCarrangements for biomass, set out in the government's consultation documentReform of the Renewables Obligation, but these are not expected to come intoeffect until April 2009. 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 expectedto total around £225m. This will extend the stations' contribution to thesecurity of the UK's energy supplies and means that SSE will continue to havethe country's most diverse electricity generation portfolio. Making good progress with the investment was one of SSE's priorities during 2006/07, and the civil works at both sites are now well under way, with the firstoutage connected to the project commencing at Fiddler's Ferry in March 2007.This was to allow the removal of asbestos from the exhaust ducting before theducting itself was removed and replaced to accommodate the FGD plant. Theinstallation of FGD is expected to be complete in time for the power stations tobegin generating electricity through a 'de-sulphurised' process during 2008. To complement the investment in FGD, SSE is investing £17m 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. The turbinesand the static blades have been installed at the first of the units at Fiddler'sFerry, and further installations will take place at both stations during 2007. SSE's partnership with Doosan Babcock Energy, Siemens and UK Coal is intended tolead to the installation of 'cleaner coal' technology at Ferrybridge, comprisinga 500MW Supercritical Boiler and Steam Turbine, with a thermal efficiency ofaround 45%, and the subsequent deployment of post-combustion carbon captureequipment. The front-end engineering and design study is almost completed andSSE expects to make a decision before the end of 2007 on whether to proceed withthe investment. It was originally expected that installation of theSupercritical Boiler and related plant to meet all established environmentalstandards would require investment by SSE of around £250m. Over the past year,costs across the power equipment sector have risen and the required level ofinvestment may be significantly higher, which will clearly influence SSE's finaldecision. In February 2007, SSE and RockTron Limited concluded an agreement leading to theconstruction at Fiddler's Ferry of the first plant in the UK to separate asharising from electricity generation into constituent mineral parts for sale ascement substitute products and industrial minerals. Under the agreement, SSEhas acquired one preference share in RockTron and is providing it with a loan ofup to £22m to facilitate the construction of the plant. All of the necessaryconsents are in place, and work on the development is now under way, with theplant on course to become fully operational in the summer of 2008. Over a period of up to 25 years, the plant will remove and process all fresh ashproduced and all which is currently stored in lagoons at the site, up to a totalof around 800,000 tonnes per annum. It will take this as its raw material andprocess it into its constituent parts such as fine and coarse ash fractions,magnetic fraction, carbon rich fraction and cenospheres. These constituent partsthen become marketable products and will be sold into their respective markets,with the largest volume being used as cement substitutes. Without processing,ash disposal would begin to attract landfill duty and associated environmentalliabilities. The agreement between SSE and RockTron governs all of the commercial andoperational matters in respect of the new plant, including a lease to allowconstruction and operation of the plant at the power station and the supply tothe plant on a 'must-take' basis of ash from the power station. RockTron will beresponsible for the operation of the new plant and for the marketing and sale ofthe constituent mineral parts arising from the processing. EU Emissions Trading Scheme In March 2007, the UK government published its Approved National Allocation Planfor Phase II of the EU Emissions Trading Scheme, from 2008 to 2012. 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 around 83%,compared with around 80% across the electricity sector as a whole. Hydro and Wind Generation - Operations The Energy White Paper, published in May 2007, stated that 'renewable energy isan integral part of the Government's strategy for reducing carbon emissions'.It also stated that 'renewables can also make a contribution to security ofsupply, by diversifying the electricity mix and reducing the need for energyimports'. SSE owns and operates over 1,500MW of renewable energy generating capacity,including pumped storage. Total output from its hydro electric stations duringthe year was the fourth highest on record at 3,767GWh. This compares with the10-year average of 3,177GWh and with output of 3,054GWh during 2005/06. As at31 March 2007, the amount of water held in SSE's reservoirs which could be usedto generate electricity was 75% of the maximum, compared with 61% on the samedate last year, enough to generate 670GWh of electricity. The output of refurbished hydro-electric stations with capacity of up to 20MWqualifies for ROCs. The refurbishment of all of SSE's sub-20MW capacity wascompleted during 2005 and,in total, it has 406MW of capacity in its sub-20MWstations (including the new plant commissioned in the last few years at Culleig,Kingairloch and Fasnakyle). Of the total hydro output in 2006/07, 1,791GWhqualified for ROCs. The Tangy, Spurness, Artfield Fell and Hadyard Hill wind farms also contributed384GWh of ROC-qualifying output in 2006/07, compared with the 108GWh of outputproduced by SSE's wind farms in the previous year. This increase reflects thefact that Hadyard Hill was commissioned at the start of the financial year andbecame the first wind farm in the UK to generate over 100MW of electricity. 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 is expected to be almost 2,000GWh in 2007/08. Hydro Generation - Investment The construction of what will be SSE's second largest conventional hydroelectric station at Glendoe, near Loch Ness, is now well under way. At the endof March, over 500 people were working on the development. By that time, cavernexcavation had been completed to power station floor level, the headrace tunnelhad advanced to 1,250 metres and the aqueduct tunnel to 520 metres. With an installed capacity of around 100MW, Glendoe will produce around 180 GWhof electricity qualifying for ROCs in an average year. When synchronised, itwill be able to start generating 100MW of electricity in 30 seconds. Thedevelopment of Glendoe is requiring investment of around £140m. The project is akey priority and remains on course for electricity to be generated from thewinter of 2008/09. In March 2007, SSE applied for consent to build a new 2.5MW hydro electricstation near Crianlarich; the proposal is for a 'run-of-river' scheme. This wasfollowed by an application, in April 2007, for consent to build another new 'run-of-river' hydro electric scheme, of 3.5MW, in Wester Ross. SSE believes there may be potential to develop up to three larger hydro electricschemes in the Highlands, which could be capable of producing a total of up to200GWh of electricity a year, plus a number of pumped storage schemes. Theirdevelopment would, however, require a planning and policy framework more attunedto the critical need to maximise production of energy from renewable sources andreform of the current regime for charging generators for the use of theelectricity networks. Wind Generation - Investment SSE's four operational wind farms have a total installed capacity of 162MW.This will increase to 236MW with completion of construction of the wind farmsat Tangy 2 (6MW), Drumderg (32MW) and Toddleburn (36MW). Drumderg finallyreceived consent in September 2006 and Toddleburn received consent in January2007. At the start of 2006/07, SSE said it hoped that its applications in respect ofseven wind farms in Scotland would be determined and approved during thefinancial year. Of these seven, two have been approved and one was the subjectof a Public Inquiry which has now been completed and from which the result isawaited. Two have been referred to Public Inquiries which will start later thisyear and two have yet to be determined by the relevant planning authority.Another wind farm, Strathy North, was submitted for planning consent during theyear. Its proposed installed capacity is 70MW. Despite these issues, SSE is still aiming to have around 1,000MW ofROC-qualifying wind and hydro generating capacity by the end of the decade. Italready has in place, or has secured consent to develop, 742MW of capacity(568MW in operation and 174MW in development or construction). In January 2007, SSE signed a partnership agreement with Viking Energy Ltd, thecompany established to represent Shetland Islands Council's interests in windfarm development, which is intended to lead to the development on Shetland'sCentral Mainland of a wind farm with around 600MW of capacity. SSE and VikingEnergy each have a 50% stake in the partnership. Under the agreement, the newpartnership will, later this year, submit to the Scottish Executive a planningapplication for the wind farm which, if consented, could reduce the UK's annualcarbon emissions by an estimated two million tonnes, or more. Its developmentis subject to, amongst other things, planning consent being secured and to theconstruction of a sub-sea cable between Shetland and the mainland of Scotland. Innovation The placing of a 5MW wind turbine, one of the largest installed anywhere in theworld, in 45 metres of water 25km off the coast in the Moray Firth, was a keymilestone in a research, development and demonstrator project to test thetechnical and economic feasibility of deep water wind farms. The project hasbeen funded by Talisman Energy (UK) Ltd and SSE, as well as the European Union,the Scottish Executive and the Department of Trade and Industry. Electricitywas first generated by the turbine in May 2007 and is being used to power theBeatrice oil platform, which, in turn, will provide a base from which to carryout turbine maintenance and performance monitoring. A second turbine was due to be installed, but this did not take place before theonset of the autumn and winter weather, and was postponed until the summer of2007. In addition, the project has been subject to significant cost over-runs,and total costs have now exceeded £30m, of which SSE's share was £16m. All ofthis demonstrates the challenges associated with the development of leading-edgetechnology and this project has had difficulties. Accordingly, SSE hasrecognised a charge of £5m in 2006/07 in respect of this expenditure. 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 UK's leading generator ofelectricity from renewable sources. Against this background, SSE agreed inOctober 2006 to become a partner in the new Energy Technologies Institute,providing it with up to £2.5m a year for five years. The detailed arrangementsfor the ETI are still being finalised and if, in practice, SSE's participationin the ETI is not the best way forward, SSE will engage directly withuniversities and other research establishments to make appropriate investmentsin new technologies. SSE is a major contributor to a £6m fund to support renewable energydevelopments in Scotland. The Sigma Sustainable Energies Fund is being financedby a range of partners - including the Scottish Executive - to stimulate growthin renewable energy. The Fund considers energy-related projects in a wide rangeof fields including wind, solar, hydro electric, biomass (including biofuels),ocean, hydrogen and geo-thermal. Its early investments include Ocean PowerDelivery Ltd, which is developing the Pelamis marine energy device, and XipowerLtd, which has developed patented battery, power management and monitoringtechnologies. Micro generation technologies have the potential to become a key way of reducingthe demand for energy from the national electricity and gas grids by giving thebuildings connected to them the means to produce at least some of the energythat their occupants need. During 2006/07, SSE invested £2.0m to increase itsstake in solarcentury, the leading independent solar photovoltaics company inthe UK, to 13.3% of the issued share capital. The development of low carbonbuildings is an example of where new business opportunities should arise forSSE, with Southern Electric Contracting (SEC) now the preferred installer forsolarcentury. The two companies have been appointed by the Department of Tradeand Industry to supply and install solar panels on Britain's public buildings aspart of its £50m Low Carbon Buildings Programme. SSE's investment in Edinburgh-based Renewable Devices (Swift Turbines) Ltd hasnot been successful to date. The Swift rooftop-mountable wind energy systemwill require further work before its long-term feasibility can be confirmedbeyond doubt. 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 White Paper In the Energy White Paper, published in May 2007, the UK government said that 'we need a diverse electricity generation mix'. It defined the long-term energychallenges facing the UK - to encourage lower carbon and more secure supplies ofenergy. SSE agrees that diversity in the electricty generation mix is vitallyimportant and also agrees that the challenges which have been defined by thegovernment are the ones that need to be addressed with a practical, consistentand long-term policy framework. The publication of the White Paper followed the European Union agreement toadopt a binding target on the use of renewable energy, the Approved NationalAllocation Plan for Phase II of the EU Emissions Trading Scheme and the draftClimate Change Bill. All of these developments point in a single direction:there will have to be a reduction in the amount of carbon dioxide which isproduced per unit of electricity generated. Against this background, SSE has set itself a target to reduce by 20% over 10years the amount of carbon dioxide per kilowatt hour of electricity produced atpower stations in which it has an ownership or contractual interest. The baseyear for SSE's target is 2005/06, when its emissions of carbon dioxide were 622g/kWh, and it is aiming to achieve the 20% reduction, to 498g/kWh or less, by2015/16. SSE will report on its progress against the 2016 target each year and thedecisions it takes and the investments it makes will be guided by it. Like mostlong-term targets, achievement will be influenced by circumstances outside itscontrol, but SSE is very serious in its aim to make such a significant cut incarbon intensity. That is why it already has such extensive involvement indevelopments designed to deliver much more renewable energy, carbon capture andstorage and increased thermal efficiency of power plant. It will maintain abalanced approach to reducing carbon intensity in the years ahead. Alongside the White Paper, the UK government published its consultation onproposals to modify the Renewables Obligation, so that it ceases to be 'technology neutral' and features four technology bands to be fixed from 2009 to2013. It remains unfortunate that the Obligation has been the subject of afundamental review when it was originally conceived and presented as a stablemechanism for the long-term. The key test for the proposals in the consultationdocument is whether they represent an adequate framework for future investmentin those mature renewable energy technologies which are most likely to make ameaningful contribution to the achievement of EU and UK government targets,while protecting capital already invested on the basis of the Obligation'soriginal structure. Specifically, therefore, SSE is considering the proposalswith regard to biomass investment and the future potential for hydroelectricity. Generation Priorities for 2007/08 During 2007/08, SSE's key objectives in generation will be to ensure that itsdiverse portfolio of power stations is available to generate electricity, withthe maximum possible efficiency, in response to customer demand and marketconditions, while complying fully with all safety standards and environmentalregulations. The achievement of these objectives will be supported by thedelivery of a comprehensive programme which has been established to identifyfurther improvements in the management and operation of its portfolio of powerstations. SSE will also be working to ensure that all generation plant is well-maintained,with timely investment in asset replacement and refurbishment projects and thatthe new generation projects at Beatrice, Drumderg, Ferrybridge, Fiddler's Ferry,Glendoe, Marchwood, Tangy and Toddleburn proceed on time and on budget. It willalso consider whether to install a Supercritical Boiler and post-combustioncarbon capture equipment at Ferrybridge, and progress needs to be made with itsplans for new onshore wind developments. As is the case throughout thegeneration sector, these projects and plans may be subject to the impact ofincreasing capital costs and skills shortages as worldwide demand forelectricity infrastructure continues to rise. SSE will also continue to monitor developments in other generation technologiessuch as offshore wind and carbon capture and storage. Following the publicationof the Energy White Paper, it will also continue to participate actively in thedebate about how best to meet the UK's need for diverse, more secure and lowercarbon sources of energy. Energy Supply Further growth in customer numbers was a key priority for SSE during 2006/07 andits energy supply business had 7.75 million energy supply customers at 31 March2007, a net gain of 1.05 million in 12 months. This comprises: 4.95 millionelectricity customers; 2.80 million gas customers. In addition, SSE had reached100,000 'talk' telecoms customers, giving it an overall customer base of 7.85million. Within the total, SSE's business customers now cover 390,000 sitesthroughout Great Britain. Including telecoms, SSE has achieved a net gain of3.35 million customers in the past five years, an increase of 74%. This growth is deliberately and clearly related to SSE's responsible pricingpolicy. It meant that, during periods of rising wholesale energy prices, SSEpassed on to its domestic gas and electricity customers much less than the fullextent of the increases and it deliberately delayed any price rises. As aresult, its customers paid an average of £340 less for their gas and electricityover three years than did customers of British Gas. On 1 March 2007, SSE started implementing cuts in prices for domestic gascustomers, the first such cuts for six years, and it started to implement cutsin prices for domestic electricity customers on 1 April. The price cuts meantSSE continued to be the UK's cheapest supplier of energy and it is hoped thatthey marked the start of a sustained downward trend in the prices paid bycustomers. Customer Service Central to success in Energy Supply is maintaining the highest possiblestandards of customer service. In May 2007, SSE again secured recognition forthe best overall customer service in the large-scale customer satisfactionsurvey in energy supply organised by uSwitch.com. In the results of the JDPower 2006 UK Electricity and Gas Customer Satisfaction Study, announced inNovember, SSE was ranked first amongst gas suppliers and second amongstelectricity suppliers. This recognition followed the introduction by SSE of a Domestic Energy CustomerCharter in 2006, the first of its kind in the UK energy supply industry. Partof a comprehensive performance improvement programme in SSE's Customer Servicedivision, the completion of which was one of SSE's priorities for 2006/07, theCharter reflects a 'commitment-based' approach to general customer enquiries, sothat a much greater number of customer enquiries are dealt with at the firstpoint of contact. It is in line with research which has confirmed that the key frustrations forcustomers are the length of time they spend on hold when seeking help over thetelephone and being passed to more than one company representative. In otherwords, while technology has its part to play in supporting service delivery,customers like to interact directly with company representatives. SSE has,therefore, broadened the role of its advisers and actively extended call timesto ensure there is a full understanding of customers' requirements. In 2006/07,this helped SSE to bring its customer 'churn' rate down from over 14% in theprevious year to below 13% for the first time. Other achievements stemming from the programme include a large increase in thenumber of customers receiving a minimum of two bills each year based on actual(as opposed to estimated) meter readings. Bills themselves have been totallyre-designed to make them clearer and easier to understand. SSE believes that this approach is having a positive impact on its customers'dealings with, and perceptions of, its Customer Service division. Despite thesustained growth in customer numbers, SSE secured during 2006/07 anothersignificant reduction, of 47%, in the number of customer complaints received byenergywatch for resolution. In its statement in April 2007, energywatch saidthat it had received 840 complaints about SSE, which was the best-performingcompany, over the year. This compares with 2,509 for the second best-performingcompany and 37,100 for the poorest-performing company, British Gas. The numberof complaints about SSE sent to energywatch has fallen by almost 60% in the lasttwo years, during which time the number of customers has grown by 27%. Product Marketing Energy supply remains intensely competitive and, in addition to responsiblepricing, the key to long-term growth will be greater success in gaining andretaining customers' loyalty. The performance improvement programme is designedto achieve that, as is product development and marketing. 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 7.75million energy supply customers, around 1.34 million now have 'loyalty' products- an increase of around 60% during the period. As part of a six-figure, three-year sponsorship package agreed in January 2007,SSE (under the brand name Scottish Hydro Electric) and Scottish Rugby haveagreed to collaborate on the provision and marketing of a new electricity andgas tariff, energyplus Rugby, which is scheduled for launch later in 2007. The Energy White Paper said 'the starting point for our energy policy is to saveenergy'. It said the government would 'empower consumers to make more informedenergy choices' and it also referred to trials of smart meters and real-timedisplays which enable people to track their energy use, and in which SSE hasbeen selected to participate. Against this background, SSE will later this year launch a unique energyprogramme which will enable and encourage customers to commit to using lessenergy - and reward them for doing so with vouchers enabling them to get moneyoff their energy bills, A-rated electrical and gas appliances and energyefficiency measures. This progress in product development and marketing, allied to its policy ofresponsible, value-based pricing and commitment to improving further itscustomer service, means that SSE's Energy Supply business should be able tocontinue the period of growth which began at the start of 2002. Energy Services The UK energy market is still focused on the delivery of units of energy but amarket is beginning to emerge for the supply of energy services - warmth, lightand power. SSE's goal is to deliver products and services 'beyond the meter'which help it to gain, retain and develop long-term relationships withcustomers. 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. Establishing the new business was a priorityfor 2006/07, and its launch has gone well. While its first-year losses werearound £4m, the service had already attracted over 20,000 customers by the endof March 2007. This growth should continue and accelerate as the number ofpostcode areas covered by the service has now increased from 13 to 24, with afurther 18 postcode areas due to be added in 2007/08. The business is,therefore, on course to become profitable in 2009. SSE is on course to be appointed as the partner for the energy servicesrequirements for the first phase of a major development by a leading UKdeveloper. Under what will be an ESCO (energy services company) Agreement, SSEwill be responsible for installing an energy centre, including a Combined Heatand Power (CHP) plant, for the development, which will serve over 450apartments, a nursery unit, primary care trust and commercial units. Theinstallation of CHP is in line with a planning consent requirement for thedevelopment to reduce carbon dioxide emissions and the SSE design will achieve a24% reduction, helping the development to achieve the Eco Homes 'very good'rating. The agreement, when signed, will be a significant milestone in thedevelopment of SSE's energy services business and other similar contracts areexpected to follow. Energy Supply Priorities in 2007/08During 2007/08, SSE will seek to capitalise further on its strong regionalbrands, best-in-sector customer service, responsible pricing policy and range ofvalue-adding offers to increase further its number of energy supply customers.Central to this will be the development and deployment of further improvementsto the level of service offered to customers, leading to higher standards andfewer complaints, and the successful launch of new products. The expansion ofSSE's services 'beyond the meter' will focus principally on the furtherdevelopment of the gas boiler installation and maintenance and repair serviceand on securing additional ESCO Agreements. CONTRACTING, CONNECTIONS AND METERING Introduction to Contracting, Connections and Metering SSE's Contracting business, Southern Electric Contracting (SEC), has three mainareas of activity: industrial, commercial and domestic mechanical and electricalcontracting; electrical and instrumentation engineering; and public and highwaylighting. It is one of the largest mechanical and electrical contractingbusinesses in the UK, operates from 55 regional offices throughout Great Britainand also trades as SWALEC Contracting in Wales, Scottish Hydro Contracting inScotland and Eastern Contracting in the east of England. SSE's national Connections business provides all utility infrastructures andconnections for new developments. It designs, finances, builds, owns andoperates gas, electricity and telecommunications networks throughout thecountry. 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 sectors. It also offers data collectionservices to the domestic and SME sectors. Contracting, Connections and Metering Overview Contracting, Connections and Metering delivered operating profit* of £51.6mduring 2006/07, compared with £47.0m in the previous year (excluding the £3.4moperating profit from Thermal Transfer, the specialist contracting business soldby SSE on 31 March 2006). Contracting SEC made significant progress against its key priorities for the year ofbroadening further its geographical presence and ensuring there continues to begood performance in the long-term contracts which are central to its ongoingbusiness development. • In line with the priorities for 2006/07, the integration of HarrisonSmith has been completed and is already allowing SEC to offer its customers inthe north of England a more comprehensive range of mechanical and electricalservices. • SEC's Eastern Contracting division, acquired in 2005, won the secondphase of an infrastructure contract at the Colchester Barracks re-development,one of the UK's largest PFI projects to date, following the successfulcompletion 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 FinanceInitiative (PFI), in partnership with the asset finance division of The RoyalBank of Scotland. This includes the largest-ever street lighting PFI in the UK,with Leeds City Council, the successful launch of which was a priority for 2006/07. It will see the majority of the 110,000 street lights, illuminated signsand bollards in the city replaced. The first 8,500 lighting points have alreadybeen installed. During 2006/07 SEC's order book exceeded £90m for the first time. The orderbook has been supported by significant contract wins with a number of leadingorganisations such as Marks and Spencer, Texaco and IBM. This business nowemploys 3,500 people and, to support future growth, recruited 92 apprenticeelectricians during the year and expects to recruit a further 200 apprenticesduring 2007. Connections Continued expansion of its Connections business was among SSE's priorities for2006/07, and during the year it completed 44,600 electrical connections, 1,700more than in the previous year. In addition, it has continued to develop itsportfolio of electricity networks outside the Southern Electric and ScottishHydro Electric Power Distribution areas. It now owns and operates 24 electricitynetworks outside these two areas, and 14 additional networks are underconstruction, including: St David's Centre, Cardiff; Manor Royal, Crawley; andQuartermile, Edinburgh. As with its domestic gas boiler service, this is arelatively new business for SSE, which is on course to become profitable during2007/08. 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 has continued to grow, and during theyear, it connected a further 9,200 premises, 1,300 more than in the previousyear, taking the total number of connections to over 44,000. With interests in electricity, gas and telecoms connections, SSE completed areview of the extent of its ability to offer 'multi-utility' services to largercustomers. This ability is presently limited to a contracting role in providingwater connections services. Subject to a short public consultation, SSE has,therefore, sought and secured from Ofwat a so-called 'inset' licence which willallow it to install, own, operate and supply water and sewerage services forend-user customers for the first time. The first installation will be at aCharles Church Southern development near Salisbury. Ofwat said this will createthe first new water and sewerage company to serve domestic customers sinceprivatisation in England and Wales18 years ago. Metering In total, SSE owns 3.7 million meters and changes around 250,000 meters eachyear as they reach the end of their useful life or to meet customer requests forchanged functionality. During 2006/07, it collected around 4.3 millionelectricity readings and 1.4 million gas readings. SSE's Metering activities have expanded following the in-sourcing of meterreading operations in the South West England and South Wales electricitydistribution areas in April 2007, and will expand further in July 2007 with thein-sourcing of the meter operator work for the South Wales distribution area.This is resulting in the transfer of over 150 employees from Western PowerDistribution to SSE and is intended to result in both efficiency savings andhigh standards of service for SSE's customers in these areas. Later this year,SSE will also in-source meter reading operations and then meter operator work incentral and southern Scotland, resulting in around 50 posts becoming part ofSSE. Contracting, Connections and Metering Priorities in 2007/08 The first priority for SEC in 2007/08 is to ensure that it delivers a highstandard of service to all customers in all of the sectors in which it operates,given such a major proportion of its business is 'repeat'. It will also seek tosecure further increases in its order book. To position itself for long-termgrowth, it expects to recruit 200 apprentices. The Connections business' focus will be on the successful delivery of a growingnumber of utility connections and on continuing to expand its range ofelectricity networks outside the Southern Electric and Scottish Hydro ElectricPower Distribution areas, reinforcing its position as a leading provider ofutility infrastructure solutions to the UK land development sector. Subject tothe outcome of the Ofwat consultation on its 'inset' appointment, SSE will seekto make a successful start in water connections. For Metering, the key priority is the successful completion of the 'in-sourcing'of work in three additonal distribution areas, which will be a significantmilestone in SSE's long-term objective of building a national metering business.It is also important that SSE's participation in the DTI/DEFRA/Ofgem-sponsoredEnergy Demand Research Project, with its focus on 'smart' metering technologies,is successful. GAS STORAGE Introduction to Gas Storage SSE owns and operates the UK's largest onshore gas storage facility at Hornseain East Yorkshire. Nine salt caverns have been leached into a salt layer 1.8kilometres below the surface, creating 325 million cubic metres (mcm) of gasstorage capacity. Gas can be injected at a rate of two mcm per day andwithdrawn at a rate of 18 mcm per day, which is equivalent to the requirementsof around four million homes. The services offered at Hornsea provide customerswith a reliable source of flexibility with which to manage their gas supply/demand balance and exploit market opportunities. Capacity is sold in StandardBundled Units (SBUs), of which Hornsea has 195 million available in total, andeach SBU provides capacity to inject gas into the facility, store gas there andwithdraw gas from it. Gas Storage - Operations Gas Storage delivered an operating profit* of £55.9m, an increase of 104.8%compared with the previous year. The value of, and demand for, gas storagefacilities in the UK continued to be high. This was demonstrated in July 2006,when SSE completed the auction of around 23% of the capacity (43.9 million SBUs)at Hornsea for a five-year term commencing in May 2007. The average priceachieved per SBU was 41.7 pence per annum over each of the five years. In March 2006, SSE auctioned 54 million SBUs for the one year term whichcommenced in May 2006. The average price achieved per SBU then was 54.2 penceper annum. After this auction took place, a number of significantinfrastructure projects designed to address the UK's increasing dependence onimports of gas were completed, which means that 2006/07 is likely to prove to bea high point for securing value from gas storage units. In March 2007, SSEcompleted its storage auction of around 63% of the capacity (121.7 million SBUs)at Hornsea for a one-year term which commenced on 1 May. The average priceachieved per SBU was 30.1 pence per annum. One of SSE's priorities for 2006/07 was to ensure that Hornsea maintained itsexcellent record of reliability, and during the year it was 100% available tocustomers, except in instances of planned maintenance. This enabled customersto manage their gas market risks and exploit gas trading opportunities. Gas Storage - Investment In line with SSE's priorities for the year, the joint venture with Statoil (UK)Ltd to develop, at Aldbrough, what will become the UK's largest onshore gasstorage facility is continuing to make good progress. Commissioning of thefirst three of the nine storage caverns is expected to get under way in 2007.SSE is investing around £150m in Aldbrough, out of a total of around £225m forthe development. With a total new capacity of around 420 mcm, of which SSE willhave ownership interest in 280 mcm, Aldbrough will provide valuable gas storagefor the UK energy industry. Its flexibility is demonstrated by the fact that itwill enable gas to be injected at a rate of up to 30 mcm per day and withdrawnat a rate of 40 mcm. SSE and Statoil (UK) Ltd have secured consent from East Riding of YorkshireCouncil to increase the storage capacity at the Aldbrough site beyond thatcurrently under development (subject to reaching agreement under Section 106 ofthe Town and Country Planning Act). They are now able to develop a further ninegas storage caverns, taking the total to 18. If developed in full, this wouldapproximately double the amount of gas that can be stored, to over 800mcm.After the completion of the extension to its maximum capacity, the Aldbroughfacility would be able to provide enough gas in a day to supply around 13million homes. The extension is designed to be largely under ground, and the intention is touse above ground facilities already on site, although some additionaldevelopment would be required. Construction of the extension would help toensure that the UK can meet gas demand during periods of high energy usage. Itis expected that it would cost less than the current development. SSE wouldcontribute 50% of the cost of the extension in return for ownership of 50% ofthe capacity. On completion of the extension, SSE would have effectiveownership of over 800mcm of gas storage capacity, including Hornsea. Gas Storage Priorities in 2007/08 SSE's priorities in Gas Storage during 2007/08 are to: maintain its excellentrecord of reliability at Hornsea; ensure that the first of the new caverns atAldbrough are commissioned; and make material progress with the preparation andplanning for the extension of the Aldbrough development. TELECOMS Introduction to Telecoms SSE Telecom currently provides radio sites for local authorities, mobileoperators and emergency services throughout central southern England and thenorth of Scotland, enabling customers to improve their coverage and capacity.Its subsidiary, Neos , operates a 7,500km UK-wide telecoms network, including1,100km of underground and overhead fibre optic cable installed on SSE'selectricity network, providing services to other telecoms providers, companiesand public sector organisations. Telecoms Operations SSE's combined Telecoms business (SSE Telecom and Neos) achieved an operatingprofit* of £13.9m during 2006/07, compared with £13.2m in the previous year, anincrease of 5.3%. The business offers customers a national telecoms network, andhas a UK-wide sales force and a competitive range of products targeted atcommercial and public sector customers. As a subsidiary of SSE, it is also ableto position itself as one of the UK's most financially secure telecoms networkoperators, which gives an important competitive advantage. The improvement in performance during 2006/07 was mainly the result of highersales achieved by Neos, one of the telecoms priorities during the year, andimportant contracts were signed with a diverse range of major organisations,such as Opal Telecom (part of the Carphone Warehouse) and AT&T and new customerssuch as Schlumberger Limited, one of the world's leading oilfield servicescorporations. Telecoms Investment Neos has decided to upgrade its ethernet platform (a frame-based technologyconnecting computer systems to form a network), with an investment of over £5mto be made over five years. This will support future new business growth. Telecoms Priorities in 2007/08 SSE's priority in Telecoms in 2007/08 is to continue to grow its sales, usingits already-established nationwide network, with its competitive range ofproducts targeted at commercial and public sector customers. It will also seekto complete the process of re-focusing its telecoms business on network-relatedservices, including possible fibre optic extensions, as opposed to site-relatedservices. EXCEPTIONAL ITEM TXU Europe Group plc In July 2006, SSE received a fourth distribution payment of £24.5m from theadministrators of TXU Europe Group plc in respect of its agreed claim of £294.2mrelating to a 14-year contract originally entered into in 1997. This wasfollowed by a fifth distribution payment of £8.5m, taking the total directreceipt from the administration process (excluding Barking Power) to £33.0m in2006/07 and to £284.2m overall. Following the fifth distribution, SSE hasreceived 96.6% of its agreed claim. In addition, SSE received in July 2006 ashare (£0.9m) of the distribution payment to Barking Power Ltd, in which SSE nowhas a total stake of 30.4%. When it received its first distribution in March 2005, SSE said it expected thatover 75% of its agreed claim would be settled. It expects to receive further,smaller distributions over the next year, which would result in around 98% ofits agreed claim being settled. INVESTMENT AND CAPITAL EXPENDITURE Investment and capital expenditure is a key means by which SSE seeks to enhanceand create value and it totalled £663.4m during 2006/07, including £32.5m inrespect of Marchwood Power Ltd, compared with £502.1m in the previous year. Capital expenditure in Power Systems was £204.5m, compared with £172.1m in theprevious year. The increase is in line with the Distribution Price ControlReview for 2005-10. A major part of the investment programme is focused on thereinforcement and replacement of parts of the electricity network that date asfar back as the 1960s. In addition, there was investment of £220.9m for growth in Generation during theyear, with the progress of the Marchwood development, construction work beingcarried out at Glendoe and the installation of FGD equipment and other work suchas the installation of re-designed high-pressure turbines and static blades atFiddler's Ferry and Ferrybridge. As well as Power Systems and Generation, £41m 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 £123m at Aldbrough. Within the total, capital expenditure for growth, including Marchwood, was £394mduring 2006/07. This mainly comprised electricity generation and gas storage. Capital expenditure will continue to be substantial during the rest of thisdecade, with investment of around £850m expected in 2007/08. This will focus onGeneration, including FGD installation and Marchwood, Electricity Networks andGas Storage. In total, over the next three years to March 2010, SSE's capitalexpenditure and investment is currently estimated to be over £2bn, compared witharound £1.5bn in the three years to March 2007. All investments are expected toachieve returns which are greater than the cost of capital and are expected toenhance earnings. FINANCIAL MANAGEMENT Treasury Policy SSE's operations are financed by a combination of retained profits, bankborrowings, long-term debt issuance and commercial paper. As a matter ofpolicy, a minimum of 50% of SSE's debt is subject to fixed rates of interest.Within this policy framework, SSE borrows as required at both fixed and floatingrates, with interest rate swaps and forward rate agreements being used toachieve the desired profile. All borrowings in foreign currencies are swappedback into Sterling. At 31 March 2007, 82.6% of SSE's borrowings were at fixedrates, after taking account of interest rate swaps. SSE's liquidity policy is to ensure that it has committed borrowings andfacilities equal to at least 105% of forecast borrowings over a rolling 12 monthperiod and on 31 March 2007 it held undrawn borrowings and facilities of £650m. As the United Kingdom is SSE's main area of operation, foreign currency risk islimited mainly to procurement contracts, fuel purchases and commodity hedgingtransactions. Its policy is to hedge all material foreign exchange exposuresthrough the use of forward currency purchases and/or derivative instruments.Indirect exposures created by SSE's gas purchasing are similarly hedged on anongoing basis. Net Debt and Cash Flow As at 31 March 2007, SSE's net debt was £2.233bn, compared with £2.166bn at 31March 2006, an increase of £66.5m. Underlying cash generated from operationsincreased significantly compared with the previous year, reflecting increasedprofitability. Borrowings and Facilities The objective for SSE is to maintain a balance between continuity of funding andflexibility, with debt maturities staggered across a broad range of dates. Itsaverage age of debt as at 31 March 2007 was 13.8 years, compared with 12.7 yearsas at 31 March 2006. During the year, a new £100m index-linked bond, maturing in 2056, with a couponof 1.429%, was issued by Scottish Hydro Electric Power Distribution; and inMarch 2007, a £150m bond originally issued by Scottish Hydro Electric PowerDistribution, with a coupon of 7.875%, matured. As a result, the average costof SSE's longer-dated debt has decreased and the average age of its debt hasincreased. The maturity profile reflects the medium-to-long term nature of SSE's underlyingassets and means that its debt structure continues to be strong going forward,with around £1.8bn of borrowings in medium to long-term funding in the form ofissued bonds and European Investment Bank borrowings. A total of 20.4% of SSE'sborrowings will mature in the 12 months to March 2008. Net Finance Costs The basis of the presentation of net finance costs changed on adoption of IFRSand the table below reconciles reported net finance costs to adjusted netfinance costs, which SSE believes is a more meaningful measure. Followingreview during the year, net income associated with pension scheme assets andliabilities is no longer excluded in arriving at adjusted net finance costs. Inline with this, SSE's adjusted net finance costs during 2006/07 were £151.8m,compared with £139.6m in the previous year. March 07 March 06 £m £m Reported net finance costs (Note 6) 48.1 89.4add/(less) Share of JCE*/Associate interest 117.9 97.3 Convertible debt IAS 32 adjustment (3.6) (3.6) Movement on derivatives (10.6) (43.5)Adjusted net finance costs 151.8 139.6 Return on pension scheme assets 130.1 115.7 Interest on pension scheme liabilities (107.2) (100.0) Notional interest arising on discounted provisions (1.4) (4.3)Adjusted interest costs** 173.3 151.0 *Jointly Controlled Entities **Adjusted finance income and costs for interest cover calculation The average interest rate for SSE, excluding JCE/Associate interest, during theyear was 5.31%, compared with 5.42% in the previous year. Underlying interestcover was 11.0 times, compared with 9.2 times the previous year, and includinginterest related to SGN it was 7.1 times (6.6 times in the previous year). Within the adjusted net finance costs of £151.8m, SGN's net finance costs were£70.6m (compared with £54.1m in the previous year), after netting loan stockinterest payable to SSE. Its contribution to SSE's profit before tax* was,therefore, £32.5m, compared with £48.6m in the previous year, reflecting lowertransportation volumes. TAX To assist the understanding of SSE's tax position, the adjusted current taxcharge is calculated as follows: March 07 March 06 £m £m Reported tax charge 301.5 254.6add back: Share of JCE/Associate tax 33.8 29.9less: Deferred tax (27.3) (37.7) Exceptional tax (25.4) (15.3) Adjusted current tax charge 282.6 231.5 The adjusted effective current tax rate, based on adjusted profit before tax,was 26.2%, compared with 26.5% in the previous year, on the same basis. Theimpact of SSE's higher capital expenditure programme and the changes introducedin Budget 2007 are likely to have a positive effect on the effective current taxrate in the coming years. The headline tax charge was 26.6%, compared with28.3% in the previous year. BALANCE SHEET SSE maintains one of the strongest balance sheets in the global utility sector.This gives it significant competitive advantages. It enables SSE to payinterest at lower rates than would otherwise be the case and also enables it torespond speedily to opportunities which emerge to invest in, or acquire, assets.It is also characteristic of utility companies which are built to last. In line with the IAS 19 treatment of pension scheme assets, liabilities andcosts, pension scheme liabilities of £220.0m and a pension scheme asset of£128.1m are recognised in the balance sheet at 31 March 2007, gross of deferredtax. This means there was a reduction of over half in net liabilities comparedwith the position at March 2006, from £193.8m to £91.9m. During 2006/07, employer cash contributions to the Scottish Hydro Electricscheme amounted to £11.6m. Contributions to the Southern Electric scheme,including deficit repair contributions of £34.3m, amounted to £50.3m. As part ofthe Distribution Price Control for 2005-2010, it was agreed that allowances for76% of deficit repair contributions should be recoverable via price controlledrevenue. At 31 March 2007, there was a net asset arising from IAS 39 of £45.0m, beforetax, compared with a net asset of £46.5m, before tax, at 1 April 2006. PURCHASE OF OWN SHARES The Directors of SSE did not exercise their authority to purchase, in themarket, the company's own shares during 2006/07. They are, however, seeking atthe Annual General Meeting on 26 July 2007 renewal of their authority topurchase, in the market, the Company's own shares should conditions beappropriate. CORPORATE RESPONSIBILITY Risk Management SSE is mindful of the risk factors that may affect it and they were againreviewed by the Board in March 2007. Broadly, the principal risk factors fallinto four categories: the operation of assets, equipment and processes;financial risks, such as interest rate and commodity exposure; the impact ofpublic policy or regulatory developments in the areas of energy and theenvironment; and the impact of the weather on SSE's interests in the generationof electricity from renewable sources, in energy supply and in energydistribution. At a corporate level, SSE seeks to address these risks by: maintaining thestrongest possible focus on the consistent delivery of excellence across allaspects of its operations; adhering to the series of well-defined andestablished financial principles set out under 'Financial Overview'; andoperating and investing in a balanced range of regulated and non-regulatedenergy-related businesses, thereby limiting both the extent of any single riskand the value associated with it. At an operational level, comprehensive procedures for internal control and riskmanagement are in place throughout SSE. These procedures are activelymaintained and regularly reviewed through an audit programme which addresses thefull spectrum of SSE's potential risks. This is complemented by an ongoingprogramme of business improvement initiatives designed to secure continuousprogress in processes and procedures and further improve the overall managementand performance of SSE. 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 2006/07, the number of lost time and reportableaccidents within the company was 11, compared with 17 in both 2005/06 and 2005/04. This means there were 0.05 reportable and lost time injuries per 100,000hours worked in SSE during 2006/07 compared with 0.17 five years ago, in 2001/02. The number of serious, or potentially serious, road traffic accidents involvingemployees driving company vehicles was 19, compared with 17 in 2005/06, 24 in2004/05 and 50 in 2003/04, the first year for which data is available. Theyincluded a fatal injury to a trainee linesman in a tragic accident in Hampshirein February 2007 and SSE's condolences continue to be extended to his family andfriends. SSE's target for any given year is zero reportable environmental incidents.There were no such incidents during 2006/07. Corporate Responsibility Index and Business in the Environment Index Business in the Community's Corporate Responsibility Index provides anauthoritative benchmark for companies to evaluate their management practice infour key areas of corporate responsibility (community, environment, marketplaceand workplace) and performance in a range of environmental and social impactareas material to their business. The results of the Index for 2006, in which 128 companies participated, werepublished in May 2007. SSE's score was 98.5%, compared with 97.5% in theprevious year, putting the company in the highest possible performance band of'Platinum'. Within the main Index is the Business in the Environment Index.SSE's score was 99.58%, compared with 99.20% in the previous year. Teamwork The progress made by SSE is due to the professionalism, commitment and teamworkof its employees. For that reason, and reflecting the performance delivered in2006/07, every person who was employed by SSE on 31 March 2007, and who is stillin employment will receive a special award comprising: an offer, free of charge,of 20 shares in the company; a cash award of £150; a £50 'virtual voucher' tospend online with WWF-UK, the world's largest independent conservationorganisation; and an additional day's holiday. STRATEGY AND OUTLOOK SSE's core purpose is to provide the energy people need in a reliable andsustainable way. In line with this, its strategy has been and will continue tobe the delivery of sustained real growth in the dividend payable to shareholdersthrough the efficient operation of, and investment in, a balanced range ofregulated and non-regulated energy-related businesses. Implementation of thestrategy is founded on a series of well-established financial principles. This strategy and these principles have been shown to be robust in a widevariety of financial and operational conditions and SSE will continue to adhereto them in the future. SSE's financial and operational performance during 2006/07 was strong, and thefoundations have been laid for this to continue well into the future. Thatfuture will be shaped to a significant degree by the ongoing developments inenergy and environment policy taking place within the UK and at EU level. Thesepolicy developments are geared to addressing what the UK government hasdescribed as 'immense challenges....energy security and climate change'. This means there will have to be signficant reductions in emissions of carbondioxide, while maintaining reliable and affordable supplies of energy in acarbon-constrained world. In other words, there will have to be a substantialfall in the amount of carbon dioxide emitted per kWh of electricity produced,while securing sustained increases in the efficiency with which energy is used. This is presenting SSE with major investment opportunities in electricitygeneration from coal, gas and renewable sources. SSE's long-term objective ofproviding a wider variety of energy-related services is also fully in line withthe direction of public policy in the UK. The need for secure supplies of energy, including the primary fuel with which togenerate power, and robust means of distributing it, is also paramount, and setsthe context for SSE's plans for significant investment in new gas storagecapacity in the UK and in its electricity networks. As a result of all of this, SSE's asset base in each of its key areas ofactivity will again expand significantly in the coming years. This valuecreated through investment will be complemented by value enhancement through thestrongest possible focus on operational excellence across all aspects of SSE'sbusinesses. It is this operational focus which has enabled SSE to gain overthree million customers in the past five years, including one million customersduring 2006/07, and which is expected to lead to further growth in customernumbers and expansion in Energy Services, Contracting and Connections. As it did between 2002 and 2005, SSE may also seek to create value forshareholders through the acquisition of assets, but only if such acquisitionsare compatible with its financial principles. All of this illustrates the fact that there are significant growth opportunitiesin UK energy networks, supply and services. While SSE is clearly thebroadest-based UK energy company, it is not yet the largest participant in anypart of it, except in the generation of electricity from renewable sources. Itscarefully-maintained financial strength and its focus on operational excellencemean SSE is well-positioned to expand its presence in those activities where itis already a significant player. The recommended full-year dividend for 2006/07, of 55 pence per share, is doublethe dividend paid to shareholders for 1999/2000. With its first responsibilityto shareholders being to deliver sustained real growth in the dividend, SSE'snext long-term objective must be to double it again. Investor Timetable Annual Report 2007 on website 07 June 2007AGM 26 July 2007Ex-dividend date 22 August 2007Record date 24 August 2007Payment date 21 September 2007Interim results 14 November 2007 Enquiries to: Scottish and Southern Energy plcAlan Young - Director of Corporate Affairs + 44 (0)870 900 0410Sally Fairbairn - Investor Relations and Analysis Manager + 44 (0)870 900 0410 Financial DynamicsAndrew Dowler + 44 (0)20 7831 3113 There will be an analysts' presentation starting at 09:30GMT on Thursday 31 May2007at the offices of Financial Dynamics, Holborn Gate, 26 SouthamptonBuildings, London WC2A 1PB. Webcast facility: This is available by going to:www.scottish-southern.co.uk then click on Investor Centre. Telephone conference call: UK Dial in: 0845 146 2004 International dial in: +44 (0) 1452 569 393 Replay facility (for one week) UK local rate no: UK dial-in: 0845 245 5205 UK International no: International dial-in: +44 (0) 1452 550 000 UK PIN (access) no: 4441698 # ConConsolidated Income Statementfor the year ended 31 March 2007 2007 2006 Before Exceptional Before Exceptional exceptional items and exceptional items and items and certain items and certain certain re-measure-ments certain re-measure-ments re-measure-ments (note 5) Total re-measure-ments (note 5) Total Note £m £m £m £m £m £m Revenue 4 11,867.1 - 11,867.1 10,145.2 - 10,145.2Cost of sales (10,247.7) 61.3 (10,186.4) (8,816.4) (14.4) (8,830.8)Gross profit 1,619.4 61.3 1,680.7 1,328.8 (14.4) 1,314.4Operating costs (557.5) - (557.5) (482.4) - (482.4)Other operating income - 33.0 33.0 - 92.1 92.1Gain on disposal of subsidiary - - - - 18.6 18.6Operating profit before 1,061.9 94.3 1,156.2 846.4 96.3 942.7jointly controlled entitiesand associatesJointly controlled entitiesand associates:Share of operating profit 169.2 0.9 170.1 167.1 16.7 183.8Share of interest (117.9) - (117.9) (97.3) - (97.3)Share of movement on - 5.5 5.5 - (13.0) (13.0)derivativesShare of tax (31.8) (2.0) (33.8) (28.8) (1.1) (29.9)Share of profit on jointly 19.5 4.4 23.9 41.0 2.6 43.6controlled entities andassociatesOperating profit 4 1,081.4 98.7 1,180.1 887.4 98.9 986.3Finance income 6 193.4 - 193.4 164.9 - 164.9Finance costs 6 (230.9) (10.6) (241.5) (210.8) (43.5) (254.3)Profit before taxation 1,043.9 88.1 1,132.0 841.5 55.4 896.9Taxation 7 (276.4) (25.1) (301.5) (244.3) (10.3) (254.6)Profit for the year 767.5 63.0 830.5 597.2 45.1 642.3 Attributable to:Equity holders of the parent 767.5 63.0 830.5 597.2 45.1 642.3 Basic earnings per share 9 96.5p 74.7pDiluted earnings per share 9 93.9p 72.9p Dividends paid in the year 8 £411.3m £378.8m The accompanying notes are an integral part of these accounts. Consolidated Balance Sheetas at 31 March 2007 2007 2006 restated £m £m Assets Property, plant and equipment 5,042.1 4,646.6 Intangible assets: Goodwill 293.2 293.4 Other intangible assets 12.9 12.5 Investments in associates and jointly controlled entities 702.3 703.1 Other investments 4.1 3.3 Retirement benefit assets 128.1 90.2 Deferred tax assets 66.0 86.0 Derivative financial assets 54.5 34.4 Non-current assets 6,303.2 5,869.5 Intangible assets 177.7 284.7 Inventories 214.1 164.2 Trade and other receivables 1,861.4 1,662.9 Cash and cash equivalents 56.1 49.9 Derivative financial assets 452.9 287.2 Current assets 2,762.2 2,448.9 Total assets 9,065.4 8,318.4 Liabilities Loans and other borrowings 474.8 417.3 Trade and other payables 1,935.1 1,834.6 Current tax liabilities 199.2 165.4 Provisions 8.0 2.8 Derivative financial liabilities 351.9 205.2 Current liabilities 2,969.0 2,625.3 Loans and other borrowings 1,803.8 1,797.6 Deferred tax liabilities 923.7 919.1 Provisions 104.4 79.0 Trade and other payables 327.7 396.7 Employee benefit obligations 220.0 284.0 Derivative financial liabilities 120.9 71.3 Non-current liabilities 3,500.5 3,547.7 Total liabilities 6,469.5 6,173.0 Net assets 2,595.9 2,145.4 Equity: Share capital 431.0 430.2 Share premium 99.1 90.7 Capital redemption reserve 13.7 13.7 Equity reserve 14.6 14.6 Hedge reserve (10.5) 6.6 Retained earnings 2,048.0 1,589.6 Total equity attributable to equity holders of the parent 2,595.9 2,145.4 Consolidated statement of recognised income and expenseFor the year ended 31 March 2007 2007 2006 £m £m (Losses) on effective portion of cash flow hedges (net of tax) (22.6) (11.7)Actuarial gain / (loss) on retirement benefit schemes (net of tax) 33.2 (9.9)Jointly controlled entities and associates:Share of gains on effective portion of cash flow hedges (net of tax) 5.5 -Share of actuarial (loss) on retirement benefit schemes (net of tax) (1.4) -Other movements - (0.4)Net income / (expense) recognised directly in equity 14.7 (22.0)Profit for the year 830.5 642.3Total recognised income and expense for the year 845.2 620.3 Attributable to:Equity holders of the parent 845.2 620.3 Consolidated Cash Flow Statementfor the year ended 31 March 2007 2007 2006 £m £mCash flows from operating activitiesProfit for the year after tax 830.5 642.3Taxation 301.5 254.6Movement on financing and operating derivatives (50.7) 57.9Finance costs 230.9 210.8Finance income (193.4) (164.9)Share of jointly controlled entities and associates (23.9) (43.6)Gain on disposal of subsidiary - (18.6)Pension service charges less contributions paid (31.6) (22.3)Depreciation and impairment of assets 239.1 200.1Amortisation and impairment of intangible assets 57.2 3.9Deferred income released (15.1) (16.4)(Increase) in inventories (48.7) (30.8)(Increase) in receivables (225.0) (585.1)Increase in payables 40.4 436.8(Decrease) in provisions 25.7 (14.5)Charge in respect of employee share awards 6.8 4.0Profit on disposal of property, plant and equipment (5.0) (5.2)Loss on disposal of replaced assets 1.7 5.2Cash generated from operations 1,140.4 914.2 Dividends received from jointly controlled entities 22.7 8.0Finance income 63.4 51.4Finance costs (118.8) (119.5)Income taxes paid (212.2) (217.9)Payment for consortium relief (26.6) -Net cash from operating activities 868.9 636.2 Cash flows from investing activitiesPurchase of property, plant and equipment (564.1) (529.4)Purchase of software (3.7) (1.2)Deferred income received 12.4 7.9Proceeds from sale of property, plant and equipment 13.0 16.3Net proceeds from sale of subsidiary - 17.3Loans to jointly controlled entities (5.5) -Loans to associates - (0.7)Initial investment in Scotia Gas Networks plc - (505.0)Initial investment in Marchwood Power (5.0) -Loans repaid by jointly controlled entities 33.8 10.8Loans repaid by associates 0.8 7.3Investment in associate - (15.0)Investment in other financial assets (2.8) (1.9)Purchase of businesses and subsidiaries - (0.6)Net cash from investing activities (521.1) (994.2) Cash flows from financing activitiesProceeds from issue of share capital 9.2 9.9Dividends paid to company's equity holders (411.3) (378.8)Employee share awards share purchase (8.2) (9.5)New borrowings 236.5 552.4Repayment of borrowings (169.4) -Net cash from financing activities (343.2) 174.0 Net increase/(decrease) in cash and cash equivalents 4.6 (184.0) Cash and cash equivalents at the start of year 43.8 227.8Net increase/(decrease) in cash and cash equivalents 4.6 (184.0)Cash and cash equivalents at the end of year 48.4 43.8 Notes to the Preliminary StatementFor the year ended 31 March 2007 1. Financial Information The financial information set out in this announcement does not constitute theGroup's statutory accounts for the years ended 31 March 2007 or 2006 within themeaning of Section 240 of the Companies Act 1985. Statutory accounts for 2006have been delivered to the Registrar of Companies and those for 2007 will bedelivered in due course. Both sets of accounts have been prepared underInternational Financial Reporting Standards as adopted by the EU (adopted IFRS)The auditors have reported on those financial statements; their reports were(i) unqualified; (ii) did not include references to any matters to which theauditors drew attention by way of emphasis without qualifying their reports; and(iii) did not contain statements under sections 237(2) or (3) of the CompaniesAct 1985. This preliminary announcement was authorised by the Board on 30 May2007. 2. Basis of preparation The financial information set out in this announcement and has been preparedunder the historical cost convention and in accordance with InternationalFinancial Reporting Standards and its interpretations as adopted by the EuropeanUnion (adopted IFRS). The accounting policies adopted by the group in thisfinancial information are consistent with those used in the financial statementsfor the year ended 31 March 2007. Certain comparative balance sheet items havebeen reclassified as current and non-current assets or liabilities to enhanceunderstanding of the prior year results and to aid comparability with thecurrent year presentation. No revision of valuations has been made. Thefinancial statements are presented in pounds sterling. 3. Basis of consolidation of the Group The financial information consolidates the results and net assets of Scottishand Southern Energy plc and its subsidiaries together with the Group's share ofthe results 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 the purchasemethod 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. Notes to the Preliminary Statementfor the year ended 31 March 2007 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 the South of England (together referred to as PowerSystems), the generation and supply of electricity and sale of gas in GreatBritain (Generation and Supply). The Group's 50% equity share in Scotia GasNetworks 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 Total Total Intra-segment Intra-segment External External revenue revenue revenue revenue revenue revenue 2007 2006 2007 2006 2007 2006 £m £m £m £m £m £mPower Systems Scotland 270.4 261.1 99.1 104.1 171.3 157.0 England 407.4 415.9 189.6 204.0 217.8 211.9 677.8 677.0 288.7 308.1 389.1 368.9Generation and Supply 10,977.9 9,287.8 15.4 27.4 10,962.5 9,260.4Other businesses 859.4 783.3 343.9 267.4 515.5 515.9 12,515.1 10,748.1 648.0 602.9 11,867.1 10,145.2 Revenue from the Group's investment in Scotia Gas Networks (SSE share being 2007- £297.3m; 2006 - £261.5m) is not recorded in the revenue line in the incomestatement. b) Operating profit by segment 2007 Adjusted JCE / Before Exceptional Total Associate exceptional items and share of items and certain interest certain re-measurements and tax (i) re-measurements £m £m £m £m £m Power Systems Scotland 144.0 - 144.0 - 144.0 England 224.0 - 224.0 - 224.0 368.0 - 368.0 - 368.0Scotia Gas Networks plc 103.1 (122.2) (19.1) 3.8 (15.3)Energy Systems 471.1 (122.2) 348.9 3.8 352.7 Generation and Supply 642.6 (27.1) 615.5 94.9 710.4Other businesses 125.2 (0.4) 124.8 - 124.8 1,238.9 (149.7) 1,089.2 98.7 1,187.9Unallocated expenses (ii) (7.8) - (7.8) - (7.8) 1,231.1 (149.7) 1,081.4 98.7 1,180.1 Notes to the Preliminary Statementfor the year ended 31 March 2007 4. Segmental information (continued) b) Operating profit by segment (continued) 2006 Adjusted JCE / Before Exceptional Total Associate exceptional items and share of items and certain interest certain re-measurements and tax (i) re-measurements £m £m £m £m £m Power 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) 363.6 Generation 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, fair value movements on financing derivatives and taxfrom jointly controlled entities and associates. The share of Scotia GasNetworks plc interest includes loan stock interest payable to the consortiumshareholders (£35.8m; 2006 - £28.m), other interest payable (£70.6m; 2006 -£54.1m) and tax (£15.8m; 2006 - £15.0m). The Group has accounted for its 50%share of this, £35.8m (2006 - £28.8m), as finance income (note 6). (ii) Unallocated expenses comprise corporate office costs which are not directlyallocable to particular segments. Notes to the Preliminary Statementfor the year ended 31 March 2007 5. Exceptional items and certain re-measurements i) Exceptional items During the year, net dividends of £33.0m (2006 - £92.1m) were received inrelation to the administration of TXU Europe Energy Trading Limited which hadbeen placed into administration in 2002. The net receipts have been shownseparately in the income statement. In addition to this, the Group's share ofthe net dividend from the administration of TXU Europe Energy Trading Limitedrecognised as income by an associate company, Barking Power Limited, amountingto £0.9m, (2006 - £16.7m) is shown separately within share of operating profitfrom jointly controlled entities and associates. In the year to March 2006 a gain on disposal of Thermal Transfer Limited, awholly 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 are disclosedseparately to aid understanding of the underlying performance of the Group. Thiscategory includes the movement on derivatives as described in note 12. These transactions can be summarised thus: 2007 2006 £m £mExceptional items Distributions from TXU administrator 33.9 108.8 Disposal of Thermal Transfer - 18.6 33.9 127.4Certain re-measurements Movement on operating derivatives (note 12) 61.3 (14.4) Movement on financing derivatives (note 12) (10.6) (43.5) Share of movements on derivatives in jointly controlled entities 5.5 (13.0) 56.2 (70.9)Profit before taxation 90.1 56.5Taxation (i) (27.1) (11.4)Profit for the year 63.0 45.1 (i) Taxation includes £2.0m (2006 - £1.1m) recognised within share of associatesand jointly controlled entities on the face of the Income Statement. Notes to the Preliminary Statementfor the year ended 31 March 2007 6. Net finance costs 2007 2006 £m £m Finance income: Return on pension scheme assets 130.1 115.7 Interest income from short term deposits 3.8 3.3 Other interest receivable Scotia Gas Networks loan stock 35.8 28.8 Other jointly controlled entities and associates 9.5 10.4 Other receivable 14.2 6.7 59.5 45.9 Total finance income 193.4 164.9 Finance costs:Bank loans and overdrafts (34.0) (40.1)Other loans and charges (98.2) (71.1)Interest on pension scheme liabilities (107.2) (100.0)Accretion of convertible debt component (3.6) (3.6)Less: interest capitalised 13.5 8.3Notional interest arising on discounted items (1.4) (4.3)Finance costs excluding movement on financing derivatives (230.9) (210.8)Movement on financing derivatives (note 12) (10.6) (43.5)Total finance costs (241.5) (254.3) Net finance costs (48.1) (89.4) Adjusted net finance costs are arrived at after the following adjustments: 2007 2006 £m £mNet finance costs (48.1) (89.4)(add)/less:Share of interest from jointly controlled entities and associates Scotia Gas Networks loan stock (35.8) (28.8) Other jointly controlled entities and associates (82.1) (68.5) (117.9) (97.3)Accretion of convertible debt component 3.6 3.6Movement on financing derivatives (note 12) 10.6 43.5Adjusted finance income and costs (151.8) (139.6)(add)/less:Return on pension scheme assets (130.1) (115.7)Interest on pension scheme liabilities 107.2 100.0Notional interest arising on discounted provisions 1.4 4.3Adjusted finance income and costs for interest cover calculation (173.3) (151.0) Notes to the Preliminary Statementfor the year ended 31 March 2007 7. Taxation Analysis of charge recognised in the income statement: 2007 2006 Before Exceptional Before Exceptional Exceptional items and Exceptional items and items and certain items and certain re-measure- re-measure- certain certain re-measure- ments re-measure- ments ments Total ments Total £m £m £m £m £m £mCurrent taxUK corporation tax 286.5 9.9 296.4 218.1 27.6 245.7Adjustments in respect of previous (19.9) - (19.9) (0.4) - (0.4)yearsTotal current tax 266.6 9.9 276.5 217.7 27.6 245.3 Deferred taxCurrent year 7.1 15.2 22.3 14.6 (17.3) (2.7)Adjustments in respect of previous 2.7 - 2.7 12.0 - 12.0yearsTotal deferred tax 9.8 15.2 25.0 26.6 (17.3) 9.3 Total taxation charge 276.4 25.1 301.5 244.3 10.3 254.6 The charge for the year can be reconciled to the profit per the income statementas follows: 2007 2007 2006 2006 £m % £m %Group profit before tax 1,132.0 896.9Less: share of results of associates and jointly (23.9) (43.6)controlled entitiesProfit before tax 1,108.1 853.3Tax on profit on ordinary activities at standard UK 332.4 30.0 256.0 30.0corporation tax rate of 30% (2006 - 30%)Tax effect of: Expenses not deductible for tax purposes 1.5 0.1 0.7 0.1 Non taxable income (6.3) (0.6) (4.8) (0.6) Adjustments to tax charge in respect of previous years (17.1) (1.5) 11.6 1.3 Consortium relief not paid for (8.9) (0.8) (8.6) (1.0) Utilisation of tax losses (0.1) - (0.3) -Group tax charge and effective rate 301.5 27.2 254.6 29.8 The adjusted current tax charge is arrived at after the following adjustments: 2007 2006 £m % £m %Total taxation charge 301.5 26.6 254.6 28.3Effect of adjusting items (see below) - 1.3 - 0.8 301.5 27.9 254.6 29.1(add)/less: Share of current tax from jointly controlled entities and 16.0 1.5 13.8 1.6associates Exceptional items (9.9) (0.9) (27.6) (3.2) Tax on movement on derivatives (15.2) (1.4) 17.3 2.0 Deferred tax (9.8) (0.9) (26.6) (3.0)Adjusted current tax charge and effective rate 282.6 26.2 231.5 26.5 The adjusted effective rate is based on adjusted profit before tax being: 2007 2006 £m £mProfit before tax 1,132.0 896.9(add)/less: Exceptional items and certain re-measurements (88.1) (55.4) Share of tax from jointly controlled entities and 31.8 28.8associates Accretion of convertible debt component 3.6 3.6 Adjusted profit before tax 1,079.3 873.9 Notes to the Preliminary Statementfor the year ended 31 March 2007 8. Dividends 2007 2006 £m £mAmounts recognised as distributions from equityFinal dividend for the previous year of 32.7p (2006 - 30.3p) per share 281.3 260.0Interim dividend for the current year of 15.1p (2006 - 13.8p) per share 130.0 118.8 411.3 378.8 Proposed final dividend for the current year of 39.9p (2006 - 32.7p) per 343.9 281.3share The proposed final dividend is subject to approval by shareholders at the AnnualGeneral Meeting and has not been included as a liability in these financialstatements. The final dividend paid, £281.3m (32.7p, 2006 - 30.3p), was declaredon 31 May 2006, approved at the Annual General Meeting on 27 July 2006 and waspaid to shareholders on 22 September 2006. An interim dividend of £130.0m(15.1p, 2006 - 13.8p) was paid on 23 March 2007. 9. Earnings per share Basic earnings per share The calculation of basic earnings per share at 31 March 2007 is based on the netprofit attributable to ordinary shareholders and a weighted average number ofordinary shares outstanding during the year ended 31 March 2007. All earningsare from continuing operations. Adjusted earnings per share Adjusted earnings per share has been calculated by excluding the charge fordeferred tax and exceptional items and certain re-measurements. 2007 2006 Earnings Earnings Earnings Earnings per share per share £m pence £m pence Basic 830.5 96.5 642.3 74.7Exceptional items and certain re-measurements (note 5) (63.0) (7.3) (45.1) (5.2)Basic excluding exceptional items and certain re-measurements 767.5 89.2 597.2 69.5Adjusted for:Deferred tax (note 7) 9.8 1.1 26.6 3.1Deferred tax from share of jointly controlled entities and 15.8 1.8 15.0 1.7associates resultsAccretion of convertible debt component 3.6 0.4 3.6 0.4Adjusted 796.7 92.5 642.4 74.7 Basic 830.5 96.5 642.3 74.7Convertible debt interest (net of tax) 10.7 1.2 10.5 1.2Dilutive effect of convertible debt - (3.8) - (3.0)Diluted 841.2 93.9 652.8 72.9Exceptional items and certain re-measurements (63.0) (7.0) (45.1) (5.0)Diluted excluding exceptional items and certain re-statements 778.2 86.9 607.7 67.9 The weighted average number of shares used in each calculation is as follows: 2007 2006 Number of Number of shares shares (millions) (millions) For basic and adjusted earnings per share 860.9 859.5Effect of exercise of share options 1.8 1.7 862.7 861.2Effect of dilutive convertible debt 33.3 33.3For diluted earnings per share 896.0 894.5 Notes to the Preliminary Statementfor the year ended 31 March 2007 10. Reserves Share Capital Equity Retained Hedge premium redemption reserve earnings reserve account reserve Total £m £m £m £m £m £m At 1 April 2006 90.7 13.7 14.6 1,589.6 6.6 1,715.2Profit for the year - - - 830.5 - 830.5Effective portion of changes in fair value of - - - - (22.6) (22.6)cash flow hedgesPremium on issue of shares 8.4 - - - - 8.4Actuarial losses on retirement benefit schemes - - - 33.2 - 33.2(net of tax)Jointly controlled entitiesShare of change in fair value of effective - - - - 5.5 5.5cash flow hedgesShare of actuarial losses on retirement - - - (1.4) - (1.4)benefit schemes (net of tax)Dividends to shareholders - - - (411.3) - (411.3)Credit in respect of employee share awards - - - 6.8 6.8Investment in own shares - - - (8.2) - (8.2)Current and deferred tax recognised in equity - - - 8.8 - 8.8in respect of employee share awards At 31 March 2007 99.1 13.7 14.6 2,048.0 (10.5) 2,164.9 The hedge reserve comprises the effective portion of the cumulative net changein the fair value of cash flow hedge derivative instruments related to hedgedtransactions that have not yet occurred. The equity reserve comprises the equity component of the Group's convertiblebond. Notes to the Preliminary Statementfor the year ended 31 March 2007 11. Pensions Valuation of combined Pension Schemes Long- term rate Value Long- term rate Value of return of return expected at 31 at 31 March expected at 31 at 31 March March 2007 2007 March 2006 2006 % £m % £m Equities 8.0 1,253.6 7.7 1,258.5Government bonds 4.5 378.6 4.2 321.8Corporate bonds 5.4 221.4 4.9 211.4Other investments 5.7 256.8 5.0 225.6Total fair value of plan assets 2,110.4 2,017.3Present value of defined benefit obligations (2,202.3) (2,211.1)Deficit in the scheme (91.9) (193.8)Deferred tax thereon 27.6 58.1Net pension liability (64.3) (135.7) Movements in the defined benefit obligation are as follows: 2007 2006 £m £m At 1 April (2,211.1) (1,878.9)Movements in the year: Service costs (30.3) (22.9) Member contributions (7.7) (7.7) Benefits paid 89.2 86.1 Interest on pension scheme liabilities (107.2) (100.0) Losses on curtailments - (0.6) Actuarial gains / (losses) 64.8 (287.1) At 31 March (2,202.3) (2,211.1) Movements in scheme assets during the year: 2007 2006 £m £m At 1 April 2,017.3 1,651.3Movements in the year: Expected return on pension scheme assets 130.1 115.7 Assets distributed on settlement (89.2) (86.1) Employer contributions 61.9 55.7 Member contributions 7.7 7.7 Actuarial (losses) / gains (17.4) 273.0 At 31 March 2,110.4 2,017.3 Notes to the Preliminary Statementfor the year ended 31 March 2007 12. Financial Assets / Liabilities The Group has classified derivative financial instruments into two categories,operating derivatives and financing derivatives. Operating derivatives includeall qualifying commodity contracts including those for electricity, gas, oil,coal and carbon. Financing derivatives include all fair value and cash flowinterest rate hedges, non-hedge accounted (mark-to-market) interest ratederivatives, cash flow foreign exchange hedges and non-hedge accounted foreignexchange contracts. Non-hedge accounted contracts are treated as held fortrading. The carrying value is the same as the fair value for all instruments. The net movement reflected in the Income Statement can be summarised thus: 2007 2006 £m £mOperating derivativesTotal result on operating derivatives (i) (134.5) 176.1Less: amounts settled in the year (ii) 195.8 (190.5)Movement in unrealised derivatives 61.3 (14.4) Financing derivatives (and hedged items)Total result on financing derivatives (i) (117.7) (47.3)Less: amounts settled in the year (ii) 107.1 3.8Movement in unrealised derivatives (10.6) (43.5)Total 50.7 (57.9) (i) Total result on derivatives in the income statement represents the totalamount (charged) or credited to the income statement in respect of operating andfinancing derivatives. (vi) Amounts settled in the year represent the result on derivatives transactedwhich have matured or been and have been included within the total result onderivatives. 13. Analysis of net debt At Decrease (Increase)/ At 31 March 1 April in cash decrease 2007 2006 and cash in debt equivalents £m £m £m £m Cash and cash equivalents 49.9 6.2 - 56.1Bank overdraft (i) (6.1) (1.6) - (7.7) 43.8 4.6 - 48.4 Loans and borrowings (2,214.7) - (73.2) (2,287.9)Finance lease creditors (1.6) - 0.5 (1.1)Bank overdraft (i) 6.1 - 1.6 7.7 (2,210.2) - (71.1) (2,281.3) Net debt (2,166.4) 4.6 (71.1) (2,232.9) (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. This information is provided by RNS The company news service from the London Stock Exchange

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