Results Centre

Half-year results 2009-10

Financial Overview

Approach to Financial Results

These financial results for the six months to 30 September 2009 are reported under International Financial Reporting Standards, as adopted by the EU. SSE's focus has consistently been, and remains, on profit before tax before exceptional items, the impact of International Accounting Standards IAS 32 and IAS 39 and after the removal of taxation on profits from jointly controlled entities and associates.

This 'adjusted profit before tax*' was first adopted by SSE in the six months to 30 September 2005. The adjusted definition of profit before tax reflects the underlying profits of its business, reflects the basis on which the business is managed and avoids the volatility introduced by IAS 39. The table below reconciles SSE's reported profit before tax and its adjusted profit before tax*.

SSE has previously stated (most recently in its Annual Report 2009) that its focus is on a full-year, as opposed to half-year, performance and that its six-month financial results in any financial year should 5 always be viewed in light of that. This is for the reason it has set out in the past: six-month results are more likely to fluctuate, with unusual variations or exceptional circumstances.

IAS 39 requires companies to record certain forward commodity contracts that are deemed to be derivative financial instruments at 'fair value'. At 30 September 2009, there was a net derivative financial liability in SSE's balance sheet arising from IAS 39 of £1,239.8m, before tax, compared with a net liability of £1,423.6m, before tax, at 31 March 2009.

The extent of the actual profit or loss arising over the life of the contracts giving rise to this liability will not be determined until they unwind; for around 75% of the total energy volume, this will be over the next 18 months.

The liability principally relates to some of the forward commodity purchase contracts for gas, coal, oil, carbon and wholesale electricity that SSE, like all major energy suppliers, has to enter into to ensure that the future requirements of its customers are met. In recording these contracts at their 'fair value', the prevailing forward market price at 30 September is applied against the actual contract price which, in most cases, was higher than the market price (in other words 'out of the money'). SSE sets out these fair-value movements separately, as re-measurements, as they do not reflect the underlying performance of the business.

Thus, the movement on derivatives under IAS 39 of £118.1m shown in the table above and on the face of the income statement is primarily due to a reduction in the 'out-of-the-money' position on commodity contracts between 31 March 2009 and 30 September 2009.

Adjusted Profit Before Tax* for Six Months to 30 September 2009

Adjusted profit before tax* was £410.5m. This compares with £302.6m in the same six months in 2008. The increase in half-year to half-year profitability followed five key steps forward in SSE's Generation and Supply business in 2009, providing a marked contrast with the same period in 2008:

• The removal, in January and February 2009, of the restrictions on running hours at Fiddler's Ferry and Ferrybridge power stations which applied during 2008, following the installation of flue gas desulphurisation (FGD) equipment;
• The return to service, in June 2009, of Medway power station, following a prolonged unplanned outage which started in March 2008;
• The increase of 31% in the output of renewable energy from SSE's hydro electric schemes, wind farms and dedicated biomass plant;
• The increase in the number of customer accounts to which SSE supplies electricity and gas (600,000 more in April 2009 than in April 2008); and
• The restoration of greater balance between the cost of energy procured and the cost of energy supplied, following the energy supply losses sustained to protect customers from the worst impacts during the period of exceptionally high wholesale prices in the middle of 2008.

Nevertheless SSE's gas supply business, Southern Electric Gas, incurred a loss during the period. Energy supply has also been characterised by falling demand for electricity and gas and by an increase in bad debt in the six months to September 2009.

Adjusted Profit Before Tax* for 2009/10

SSE's emphasis is on adjusted profit before tax* on a full-year, as opposed to half-year, basis and since it was formed in 1998 it has delivered 10 successive annual increases in adjusted profit before tax. SSE is aiming to deliver a moderate, single digit increase in adjusted profit before tax in 2009/10 as a whole.

Adjusted profit before tax will, in practice and as always, be determined by issues such as: the availability of SSE's gas- and coal-fired power stations to generate electricity; the output of renewable energy from SSE's hydro electric stations and wind farms; the impact of the weather on actual level of energy consumption; and the interaction between wholesale prices for energy and the prices for electricity and gas charged to customers.

Adjusted Earnings Per Share*

To monitor financial performance over the medium term, SSE continues to focus on adjusted earnings per share* because it has the straightforward benefit of defining the amount of profit after tax that has been earned for each ordinary share and so reflects a clear view of underlying financial performance. In the six months to 30 September 2009, SSE's adjusted earnings per share were 34.2p, compared with 26.3p in the previous year.

Dividend

Interim Dividend

SSE's first responsibility to shareholders is to deliver sustained real growth in the dividend. The Board is declaring an interim dividend of 21.0 pence per share, compared with 19.8p in the previous year. This is an increase of 6.1% compared with 2008/09 and is more than double the interim dividend paid in 2002, since when there has been compound annual growth in the dividend of 10.1%.

Future Dividend

According to the Capita Registrars Dividend Monitor, published in August 2009, dividend payments by UK companies fell by 9% in the first six months of 2009, compared with the same period in 2008, and are forecast to be 13% lower for the full year 2009.

Against this background, SSE remains acutely aware of its first responsibility to shareholders: to deliver sustained real growth in the dividend. Its target for 2009/10 as a whole is to grow the dividend by at least 4% more than inflation (based on the average rate of inflation in the UK between April 2009 and March 2010). The 6.1% increase in the interim dividend means the full-year dividend is likely to increase from 66.0 pence per share for 2008/09 to at least 70.0p for 2009/10.

Since 2005, SSE's target for dividends after 2010 has been 'sustained real growth', and that remains the case. It will, however, set out more defined dividend targets for 2010/11 and beyond by its full-year results statement in May 2010. After a period in which dividend payments by UK companies have come under severe pressure, or been abandoned altogether, SSE's priority in setting new dividend targets will be to ensure they are realistic and attainable, thereby giving shareholders the fullest possible confidence in their achievability.

SSE's strategy is explicitly designed to deliver sustained real dividend growth and its operational and investment decisions are all taken to support its achievement. Its long term goal remains the delivery of a full-year dividend double that paid in 2007 which, in turn, was more than double the first full-year dividend paid by SSE, in 1999.

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