SOURCE: Scottish Power PLC

November 14, 2006 02:02 ET

Scottish Power PLC announces Interim Results

GLASGOW, UK -- (MARKET WIRE) -- November 14, 2006 --14 November 2006

Results for the six months ended 30 September 2006
                                    Adjusted results*             
                                    Sep-06      Sep-05           
Operating profit                   GBP517m     GBP326m   +59%  
Profit before tax                  GBP483m     GBP273m   +77%  
Profit from continuing             GBP330m     GBP237m   +39%  
Continuing earnings per share       21.05p      12.83p   +64%  
Group earnings per share            21.05p      20.50p    +3%  
Cash generated from                GBP600m     GBP179m         
Dividend                             11.4p       10.4p        

                                    Reported results
                                    Sep-06      Sep-05
Operating profit                   GBP396m     GBP197m
Profit before tax                  GBP271m      GBP17m
Profit from continuing             GBP181m      GBP88m
Continuing earnings per share       11.54p       4.72p
Group earnings per share            11.54p      12.53p
Cash generated from                GBP600m     GBP179m
Dividend                             11.4p       10.4p

- Energy Networks adjusted operating profit GBP245m* - up GBP4m

  Regulated revenue growth, strong cost management and improved network

- Energy Retail & Wholesale adjusted operating profit GBP216m* - up 

  Strong generation returns particularly from coal, and benefits from our 
  forward commodity procurement strategy.  Also delivering improved 
  customer service, better debt management and initiatives to help 
  the 'fuel poor'

- PPM Energy adjusted operating profit GBP68m* - up GBP58m

  Benefiting from wind development activities and good growth in gas 
  storage and energy management

- Cash generated from operations increased by GBP421m to GBP600m after 
  GBP102m special contribution to pension fund

  Strong operational performance and working capital improvements

- Capital investment of GBP460m; 60% for growth principally in UK and US
  wind farms

Philip Bowman, ScottishPower Chief Executive, said:

"These are excellent results and the first reported from the newly restructured and re-focused ScottishPower, since the sale of PacifiCorp in March this year. They demonstrate the transformation of the Group and the benefits of the actions we have taken to enhance operational performance and generate attractive returns from our investment programme. As a result, we have achieved strong performances across all business areas, particularly from the Energy Retail & Wholesale business and PPM Energy. In addition, our increased focus on cash generation and better working capital management is already delivering results with an additional GBP421 million of cash from operations during the period."

Note: Items marked * throughout this document represent our reported results adjusted to: exclude the effects of certain IAS 39 remeasurements; exclude exceptional items in relation to 2005/06; and to include depreciation charges in relation to PacifiCorp incurred from 24 May 2005 to 30 September 2005. Further details, are given in the Financial Review section.

For further information:

Media enquiries:

Colin McSeveny, Media Relations Director             +44 (0) 141 636 4515
Anthony Cardew, Cardew Group                         +44 (0) 20 7930 0777
Investor enquiries:
Peter Durman, Investor Relations Director            +44 (0) 141 636 4527
Presentation material:

The results presentation will be available on the corporate website from 09.00 (UK time) on Tuesday 14 November 2006.

Presentation webcast/audio broadcast:

A live webcast of the presentation to analysts will be available on the investor relations section of at 09.30 (UK time) on Tuesday 14 November. A recording of the webcast will be available from around 14.00 (UK time).

A live audio broadcast of the presentation and question and answer session will also be available. The presentation can be accessed by dialling:

UK:                     0500 551 077

International:          +44 (0)20 7162 0025

US/Canada:              1 877 491 0064

Conference call:

A conference call will be held for analysts and investors at 16.00 (UK time) on Tuesday 14 November. The call can be accessed by dialling:

UK:                     0800 953 1444

International:          +44 (0)1452 561 365

US/Canada:              1 866 220 1431

A recording of the conference call will be available until 21 November 2006:

International:          +44 (0)1452 550 000        Access code: 9341258#


Photographs will be sent to picture desks on Tuesday 14 November. Photograph enquiries should be directed to +44 (0)141 636 4557.


ScottishPower has delivered a strong first half performance with adjusted operating profit up by 59% to GBP517 million*, adjusted profit before tax up by 77% to GBP483 million* and adjusted profit from continuing operations up 39% to GBP330 million*. On a reported basis, operating profit was GBP396 million, profit before tax was GBP271 million and profit from continuing operations was GBP181 million. The difference between the adjusted and reported results relate to certain IAS 39 remeasurements, further details of which are given in the Financial Review.

All our businesses have delivered good performances with the non-regulated energy businesses in the UK and US, in particular, contributing to the strong growth. Of the GBP191 million increase in adjusted operating profit, GBP126 million came from Energy Retail & Wholesale and GBP58 million was from PPM Energy in the US. The key drivers for the growth in operating profit were:

 - The successful optimisation and flexible performance of our UK 
   generation fleet, especially our coal-fired plant;
 - The benefit of our rolling commodity hedging programme and energy
   management activities in the UK, together with increased retail 
   tariffs, which have helped to offset the impact of high wholesale 
   prices and environmental compliance costs;
 - The contribution from our investment in wind farms in the UK;
 - Good growth at PPM Energy driven by a full six month contribution from
   wind farm developments completed in the past 12 months, the sale of 
   Leaning Juniper wind farm through its first 'build-to-sell' 
   transaction, and by its gas storage and energy management activities; 
 - Cost efficiencies resulting from the restructuring programme that began
   last year.
Energy Networks continues to perform well with profit growth from an increase in regulated revenues and strong cost management. Our targeted investment programme and operational improvements have delivered a further improvement in network performance.

We have continued to drive operating efficiencies through our restructuring programme which commenced last year and delivered a further GBP20 million of savings during this first half, bringing the total delivered to date to GBP30 million. We are on track to deliver the remainder of the programme by 2008, which totals GBP60 million of savings.

Our strong operational performance and increased focus on working capital management and improved cash conversion have contributed to an increase of GBP421 million in cash generated from operations to GBP600 million, after the GBP102 million special pension contribution. In particular, we have delivered working capital efficiencies through better inventory control and customer debt management initiatives, and have also benefited from a significant reduction in margin deposits in PPM Energy.

Capital investment during the half year of GBP460 million was driven by our wind farm development programme in the UK and US; the upgrade and reinforcement of our generation and network assets in the UK; and the start of the Flue Gas Desulphurisation (FGD) installation project at Longannet power station in Scotland.

We are actively engaged with the UK Government through the Energy Review. We welcome the Review's recognition that significant investment to replace and modernise the UK's generation and infrastructure assets is essential to address energy supply security and environmental concerns. We support the development of mechanisms, such as the EU Emissions Trading Scheme and the UK Renewables Obligation, that provide industry with the long-term certainty necessary to underpin investment. However, we are concerned that unexpected revisions to these mechanisms could damage investor confidence. UK competitiveness may also be undermined by the inconsistent approaches EU Member States have adopted to setting Phase II carbon emissions allocations. The measures under the Energy Efficiency Commitment (EEC) alone will not meet the Government's aims to improve the energy efficiency of the UK's housing stock or to reduce energy demand. We believe that smart metering technology can make a major contribution to demand reduction, and that it is now ready to be rolled out on a national basis.

ScottishPower has a strong blend of high-growth competitive and low-risk regulated businesses; each well positioned in its market and well placed for future growth and investment. Our strategy to grow shareholder value in each business is clear:

 - In Energy Networks, we plan to deliver returns at, or in excess of, the
   level of allowed cost of capital on our expanding regulated asset base,
   through continued improvement in our asset and operational management.

 - In Energy Retail & Wholesale, we are focusing on maximising returns 
   from the integrated business through: optimising and expanding our 
   diversified generation fleet; effective energy management activities; 
   improving customer service; operational efficiencies; improved cash 
   conversion; and as a leading developer of renewable energy.

 - In PPM Energy, we are continuing to build leading positions in wind
   generation and independent gas storage, and expand our energy 
   management and origination businesses.
This has been a period of significant change for the Group with major restructuring and re-focusing of the business. Against this background of change, we are delivering our investment programme and associated returns whilst continuing the process of cost reduction across the business. We set out this year to continue the rapid and effective implementation of our strategy to enhance the performance of all our operations. We have sought to become leaner and more responsive - to speed up decision-making and to push accountability out into the business. This will enable us to be more competitive and to respond more quickly to our customers and changing market conditions. The effective implementation of our strategy is already delivering improved results with strong profit growth and cash generation. The Operational Review describes some of the many different initiatives underway across our business which are reducing cost, improving working capital, enhancing network performance and delivering better customer service and experience. The transformation of ScottishPower is creating a solid platform to grow shareholder value.


Energy Networks

 - Adjusted operating profit up GBP4 million to GBP245 million*

 - Invested GBP157 million to expand and improve our network performance

 - Network performance improved by 5%

 - Engaging with Ofgem on Transmission Price Control Review
Energy Networks adjusted operating profit rose by GBP4 million to GBP245 million* for the half year. This reflects an increase in regulated revenues of GBP7 million and ongoing reductions in controllable costs, partly offset by a slight rise in pension costs and the year-on-year effect of property sales income which benefited the same period last year by GBP3 million.

For the half year, net capital investment was GBP157 million, with 32% invested for growth. The growth investment has been directed to network reinforcement programmes, particularly in Liverpool and Central Scotland, and investment to support new renewable infrastructure. Refurbishment investment of GBP107 million included substation and overhead line expenditure designed to improve network resilience and system performance. In addition, we have accelerated our programme to install network controllable points, which will allow us to quickly isolate faults in the network and thereby enable services to be restored to customers more rapidly and efficiently. As a result, 5,000 of these points will be installed across our 112,000 km network by the Summer of 2008, ahead of our original timetable of 2010, and we aim to install over a quarter of these by the end of this financial year.

Section 37 applications for the Beauly-Denny transmission line and the Denny North substation have been lodged; and the public inquiry is due to commence in February. In addition, we have agreed with Ofgem the level of investment required to upgrade the Scotland-England interconnector. Work has now begun to upgrade this interconnector to 2,800 MW of capacity by 2010.

Network performance continues to benefit from our targeted investment programme and improved operating practices. Network performance measured in terms of Customer Interruptions and Customer Minutes Lost improved by an average of 5% against the same period last year. Targeted investment in infrastructure, such as network controllable points and telecontrol systems, and maintenance activities, such as tree-cutting, will help to drive further improvements in network performance. In addition, the continued roll-out of better mobile information technology and satellite navigation for our field-based response teams will help us to respond more effectively to network faults. We have combined our Scottish distribution and transmission network control centres on one site at Kirkintilloch. This will provide further focus on improved network performance and customer service. We have also established, as part of Ofgem's Innovation Funding Initiative, a range of research and development projects designed to improve network performance including a project to examine network designs and the implications of distributed generation.

We continue to work with Ofgem on the next Transmission Price Control Review, which will apply for the five year period from April 2007. Our objective is to achieve a fair outcome with sufficient and timely funding for the considerable increase in capital investment required to maintain a safe and reliable network and to support the development and connection of the growing renewable generation capacity. In particular, we believe the cost of capital should be sufficient to ensure that we are able to finance our business effectively at a time when significant investment is required to meet the Government's targets for renewables and to ensure security of supply. We strongly disagree with the report by Ofgem's advisers that assumes that the forward-looking leveraged beta will be below unity, particularly at a time of high investment levels and increased risk. Our investment allowance should also be sufficient to fund new connections and to enhance our transmission capacity to support the additional renewable connections. In addition, this significant investment programme comes at a time when growth in the global infrastructure market is causing inflationary pressures, which needs to be taken into account as part of this Review.

Energy Retail & Wholesale

 - Adjusted operating profit up GBP126 million to GBP216 million*

 - Strong generation returns particularly from coal-fired plant

 - Robust commodity procurement strategy

 - Investment in renewables delivering returns

 - Customer service improved and customer numbers held stable in volatile 

 - Continue to shield customers from the full brunt of wholesale prices

 - Customer debt management delivering working capital efficiencies

 - Range of measures introduced to help 'fuel poor'
Adjusted operating profit increased by GBP126 million to GBP216 million* for the half year. The key growth drivers have been strong generation returns, particularly from our coal-fired plant; the benefits of our rolling commodity procurement strategy and energy management; returns from the investment in our renewables programme; and a GBP15 million gain on the sale of Knapton power station. In addition, our cost efficiency initiatives and tight control of operating costs resulted in lower net operating costs.

High gas and electricity wholesale prices have resulted in better spreads, particularly for our coal plant. Our investment in flexible generation and ability to secure low sulphur coal were key to delivering strong returns in these market conditions. We have increased our coal plant running by 74% to 6.8 TWh whilst at the same time reduced output from our gas plant by 44% to 2.9 TWh, optimising economic running and availability. This ability to react to changing market conditions comes from our diversified fuel mix and ability to flex the plant operation. We retained our position as one of the top performers in the Balancing Mechanism with a contribution of GBP14 million. Strong returns from generation will support future investment including the installation of FGD equipment at our largest coal plant, Longannet.

Against a background of high commodity prices and unprecedented market volatility, we continue to benefit from our forward commodity procurement strategy, which has delivered a weighted average cost of gas and electricity below current wholesale market rates. We are 98% hedged for the remainder of this financial year but have an increasing exposure beyond this Winter in order to manage our average cost base in the event that wholesale prices fall. This will allow us to remain competitive in terms of our retail cost base. Our successful commodity procurement strategy has also provided a direct benefit for our customers as we have been able to protect them from the high price increases seen in the wholesale commodity market. We estimate this to have benefited a typical dual fuel customer by GBP200 a year on average, over the past two years.

The returns from our retail business at market rates remained poor due to rising commodity and environmental compliance costs, which in the half year have more than offset recent retail tariff increases. As a result, we have deliberately constrained customer growth and our customer numbers have been held broadly stable during the period at 5.2 million.

A key area of focus for Energy Retail has been customer service where we have delivered improvements through our new call centre telephony system and re-organisation of customer service operations, which are delivering better first-time call resolution for customers. Our actions to provide improved customer service and better complaint handling have helped deliver a 40% reduction in Energywatch complaints over the same period last year.

Another key area of focus is the management of working capital where we are increasing the proportion of customers on payment methods such as direct debit and 'pay-as-you-go' using key meter technology. This has improved debtors' cash flow and helped manage debt write-off performance. Direct debit penetration has increased further this year and we have introduced quarterly assessment for direct debit customers, which will help to ensure that the payments more accurately track consumption patterns and tariff changes. Earlier this year we commenced the introduction of key meters for 'pay-as-you-go' customers, which will improve the service offering to these customers and cash collection. Around 40,000 key meters have now been installed and, to enhance further the benefits of this initiative, we expect to accelerate its roll-out.

We continue to deliver working capital efficiencies and maintain our strong and effective performance in debt management by focusing on key operational improvements in the meter to cash process. Improved meter reader access, together with continued proactive customer contact to obtain meter reads has reduced estimation levels resulting in more accurate billing. This, coupled with enhancements to our debt management systems and processes, has offset economic pressure on debt management and collection and delivered a year-on-year improvement in customer debtor days outstanding. Some of these activities are now being benchmarked with leading international companies.

We are also involved in several other initiatives to address fuel poverty including our GBP3 million investment in the ScottishPower Energy People Trust, which we established last year. So far, GBP1.6 million has been awarded to 47 projects to help over 31,000 homes.

These results also reflect the benefit of our investment in wind farms. The completion of two additional projects, Black Law II (27 MW) and Beinn Tharsuinn (29 MW) increased operational capacity to 344 MW, reinforcing our position as the UK's leading onshore wind developer. In addition, we have begun construction on Whitelee (322 MW) and Wether Hill (18 MW). Whitelee will be the largest onshore wind farm in Europe. We currently have 464 MW under construction or with planning consents. As a result, we either operate or have approvals for 808 MW, representing over 80% of our 2010 target.

Looking to the future, net capital investment was GBP123 million for the half year, with 45% invested in growth projects such as wind farm developments and the FGD project at Longannet. Our GBP170 million programme to install FGD equipment at Longannet will use seawater-based technology and will help us maintain a balanced generation portfolio. In addition, our programme of refurbishment and overhaul expenditure continued to focus on improving plant performance and availability at our coal stations and on increasing the flexibility of our CCGT plant.

In August, we announced the sale of Knapton power station to RGS Energy Limited for GBP15 million in cash. This arrangement includes favourable long-term power purchase and gas supply agreements with RGS.

PPM Energy

 - Adjusted operating profit up GBP58 million to GBP68 million*

 - Contribution from wind business up GBP37 million from new wind 

 - Strong returns from wholesale energy optimisation and trading

 - Improved contribution from owned and contracted gas storage
PPM Energy delivered strong growth in the half year with adjusted operating profit up by GBP58 million to GBP68 million*. These results demonstrate the benefit from our positions in attractive, high-growth market segments and strong returns from our investment strategy. The key profit drivers have been a full six month contribution from new wind farms along with the new profit stream from our wind 'build-to-sell' activities, good growth in gas storage and a strong performance in energy management.

Operating profit growth reflects the additional 516 MW of wind generation that has been developed over the last 12 months and the contribution from the sale of Leaning Juniper wind farm (100 MW) which was our first 'build- to-sell' project. 'Build-to-sell' is a new product offering where we construct wind farms for sale to large utilities. These projects are commercially attractive as they capitalise on PPM Energy's wind development capabilities in turbine procurement and construction and its development assets. We will continue to pursue further 'build-to-sell' opportunities, as they arise. Given the development timescales, we do not anticipate a further 'build-to-sell' in the second half.

The majority of our half year net capital investment of GBP180 million was invested in wind farms, including the Big Horn wind farm in Washington (200 MW) and the successful completion of Maple Ridge Ia in New York adding 17 MW of renewable generation. This brings the total operational wind farm generation, under our control, to 1,620 MW, with approximately 90% of this output sold under long-term contracts. Construction is also underway at four further wind projects: the 45 MW Maple Ridge II wind farm in New York, the 150 MW MinnDakota wind farm in Minnesota and South Dakota, the 75 MW Twin Buttes wind farm in Colorado and the 221 MW Klondike III wind farm in Oregon.

We have secured wind turbines for the financial years ending March 2008 and March 2009 at competitive prices from manufacturers including GE, Siemens and Mitsubishi. This supply of turbines is consistent with our development objectives of 500-600 MW of new wind power per year. We have also announced our intention to expand our wind development activities to Canada as a natural extension of our development skills into a market with considerable momentum for adding renewable resources to its energy mix.

We also successfully completed our first and second wind portfolio transactions (Aeolus I and II) in May and November 2006, which represent a combined 657 MW of wind generation. This structure enables us to realise the value of tax benefits associated with our wind projects and release capital for reinvestment through an upfront cash payment and contracted future cash flows from equity investors. Most of the value of the tax benefits in the wind portfolio transactions are now recognised within pre-tax profit. The wind farms remain consolidated within our results and we retain significant ownership rights and operational control of the facilities. We are working on the third wind portfolio transaction representing 320 MW of wind generation in which there is continued strong market interest.

Results from our energy management activities, focusing on the management of core assets and the optimisation of wholesale energy positions and trading activities, increased by GBP22 million. These activities benefited from market volatility and our established market presence and systems' capabilities. Our contracted gas storage business operates a hedging programme, which is put in place during the first half of the year when we store gas, and secures profit which is realised during the second half of the year when the gas is withdrawn under forward gas sales. Contracted gas has benefited in the half year from lower realised hedge losses compared to the same period last year.

Our owned gas storage again showed good growth, as a result of continued high storage volumes and spreads, as well as a full six months of operations at Grama Ridge. Investment in our gas storage facilities continued, with the ongoing construction of 9.5 BCF Waha and the Phase I 1.5 BCF expansion of Grama Ridge facility. In addition, the 15 BCF Houston Hub project continues to progress through the permitting phase.


The Group's results and comparatives have been prepared in accordance with IFRS. Items marked * represent adjusted results, further details of which are given below. These adjustments have been made in order to present the results on a more comparable basis and we believe that this provides a better indication of underlying business performance.

                                                    Half year
                                          2006/07    2005/06     Change

Adjusted results*
Operating profit (GBPm)                     517.0      325.8      191.2
Profit before tax (GBPm)                    482.8      273.3      209.5
Profit from continuing operations (GBPm)    329.5      236.7       92.8
Continuing earnings per share (pence)       21.05      12.83       8.22
Group earnings per share (pence)            21.05      20.50       0.55

Reported results
Operating profit (GBPm)                     395.8      197.3      198.5
Profit before tax (GBPm)                    271.2       16.5      254.7
Profit from continuing operations (GBPm)    180.6       87.6       93.0
Continuing earnings per share (pence)       11.54       4.72       6.82
Group earnings per share (pence)            11.54      12.53      (0.99)

Cash generated from operations              600.2      179.6      420.6

Unless otherwise stated 'half year' and 'interim results' relate to the six months to 30 September 2006.

Items marked * represent the results of our operations adjusted to: (i) exclude the effects of certain IAS 39 remeasurements, specifically fair value losses or gains on operating and financing derivatives; and, in relation to 2005/06, adjusted to: (ii) exclude exceptional items; and (iii) include depreciation and amortisation charges in relation to PacifiCorp incurred from 24 May 2005 to 30 September 2005, which, under IFRS, were not recognised in the Group's results. The sale of PacifiCorp was completed on 21 March 2006 and PacifiCorp was reported as a discontinued operation during 2005/06. Reconciliations from the reported to the adjusted results are provided in Notes 2 and 14 to the Interim Accounts.

Adjusted results* - half year

Our businesses delivered a strong half year financial performance, with adjusted operating profit up 59% to GBP517 million. This growth was driven by: strong coal plant performance in the UK and benefits arising from our commodity procurement and trading strategy; the wind development activities within PPM Energy, along with growth in their energy management and gas storage activities, and a modest net increase in Energy Networks regulatory activities.

Adjusted net finance costs were GBP34 million; GBP18 million lower than for the same period last year. The improvement was largely as a result of lower average net debt and an increased net pension finance credit. Average net debt reduced due to the proceeds from the sale of PacifiCorp being held for approximately nine weeks until the majority of the cash was returned to shareholders at the beginning of June. The residual proceeds along with improved operational cash flows and the timing of capital spend also contributed to lower average net debt. Net finance income associated with our retirement benefit obligations increased largely as a result of higher expected returns on retirement benefit assets.

Adjusted profit before tax increased by 77% to GBP483 million. The profit growth was driven largely by our strong operational results, and also by lower financing costs, described above.

The adjusted income tax charge was GBP153 million compared to GBP37 million for the same period last year; and the adjusted effective rate of tax was 31.8% compared to 13.4%. Last year's charge benefited from a GBP42 million settlement of outstanding tax claims, which had a disproportionate effect on the interim adjusted effective rate of tax. Disregarding the impact of the settlement and other smaller adjustments made in respect of prior years, the underlying rates are broadly similar.

Adjusted profit from continuing operations improved by 39% to GBP330 million as a result of the strong operational performance of the businesses and lower interest costs, partly offset by an increase in the tax charge - as discussed above. Adjusted continuing earnings per share (EPS) increased by 64% to 21.05 pence reflecting both the enhanced operational performance and the benefit from a reduction in share numbers following the capital reorganisation on the return of cash.

Adjusted Group EPS of 21.05 pence increased by 3%, with the benefits of the strong growth in continuing operations and the capital reorganisation being offset by the loss of earnings following the sale of PacifiCorp. On a like-for-like basis, last year's adjusted Group EPS of 20.50 pence per share would be rebased to 15.05 pence reflecting the loss of earnings from PacifiCorp (-7.67 pence) and the capital reorganisation (+2.22 pence). Against this rebased figure, this year's adjusted Group EPS of 21.05 pence per share has grown by 40%.

Reported results - half year

The Group's reported results include the impact of IAS 39 on operating profit and net finance costs and any associated tax. Last year, the Group's reported results also included a number of exceptional items and, in relation to PacifiCorp, excluded depreciation charges from 24 May 2005. There are no exceptional items in the current half year and PacifiCorp was disposed of on 21 March 2006.

Reported operating profit was GBP396 million, reflecting our strong operational performance, offset by net fair value losses on operating derivatives. These amounted to GBP121 million and comprised mark-to- market losses of GBP102 million and the unwind of opening balance sheet positions of GBP31 million, partly offset by favourable hedge ineffectiveness of GBP12 million. This compared to last year's interim reported operating profit of GBP197 million, which included net fair value losses on operating derivatives of GBP161 million and net favourable exceptional items of GBP32 million. The exceptional items in the prior period comprised the gain on sale of Byley, offset by the first tranche of restructuring costs and an impairment provision relating to the retained US non-regulated business's historic aircraft lease portfolio.

Reported net finance costs were GBP56 million lower at GBP125 million, largely due to lower net fair value losses on financing derivatives of GBP90 million compared to GBP128 million for the same period last year. These fair value losses are largely due to the impact of the rise in our share price over the half year on the fair value of the embedded derivative within the $700 million convertible bonds.

Reported profit before tax increased by GBP255 million to GBP271 million due to our strong operational results and a GBP77 million reduction in net fair value losses, partly offset by the net exceptional credit of GBP32 million recognised in last year's interim results.

Reported profit from continuing operations increased by 106% to GBP181 million reflecting the strong underlying performance as discussed above and also an upside from lower net fair value losses compared to the same period last year, partly offset by last year's favourable exceptional items. These factors, along with the benefit from the reduction in share numbers following the capital reorganisation, resulted in a 144% increase in reported continuing EPS to 11.54 pence.

Reported Group EPS of 11.54 pence was 0.99 pence lower than last year with the loss of earnings from PacifiCorp and the impact of last year's exceptional items more than offsetting this year's strong operational performance, the impact of net fair value losses and the benefit of the capital reorganisation.

Cash and net debt

Cash generated from operations increased by GBP421 million to GBP600 million for the half year, with operating cash flows of GBP549 million and favourable working capital movements of GBP51 million. Working capital movements improved by GBP324 million compared to the same period last year reflecting a significant reduction in margin deposits within PPM Energy and the benefit from our increased group-wide focus on operational cash management. This included favourable inventory movements and the impact of debt management initiatives.

Opening net debt of GBP83 million at 31 March 2006 included GBP2,768 million of net proceeds from the sale of PacifiCorp, which completed in March 2006. During the half year GBP2,204 million of the disposal proceeds were returned to shareholders, with a further GBP46 million due to be returned. The GBP46 million relates to the outstanding B shares, which are classified as net debt; further details are given below. Largely as a result of this, net debt increased by GBP2,201 million to GBP2,284 million at 30 September 2006.

Excluding the return of cash, net debt reduced by GBP49 million. Cash generated from operations of GBP600 million comprised GBP702 million less the GBP102 million special contribution to our pension schemes. This was absorbed by: GBP133 million of net tax and interest payments; GBP438 million of capital investment; and GBP139 million of dividend payments. Other net favourable movements were GBP159 million and included favourable non-cash foreign exchange.

The GBP2.2 billion return of cash financed from the $5.1 billion (GBP2.8 billion) net cash proceeds from the PacifiCorp disposal, took place in June. Shareholders were able to elect from three alternatives and, as a result, approximately GBP1.3 billion was returned via a single B share dividend and approximately GBP0.9 billion of B shares were repurchased. A number of shareholders, representing approximately 2% of the B shares issued, elected to retain their B shares and will be entitled to receive a non-cumulative preferential dividend. It is expected there will be an opportunity for shareholders to sell these shares to the company at certain future dates. These remaining B shares (GBP46 million) are, therefore, classified as financial liabilities and are included within net debt.


The interim dividend for the six months to September 2006 will be 11.4 pence per ordinary share, payable on 28 December 2006. The ADS dividend will be confirmed in a separate announcement today. As previously announced, we are aiming to deliver an annual increase in the dividend this year of at least 7% from last year's base of 25.0 pence per ordinary share. We have also announced that dividends will be paid bi-annually in December and June.


Ex dividend date for interim dividend       22 November 2006

Record date for interim dividend            24 November 2006

Interim dividend payable                    28 December 2006

Preliminary results announced               23 May 2007

Final dividend payable                      June 2007

Safe Harbor

Some statements contained herein may include statements regarding our assumptions, projections, expectations or beliefs about future events. These statements are intended as "Forward-Looking Statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements with respect to us, our corporate plans, future financial condition, future results of operations, future business plans, strategies, objectives and beliefs and other statements that are not historical facts are forward looking. Statements containing the words "may", "expect", "anticipate", "believe", "intend", "estimate", "continue", "plan", "project", "target", "on track to", "strategy", "aim", "seek", or other similar words are also forward-looking. These statements are based on our management's assumptions and beliefs in light of the information available to us. These assumptions involve risks and uncertainties which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

We wish to caution readers and others to whom forward-looking statements are addressed, that any such forward-looking statements are not guarantees of future performance and that actual results may differ materially from estimates in the forward-looking statements. We undertake no obligation to revise these forward-looking statements to reflect events or circumstances after the date hereof. Important factors that may cause results to differ from expectations include, for example:

 - the success of reorganizational and cost-saving or other strategic 

 - any regulatory changes (including changes in environmental regulations 
   and legislation or regulatory outcomes) that may increase the 
   operating costs of the Group, may require the Group to make unforeseen 
   capital expenditures or may prevent the regulated business of the 
   Group from achieving acceptable returns;

 - future levels of industry generation and supply, demand and pricing, 
   political stability, competition and economic growth in the relevant 
   areas in which the Group has operations;

 - the availability of acceptable fuel at favorable prices;

 - weather and weather-related impacts;

 - the availability of operational capacity of plants;

 - adequacy and accuracy of load and price forecasts that could impact 
   the hedging strategy and costs to balance electricity load and supply;

 - unanticipated construction delays, changes in costs, receipt of 
   required permits and authorizations, and other factors that could 
   affect future generation plants and infrastructure additions;

 - the impact of interest rates and investment performance on pension and
   post-retirement expense;

 - the impact of new accounting pronouncements on results of operations; 

 - development and use of technology, the actions of competitors, natural
   disasters and other changes to business conditions.
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                      This information is provided by RNS
            The company news service from the London Stock Exchange