Interim Results

For immediate release 23 August 2006 SLOUGH ESTATES INTERNATIONAL RESULTS FOR THE SIX MONTHS TO 30 JUNE 2006 POSITIVE MOMENTUM CONTINUES Highlights Six months to 30 June 2006 2005 Change % Profit before tax (Â£m's) 338.1 119.0 184.1 Adjusted* profit before tax (Â£m's) 68.1 55.8 22.0 Basic EPS (p) 55.2 17.1 222.8 Adjusted* diluted EPS (p) 12.3 10.1 21.8 Interim dividend (p) 6.9 6.5 6.2 30 June 31 December 2006 2005 Adjusted* diluted NAV per share (p) 730.8 680.4 7.4 Adjusted* gearing (debt to equity) (%) 61.0 62.0 - Total property portfolio (including joint ventures)(Â£m's) 5,559 5,138 8.2 *Note: for definitions of "adjusted" items, see footnotes on page 4 of full press release * PERFORMED STRONGLY AGAIN IN FIRST HALF OF 2006 - UK : sustained delivery of good results - 109,000 sq m lettings - including over 10,000 sq m of pre-lettings - Underlying vacancy down again to 7.4% (8.1% end 2005, 9.8% end 2004) - Valuation surplus of 6.7%: industrial assets up 7.0%, ahead of 6.2% for IPD equivalent - Continental Europe: excellent performances from expanded business - Ahead of plan with over 183,000 sq m lettings - including over 96,000 sq m pre-lettings - North America: real estate biotechnology business continues building on its strong platform - 73,000 sq m of lettings - including a 23,000 sq m pre-letting - Adjusted NAV per share net growth of 50.4p or 7.4% reflects: - Adjusted profit 11.6p, valuation gains 57.5p, currency translation (7.7p), dividends (11.0p) * DRIVING GROWTH - Development pipeline now increased to 2.7m sq m - potential to add Â£215m of rental income - Over 279,000 sq m under construction, of which over 76% is pre-let or pre-sold - 650,000 sq m of construction starts expected in the next 12 months - Pace of capital recycling and asset management continues - cÂ£300m acquired or sold so far in 2006 - Significant potential for growth in rental income * MAXIMISING THE OPPORTUNITIES FROM REIT CONVERSION - Board expects to convert to REIT status in January 2007 Ian Coull, Chief Executive, said: "We delivered another strong performance in the first half of 2006, sustaining our momentum from 2005. The major restructuring of the UK business in 2005 has helped to deliver these good results. Our Continental European business has rewarded our investment with a lettings performance which was ahead of our expectations. Our groupwide development pipeline, our focus on customer service, capital recycling and asset management, and our reversionary potential will drive the Group's future growth. The business is in good shape to maximise its opportunities in a REITs environment." SUMMARY PERFORMANCE NOTES BY GEOGRAPHIC REGION: UK: An intensive work programme has produced good results in the UK with another record lettings performance driving a net increase in rental income. Across the regions, construction has started on nearly 58,000 sq m of new development projects. The UK portfolio has shown a 6.7% valuation uplift - with our industrial assets up 7.0% ahead of 6.2% for the IPD equivalent. CONTINENTAL EUROPE: An excellent performance was achieved in Continental Europe with the successful integration of the acquisitions at the end of 2005 - acquisitions which had doubled the size of this business. In the first half of 2006, the team secured a very encouraging 183,000 sq m of lettings, including over 87,000 sq m of existing space. 101,000 sq m of developments were under construction at the end of the first half, with 86% of that pre-let - and a further potential 260,000 sq m of new construction starts set for the following twelve months. NORTH AMERICA: The Group's California based biotechnology real estate business continues to perform strongly with 50,000 sq m of lettings and a 23,000 sq m major pre-let. The strategic rationale of our 2005 move into the mid San Francisco Peninsula region was endorsed by new leases on 6,000 sq m of space. REITs We welcome the introduction of REITs and believe that there will be clear corporate benefits for Slough Estates from REIT conversion. Slough Estates expects to elect for REIT status with effect from 1 January 2007, subject to publication of the final regulations and an extraordinary general meeting to approve an amendment to the company's Articles of Association, likely to take place in the fourth quarter of the year. We believe that Slough Estates will represent an attractive REIT investment: we have a strong concentration on a specific asset category - focused on flexible business space - with a high quality income profile, a diversified customer base, financial strength and good growth prospects. As a REIT the main strategy of the Group will continue to be the maximisation of total returns. The Group recognises that in a REIT environment there is likely to be an increased shareholder focus on earnings and dividends and acknowledges the general market expectation of higher dividend payments. The company's future dividend policy will be a central area of importance as the board reaches its final conclusion on REIT conversion. OUTLOOK Since the start of 2006, the economic environments in which we operate have been stable. In the UK good progress has been made in securing new customers during a period of improved demand for industrial buildings. Looking to the second half of the year and beyond, a more balanced investment market seems inevitable, which is likely to see an end to yield compression; rental levels are likely to continue to be constrained, although there are some signs of rents edging upwards. Against this background the UK team is well placed to generate and convert opportunities to drive returns. In Continental Europe, we continue to see increased occupier demand and are generating high levels of enquiries in most locations with little need for special incentives to attract new lessees - in particular we see signs that the German economy is improving. In the U.S., although the general economic outlook suggests slower growth, the biotechnology industry in California looks set to continue to expand, fuelling further growth in this specialist real estate market. Across the board SEI believes it has significant potential for sustained value creation through our focus on customer service, active capital recycling and asset management and through our 2.7m sq m development programme. For further information please contact: Slough Estates plc The Maitland Consultancy Michael Waring - Tel: 0207 491 0177 Colin Browne - Tel: 0207 379 5151 CONTENTS 1) SUMMARY DATA TABLES - Financial Highlights and the Property Portfolio a. Summary Financial Statements b. The Investment Portfolio c. Income Quality and Lease Expiries d. Rental Potential e. Lettings Analysis f. Vacancy Analysis g. Development Pipeline Summary 2) OPERATING REVIEW 3) REITs 4) FINANCIAL REVIEW 5) DETAILED FINANCIAL STATEMENTS Please note detailed tables of Development Pipeline and Property Portfolio are available on our Company website in an extended version of our Press Release. 1) SUMMARY DATA TABLES - FINANCIAL HIGHLIGHTS & PROPERTY PORTFOLIO INCOME STATEMENT Six months ended 30 Six months ended 30 June 2006 June 2005 Total net rental income(1) (Â£m's) 125.5 108.3 Net interest costs (Â£m's) (45.3) (50.6) Loss on disposals of assets (Â£m's) (0.8) (3.0) Revaluation gain (Â£m's) 262.6 137.6 Profit before taxation (Â£m's) 338.1 119.0 Adjusted profit before taxation (2) (Â£m's) 68.1 55.8 Basic earnings per share (p) 55.2 17.1 Adjusted diluted earnings per share(3) (p) 12.3 10.1 Dividend per share (p) 6.9 6.5 Effective tax rate (%) 28 38 Underlying tax rate(4) (%) 20 23 Property return(9) (ungeared) 8.7 7.2 Total return(10) (%) 9.1 5.8 BALANCE SHEET 30 June 31 December 2006 2005 Total properties, including share of joint ventures (Â£m's) 5,559.6 5,137.8 Net assets excluding minority interests (Â£m's) 2,722.7 2,440.4 Adjusted net assets(5) (Â£m's) 3,436.0 3,089.6 Adjusted diluted net assets per share(6) (p) 730.8 680.4 Group: Net debt (Â£m's) 2,079.8 2,092.3 Debt to equity(7) (%) 61 62 Loan to value(8) (%) 38 42 Including share of Joint Ventures: Net debt 2,148.0 2,121.9 Loan to value 39 41 1) Including rental income on trading properties and the Group's share of rental income from joint ventures but excluding exceptional surrender premiums received in 2005 2) Profit before tax excluding exceptional gains and losses, property revaluation surpluses and the gains and losses on derivative instruments. Lease surrender premiums which are exceptional by virtue of their size are excluded from adjusted profit before tax. A reconciliation between profit before tax and adjusted profit before tax is provided on page 12. 3) Earnings per share based on adjusted profit before tax, and reflecting the dilutive effects of preference shares and shares held by the ESOP trust properties. 4) Tax charge, excluding deferred tax on valuation surpluses, as a percentage of adjusted profit before tax. 5) Net assets adjusted to add back deferred tax associated with investment properties. 6) NAV per share adjusted to add back deferred tax associated with investment properties and to reflect the dilution caused by preference shares and shares held in the ESOP. 7) Net debt as a percentage of shareholders' funds adjusted to add back deferred tax associated with investment properties and treating preference shares as equity. 8) Net debt as a percentage of the total property portfolio excluding joint ventures 9) Increase in the capital value of properties plus rental income 10) NAV growth plus dividends paid in the period. THE INVESTMENT PORTFOLIO - SUMMARY Gross Rental Valuation Valuation Valuation Total Property Initial Reversionary / Income H1 at Surplus Surplus Return Yield (over-renting) including 2006 30 Â£m % (ungeared)% vacant space % June 2006 Â£m UK Slough 34 1,334 88 7.1 9.8 5.3 13.9 S London& The 7 267 14 5.4 7.3 4.9 28.3 South North London 10 435 27 6.6 8.7 5.3 23.5 & The East Midlands& The 10 383 21 5.8 8.5 5.1 16.4 North West London 14 547 42 8.3 11.2 4.7 19.6 Thames Valley 13 522 28 5.6 8.4 5.3 10.4 & The West Total 88 3,488 220 6.7 9.4 5.2 16.7 Industrial 71 2,763 180 7.0 9.7 5.2 19.7 Office 13 496 27 5.7 8.3 5.8 4.4 Retail 4 229 13 6.0 8.3 3.4 7.5 Total 88 3,488 220 6.7 9.4 5.2 16.7 Continental Europe Industrial 8 203 7 3.9 8.2 7.9 23.1 Office 4 138 2 1.8 4.4 5.8 (2.7) Retail 1 15 1 3.6 6.2 12.9 0.4 Total 13 356 10 3.0 6.6 7.3 12.3 North America Office / R&D 26 669 23 3.5 11.5 7.8 4.2 Total 26 669 23 3.5 11.5 7.8 4.2 Group Total 127 4,513 253 5.9 9.5 5.6 13.6 Excl' Land / WIP(2) Land / WIP (2) - UK 372 (2) (0.6) - Continental Europe 33 (1) (2.9) - North America 287 18 6.6 TotalLand/ WIP (2) 692 15 2.2 Group Total (1) 127 5,205 268 5.4 8.7 4.9 13.6 (1) Excluding joint ventures (2) Buildings under construction are carried at cost, land is held at valuation INCOME QUALITY AND LEASE EXPIRIES 30 June 31 December 2006 2006 2007 2008 2009 2010 2011 Contracted rents as at Â£m Â£m Â£m Â£m Â£m Â£m Â£m Ignoring break clauses 289 287 298 304 305 290 278 Assuming all breaks exercised 289 275 280 279 268 248 226 The weighted average lease expiry excluding breaks is 11.9 years, 10.1 years including breaks (calculated by value of annual contracted rent per year and including pre-let developments and pre-contracted rents). RENTAL POTENTIAL Reversion to ERV ERV of vacant properties on occupied properties Â£m Â£m UK - Industrial 7.7 20.0 - Offices (4.2) 5.4 - Retail 0.5 0.0 USA (6.0) 8.4 Europe (0.2) 3.7 Total (2.2) 37.5 ANALYSIS OF LETTINGS AND SPACE RETURNED By Area 000's sq m By Rent(1) pa Â£m Six month to Six months to 30.06.06 30.06.05 30.06.06 30.06.05 30.06.06 Lettings Space Returned Lettings Space Returned UK - Lettings of new developments 20 11 1.7 - Existing vacant 71 50 4.7 - Licenses 7 6 0.2 Total UK 98 67 84 99 6.6 4.6 Continental Europe 87 11 55 10 3.9 2.2 North America 50 27 22 16 8.3 2.4 Total SEI 235 105 161 125 18.8 9.2 (1) Rent passing VACANCY ANALYSIS Headline 30.06.06 31.12.05 % % UK 10.8 10.9 Continental Europe 9.3 11.0 North America 17.0 19.5 Total 11.4 12.0 Calculation of Underlying UK Vacancy Recent acquisitions (Heywood, Woodside, Land Securities 15.1 15.0 Swap, Treforest) Completed development sites (less than 18 months) 55.5 45.7 Underlying UK Vacancy 7.4 8.1 DEVELOPMENT PIPELINE SUMMARY Space to be Land Current book Future Estimated total spend ERV built area value(3) spend (3)(5) (2) (2) (3) (3)(4) 000's sq m hectares Â£m Â£m Â£m Â£m Work in Progress UK 82 15 120 83 203 12 Continental Europe 101 13 8 21 29 3 North America 96 13 157 195 352 29 Total 279 41 285 299 584 44 Land Bank - Future Development UK 983 540 491 861 1,352 106 Continental Europe 1,227 206 99 496 596 41 North America 213 48 60 255 315 34 Total 2,423 794 650 1,612 2,263 181 Group total 2,702 836 935 1,911 2,847 225 (2) Including joint ventures on a 100% basis (3) Including the Group's share of joint ventures (4) Rent of Â£10m is currently passing on properties to be redeveloped and which are included within the development pipeline. (5) Estimated total spend comprises current book value plus all future expenditure including capitalised interest 2) OPERATING REVIEW BUSINESS SEGMENTS BY GEOGRAPHY UK There continues to be strong competition from investors seeking to acquire all types of property with much of the 6.7% valuation surplus seen in the UK due to yield compression, nonetheless rental values have risen by about 1%, in the first six months of 2006. Good progress has been made in securing new customers during a period of improved demand for industrial buildings. 98,490 sq m of new and existing space has been let, producing Â£6.6m of rent per annum or Â£2m incremental rent income net of rent lost for space returned. Lettings delivered have driven underlying vacancy levels further down from 8.1% to 7.4%. The underlying vacancy excludes developments completed within the last eighteen months and major estates acquired within the last two years - Heywood and Woodside, the Land Securities Swap and most recently Treforest - vacancies related to all these projects represent a significant business opportunity. 87% of the vacant buildings acquired under the Land Securities swap in 2004 have now either been let, sold or are under active negotiation. New tenancies signed during the period included deals with Jacobs (offices at Winnersh), Bibby Distribution (warehouse at Heywood), Agilent Technologies (warehouse at Winnersh) and The Modular Heating Group (warehouse at Basildon). Over a third of the lettings were to existing customers - underlining the value created from building long term relationships. The UK team also secured pre-lettings on 10,805 sq m of space which will produce a further Â£1.5m pa of income - a major part of this group of pre-lettings was the purpose built 7,222 sq m data centre for IX Europe on the Slough Trading Estate. During the first half of 2006, 87 rent reviews were agreed at a total rent of Â£11.2m (Â£78.3 per sq m) - this is in line with ERV and produced an uplift of Â£0.5m per annum compared with passing rents. Slough Heat & Power again achieved an operating profit with the Group recording a positive Â£0.5m net gain from utilities and gas, compared to a Â£1.0m loss for the first half of 2005. Capital recycling has continued apace, with Â£37m of property sold during the first half of the year and a further Â£110m of sales agreed during July. We acquired the Treforest Industrial Estate (94,380 sq m of business space) off market for Â£63m; in the two months since acquisition it has already delivered 4.5% capital growth (net of costs) and improved tenant service and continues to adopt a more pro-active approach to lettings. Indeed across all of the UK portfolio we have been rolling out new improved tenant service initiatives, including new business clubs for tenants, flexible leasing, improved signage and amenities generally, and a further tightening of security on our sites. As is evident from the stream of announcements detailed in the business highlights section below the HelioSlough joint venture has been very active in its big box distribution area of expertise and this joint venture is now profitable for SEI. Looking ahead it is predicted that challenging conditions for occupiers will continue to constrain rental levels and a more balanced investment market seems inevitable. Against this background the UK team is well placed to generate and convert opportunities to drive returns. The UK Property Portfolio - including IPD comparisons 39 basis points of further yield compression alongside good progress with the development programme, significant asset management and capital recycling delivered a valuation surplus of 6.7%. 1% of the 6.7% of capital growth in the portfolio was attributable to rental value growth in the region of 1% since December. The industrial core of SEI's portfolio (90% of the UK investment portfolio by space) significantly outperformed the IPD index - 7.0% for Slough Estates compared to 6.2% for the index. Generally based outside of the strong London market, Slough Estates' offices (6% of the portfolio by space) underperformed the index (5.7% compared to 9.0%). Slough Estates' small retail warehouse business strongly outperformed IPD - 8.9% for Slough Estates compared to 6.4% for the index. Continental Europe An excellent first half performance with the acquisitions of the end of 2005 and in early 2006 now being successfully integrated with existing operations. We are pleased to have retained and strengthened the teams within the businesses we acquired. They are already making a significant contribution - having swiftly secured some very strong letting results. Overall lettings of over 183,000 sq m were delivered (including pre-lets) - these lettings were in part related to the acquisitions but were also driven by marketing successes and from some modest improvements in the economies we operate in. Rental conditions however as yet remain unchanged - that is relatively flat - in our major markets. With the level of takebacks stable, and with increasing demand from occupiers, vacancy levels have decreased significantly - from 11.0% to 9.3% in the investment property portfolio. In addition to strong new lettings across the board, our French team in particular also secured excellent levels of renewals. In addition to the completion of the acquisitions of assets from Grontmij in Central Europe and from KarstadtQuelle in Germany, we announced the acquisition of a 30hectare logistics portfolio from ThyssenKrupp Group and although yields have generally compressed further we continue to see attractive opportunities. In terms of the outlook although rental levels remain generally unchanged in our markets we continue to see increased occupier demand and are generating high levels of enquiries in most locations. North America In the first half of 2006 SEUSA negotiated a major letting to a large biotech company at Britannia Oyster Point II in South San Francisco - 7,500 sq m for an existing vacant facility and a 23,000 sq m pre-let securing the development of a $170m facility. This deal builds on an excellent relationship with this tenant - relationships such as this have been the bedrock of the SEUSA biotech franchise - once this project is completed this tenant will be leasing over 67,000 sq m from SEI in California. A total of 50,000 sq m of lettings (excluding pre-lettings) has driven vacancy levels down from 20% to 17% - but still leaving a significant rental growth opportunity. Included in the 50,000 sq m, Genentech took delivery of another 21,000 sq m of space - further consolidating another key SEUSA client relationship - with a further 31,000 sq m of space to complete construction in the second half of this year. 6,000 sq m of lettings to OncoMed and Cordis at Shoreline & Seaport (acquired last year) is strategically significant as it affirms SEUSA's move into this new location in the San Francisco Peninsula. The U.S. economic outlook suggests slower overall growth however the market dynamics of our biotechnology real estate industry in California position it well to continue to expand - creating further opportunities for SEUSA to fill existing vacant space and to replenish its development pipeline. Activity levels in the Bay Area have been very healthy over the past nine months and relatively sluggish in San Diego County. Group Development Programme The overall development pipeline has been increased again and now stands at 2.7m sq m. We completed 33,000 sq m of the development programme during the first half of the year - of which 67% has been either pre-let or sold. At the end of the period 279,000 sq m was under construction - of which 76% has been either pre-let or sold. In the twelve months following the end of June 2006 over 650,000 sq m of space is scheduled to start construction. The current development pipeline currently equates to an estimated total future development expenditure of Â£1.9bn, with Â£154m spent in the first half of 2006, Â£232m is expected to be spent in the second half of 2006 and a total of Â£445m planned for 2007 - of which Â£147m has already been committed. When fully built out the current development pipeline would generate Â£215m of incremental rental income - after allowing for current passing rent of Â£10m on properties which are to be redeveloped. Of this amount Â£37m has already been contracted in the form of pre-lets. Â£46m of rental income relates to properties which are currently designated as trading stock. Group Business Highlights in 2006 Acquisition of a development company in Central Europe. Announced the completion of the â‚¬19.1 million acquisition of GREI (Grontmij Real Estate International), the Central European property development operations of Grontmij - a leading European engineering firm. The acquisition gave SEI an immediate presence in Poland, the Czech Republic and Hungary with development teams already in place and sites ready to develop. Disposal of business space at Centennial Park, Elstree. Disposed of four office buildings totalling 6,285 sq m at Centennial Business Park in Elstree for Â£ 16.35 million. This transaction was part of the active acquisition and disposal programme - in line with Slough's strategy of trading stock and recycling capital across the UK portfolio. Remaining land on the site represents an excellent development opportunity within the M25. Joint venture to develop major office scheme in Paris. Announced a 50:50 joint venture agreement with Capital & Continental to develop the 26,500 sq m Portes de France office scheme in St Denis, overlooking the Stade de France, Paris. The highly specified scheme will provide two interconnected office buildings either side of the A86 motorway. â‚¬12.3m disposal in Germany. SEI announced the disposal of a light industrial property in Hamburg to Halverton for a gross disposal price of â‚¬12.3 million, resulting in a profit of â‚¬2.5m. The property - part of the Group's trading portfolio in Germany - provides a total of 12,368 sq m of light industrial accommodation and is let to 19 tenants. Joint venture acquisition in Belgium. In a 50:50 joint venture with KBC, SEI announced the acquisition of two light industrial properties in the Brussels periphery with strong medium and long-term redevelopment potential for a gross purchase price of â‚¬5.25 million, reflecting a net initial yield of 8.4%. The properties provide a total of 5,640sq m of office and light industrial accommodation and are let to nine tenants. They currently produce rental income of â‚¬441,000 per annum. HelioSlough disposal for Â£10.2m. HelioSlough (the joint venture between Slough Estates plc and Helios Properties plc) let the final unit at its Traxpark development in Doncaster, South Yorkshire and sold its Traxpark investment to a client of Morley Fund Management for Â£10.2 million, reflecting a net initial yield of 6%. The 16 hectare Traxpark development comprises 58,153 sq m. HelioSlough Â£17.7m acquisition of Lymedale Cross Business Park. HelioSlough purchased Lymedale Cross Business Park, Stoke, Staffordshire for Â£17.7 million. The 17.28 hectare site comprises 46,450 sq m of predominantly industrial space, producing an annual rental income of over Â£840,000. Detailed planning consent has been granted for a further 49,887 sq m. The deal also enables an immediate pre-let of 9,290 sq m of new and existing warehouse/office space to Spode Porcelain & Fine China Company, adding circa Â£450,000 to the annual rental income. This acquisition therefore offers existing income along with immediate development opportunities. HelioSlough acquisition. HelioSlough secured property on a former BAe Systems site in Chorley, Lancashire - for a new 120,770 sq m industrial/distribution hub to serve the North West. HelioSlough has made an initial purchase of 5.4 hectares for Â£3.3m. HelioSlough has contracted on further land which can be drawn down, up to a total of 30 hectares. Outline planning consent already exists for the development and HelioSlough plans to start work on two buildings of 18,580 sq m and 9,290 sq m in the summer. The site is strategically located, close to the M6 and the North West's major conurbations, giving the development the potential to be one of the most significant distribution hubs in the region. SEI announced an agreement to acquire a 30 hectare logistics portfolio from ThyssenKrupp. SEI agreed the acquisition of a 30 hectare logistics site from the ThyssenKrupp Group, at a phased purchase price of â‚¬19.05m. This prime site is to the west of DÃ¼sseldorf, in close proximity to the airport, and has direct access to the A44 motorway. The site will also be connected to the railway network. It is one of the very few viable sites for logistics development close to the city of DÃ¼sseldorf. SEI will develop 117,000 sq m of light industrial and logistics accommodation in 6 buildings in a low density environmentally sensitive scheme. The delivery of the first phase is anticipated for 2007. The transaction increased SEI's Continental European logistics network and enhanced SEI's ability to offer international solutions to pan European logisticians. Â£25.9m disposals at Cambridge Research Park. Slough Estates completed the sale of three buildings at its Cambridge Research Park site to Zurich Assurance, for Â£25.9 million. The three office buildings totalled 11,500 sq m and were within a prime business park setting, providing rental income of Â£1.9m per annum. Slough Estates retained the remaining 7,461 sq m of business space as well as nearly 11 hectares of development land. This represents a major development opportunity within the Cambridgeshire area and there is already interest from a number of parties. The attractiveness of Cambridge Research Park was improved with the introduction of the "easi-lease" managed workspace concept - a range of small, fully fitted out office suites available on flexible terms. This transaction was another example of the active acquisition and disposal capital recycling programme. Â£63m acquisition of Treforest Industrial Estate. Slough Estates completed the off-market purchase of the holding entity of the Treforest Industrial Estate in Cardiff, Wales for Â£63 million. This was SEI's first entry into the Welsh market and was in line with its strategy to acquire large business parks in strategic locations with good quality revenue streams and strong development potential. Following this acquisition SEI owns six of the largest industrial estates in the UK; the others being the Slough Trading Estate, Heywood Distribution Park in Manchester, Woodside in Dunstable, Winnersh near Reading and Kings Norton, near Birmingham. Treforest Estate comprises 53 hectares with 4 hectares of development land and is located adjacent to the A470 Cardiff to Merthyr Tydfil dual carriageway just north of Cardiff. It has been an established trading estate since 1936 and is just north of junction 32 on the M4. With 94,000 sq m of business space, the acquisition provides a solid foundation for growth in what is a strong market with excellent prospects over the coming years. Outsourcing of UK construction activities. Outsourced the company's UK construction activities, reflecting best practice in the property sector. Slough's construction activities in Continental Europe and in the USA were already outsourced. This marked a further step in focusing the company on its core skills - on those areas where we are best positioned to add value - maintaining the pace of change and further increasing the competitiveness of Slough's business. 3) REAL ESTATE INVESTMENT TRUSTS ("REITs") The Group welcomes the introduction of REITs in the UK. Whilst there are still some regulations to be finalised, we believe the legislative framework contained in the 2006 Finance Act represents a very workable and sensible package of measures which reflect well on the collaborative approach taken both by the property industry and the government. Slough Estates is well positioned for possible REIT conversion and we currently expect to elect for REIT status with effect from 1 January 2007, subject to publication of the final regulations and an extraordinary general meeting in the fourth quarter of the year. Both the Company and the Group satisfy the various conditions for entry and we believe that ongoing compliance with the requirements of the REIT regime will be achievable for Slough. Based upon 30 June 2006 values, the 2% conversion charge would amount to approximately Â£78m. Against this, there are clear corporate benefits to SEI from REIT conversion which include: * The elimination of the contingent capital gains tax liability on the Â£3.9bn UK investment portfolio; this will provide more flexibility to undertake asset disposals and support the Group's approach to proactively recycle capital. The contingent deferred tax liability amounted to Â£460 million at 30 June 2006 * All UK property rental income, less related expenses, will become exempt from corporation tax * Development gains on UK investment property will become tax exempt, subject to each property being held for at least three years following completion. * The facilitation of an efficient structuring of SEI's international activities. Whilst each shareholder's position will differ according to their own tax situation, we also believe that most types of shareholder will benefit from Slough's conversion, taking into account the corporation tax saved and the effects of the withholding tax on the property income distribution. Although there appear to be significant benefits from REIT conversion, to both the Group and its shareholders, it is important to note that such an election, if made, would be primarily a tax matter. The legal form and structure of the Group will not necessarily change upon conversion to REIT status and the main strategy of the Group will continue to be the maximisation of total returns from the acquisition, development, management and sale of flexible business space. As a REIT the main strategy of the Group will continue to be the maximisation of total returns. The Group recognises that in a REIT environment there is likely to be an increased shareholder focus on earnings and dividends and acknowledges the general market expectation of higher dividend payments. The company's future dividend policy will be a central area of importance as the board reaches its final conclusion on REIT conversion. We believe that Slough Estates will represent an attractive REIT investment because: * We are strongly concentrated on a specific asset category (flexible business space) in locations where we have deep expertise and knowledge * We are focused on our customers, we have an excellent contracted income profile (rent roll of Â£289m with 11.9 years weighted average lease expiry) and a diversified and broad spread of customers (over 1,700) * We manage assets actively to add value (strong letting capability, redevelopment, conversion to higher value uses) and we sell assets where there is little scope to add further value * We have a major development programme driving growth in all three of our geographies * We are financially strong and we expect to operate with a tax efficient structure. 4) FINANCIAL REVIEW Income Statement Profit before tax Profit before tax for the six months to 30 June 2006 was Â£338.1m, an increase of 184% over the first half of 2005, driven mainly by a strong revaluation surplus. Adjusted profit before tax was Â£68.1m, an increase of 22%. This improvement mainly reflects increased net rental income attributable to our strong letting performance, development completions and from property acquisitions completed in 2005 and 2006. Adjusted profit before tax has been arrived at by following the European Public Real Estates Association's (EPRA) Best Practices Policy Recommendations (January 2006) and by making other adjustments to exclude exceptional gains and losses not related to the Group's underlying property activities, as follows: Six months ended Six months ended 30 June 2006 30 June 2005 Adjusted EPRA Exceptional Total Adjusted EPRA Exceptional Total profit adjustments items profit profit adjustments items profit before tax before tax before tax before tax Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Net rental income - from investment properties 119.7 - 119.7 102.6 - 36.6 139.2 Net income from - trading properties 2.5 - 2.5 7.1 - 17.0 24.1 Net (loss)/gain - from utilities and gas 0.5 - 0.5 (1.0) - - (1.0) Other investment - income 5.7 - 5.7 3.3 - - 3.3 Administration - expenses (10.7) - (10.7) (10.0) - - (10.0) Loss on sale of - investment properties - (0.8) (0.8) - (3.0) - (3.0) Net valuation gains - 262.6 - 262.6 - 137.6 137.6 Operating income 117.7 261.8 379.5 102.0 134.6 53.6 290.2 Net finance costs (50.9) 5.6 - (45.3) (49.3) (1.3) (125.6) (176.2) Share of profit of - joint ventures' 1.3 2.6 3.9 3.1 1.9 5.0 Profit before tax 68.1 270.0 - 338.1 55.8 135.2 (72.0) 119.0 Net rental income, excluding the exceptional surrender premium received in 2005, increased by 15.9% from Â£108.3m to Â£125.5m, comprised as follows: Six months ended 30 June 2006 2005 Â£m Â£m Rental income from investment properties 134.2 153.7 Less exceptional surrender premiums - 36.6 134.2 117.1 Property operating costs less recharges to tenants and other property income (14.5) (14.5) Net rental income from investment properties 119.7 102.6 Net rental income from trading properties 2.3 1.2 Share of net rental income of joint ventures 3.5 4.5 Underlying net rental income 125.5 108.3 The 2005 exceptional surrender premium of Â£36.6m was received from Pfizer to buy-out its obligations in respect of the Sugen campus in South San Francisco. The movement in underlying net rental income is analysed in the table below. Â£m Net rental income - first half of 2005 108.3 Acquisitions 18.2 New developments 4.3 Other new lettings, rent reviews & other 6.1 Space returned (5.0) Disposals (6.4) Net rental income - first half of 2006 125.5 Net finance costs for the period, although broadly unchanged with the first half of 2005, benefited by approximately Â£4m as a result of the bond refinancing undertaken in June 2005 and Â£2.5m due to the conversion of all the Group's outstanding preference shares in the first half of 2006. Exceptional items and valuation gains and losses Under IFRS, revaluation gains on investment properties are included within the Income Statement and the equivalent items in respect of our joint venture companies are included within the group's share of results of such entities. As recommended by EPRA, such valuation gains have been excluded from adjusted profits before tax. Similarly, the Â£0.8m (2005: Â£3.0m) losses on the sale of investment properties are excluded from adjusted earnings, as is the 2005 surplus on the disposal of the group's residential leisure development at Quail West, Florida. Whilst the latter property was classified as a trading activity, it was not part of the core business and, accordingly, the profit on disposal of that asset is excluded from our underlying performance measures. Taxation The tax charge for the year can be analysed as follows: Period ended 30 June 2006 2005 Â£m % Â£m % Underlying tax charge on adjusted profit before tax: - current tax 11.7 17 11.0 20 - deferred tax 2.0 3 1.7 3 13.7 20 12.7 23 Tax relating to exceptional items and valuation gains/losses 80.6 30 33.4 53 Less amounts included above in respect of joint ventures - - (0.5) 10 Total Group tax charge 94.3 28 45.6 38 The underlying tax charge for the period as a percentage of adjusted profit before tax was 20% (2005: 23%), with the first half of 2006 benefiting from increased capital allowances as compared to the previous period. The tax relating to exceptional and valuation gain/losses was 30% (2005: 53%). The high rate in 2005 was primarily due to exceptional gains on disposals arising in the USA which attracted substantial tax costs. Dividends The key dates for dividend payments are as follows: - ex-dividend date 6 September 2006 - record date 8 September 2006 - payment date 6 October 2006 Balance Sheet Net Assets per Share Diluted adjusted net assets per share at 30 June 2006, calculated in accordance with the EPRA guidelines, were 730.8p, an increase of 7.4% over the previous year end. The increase is analysed in the following table: Pence Â£m per share Adjusted diluted equity attributable to shareholders 31 December 2005 3,197.3 680.4 Adjusted profit after tax 54.4 11.6 Property valuation gains (including joint ventures) 270.4 57.5 Currency translation differences (34.7) (7.7) Ordinary dividends paid (51.6) (11.0) Actuarial gain on pension scheme, net of tax 5.9 1.3 Fair value of derivatives 5.6 1.2 Increase in value of available for sale investments 2.1 0.4 Loss on sale of investment properties (0.8) (0.2) Other items (12.6) (2.7) Adjusted diluted equity attributable to shareholders 30 June 2006 3,436.0 730.8 Property Portfolio The value of the Group's property portfolio increased by Â£421.8m (8%) during the first six months of 2006 to Â£5,559.6, analysed as follows: 30 June 2006 31 December 2005 Â£m Â£m Investment properties - completed properties 4,381.3 4,304.7 - under development 232.9 135.4 - reclassified as assets held for sale 108.3 - Development properties 482.6 436.3 Investment and development properties 5,205.1 4,876.4 Trading Properties - completed properties 105.8 61.4 - properties under development 96.0 62.2 Share of properties held within joint ventures - investment properties 114.3 113.5 - trading properties 38.4 24.3 Total property portfolio, including share of joint ventures 5,559.6 5,137.8 This increase in the value of the portfolio was comprised of: Â£m Additions 267.7 Disposals (48.6) Valuation surpluses - included in Income Statement 262.6 - included in SORIE* 5.2 - joint ventures 2.6 Currency translation differences (67.7) Change in total portfolio including assets held for sale 421.8 *Statement of Recognised Income and Expense Cash Flow A summary of the cash flow for the period is as follows: Six months ended 30 June 2006 2005 Â£m Â£m Cash flow from operations 81.8 154.1 Finance costs (net) (59.9) (58.5) Dividends received from joint ventures 31.6 2.8 Tax paid (net) (6.6) (49.8) Additional pension scheme contributions (1.0) (15.0) Other 1.3 (3.2) Free cash flow 47.2 30.4 Capital expenditure (191.3) (257.0) Property sales (including joint ventures) 51.7 17.9 Cash cost of bond exchange - (40.8) Ordinary dividends (51.6) (41.6) Other items 7.8 (3.6) Net funds flow (136.2) (294.7) Investments in term deposits - 180.6 Net increase in borrowings 72.7 71.2 Net cash outflow (63.5) (42.9) Opening cash and cash equivalents 166.9 218.1 Exchange rate changes (0.3) (0.1) Closing cash and cash equivalents 103.1 175.1 Cash flow from operations for the first half of 2006 were Â£81.8m, a decrease of 47% compared to the first half of 2005. The reduction was mainly as a result of the exceptional surrender premium and significant trading property sales proceeds received in the first half of 2005. Dividends from joint ventures amounted to Â£31.6m, Â£28.8m higher than 2005 due to the refinancing of the Group's joint venture with Tesco, Shopping Centres Limited, which facilitated the payment of a dividend. Tax paid of Â£6.6m was much lower than in 2005 (Â£ 49.8m) as a result of one off payments in the USA in 2005 for profits on the 2004 sale of the Pfizer campus, the Quail West profit and the Sugen surrender premium. In 2005, the Company agreed to make a one-off UK pension contribution of Â£15m and to accelerate the elimination of the remaining UK pension scheme deficit. Capital expenditure of Â£191.3m was Â£65.7m lower than 2005 mainly due to higher acquisition expenditure in 2005. Development expenditure for the period, including expenditure on trading properties, amounted to Â£154m and this is expected to increase to approximately Â£386m for the full year. Property sales in the period generated proceeds of Â£51.7m. After the payment of dividends, there was a net 'funds outflow' of Â£136.2m (2005: Â£294.7m). Allowing for movements in borrowings, the net cash outflow for the period was Â£63.5m (2005: Â£42.9m). Financing At 30 June 2006, the Group's borrowingstotalled Â£2,185.2 million. Cash balances totalled Â£105.4 million resulting in reported net debt of Â£2,079.8 million (2005: Â£2,092.3m). The weighted average maturity of the debt portfolio was 11.4 years. Unsecured borrowings represent 96% of gross debt at the half year end. Secured debttotalled Â£77.8 million being certain historical mortgage debt domiciled in the Group's overseas operations. Â£1,626.2m of debt is domiciled in the UK, is unsecured and is issued by the Parent Company without any supporting up-stream guarantees. Â£481.2 million of debt is unsecured and is issued by subsidiary companies located overseas. On 22 March the Company, for the first time, had the opportunity to issue a redemption notice in respect of the 8.25p convertible redeemable preference shares 2006-2011. Such a notice was indeed served and, as anticipated, virtually all holders instead exercised their conversion options at 37.0793 new ordinary shares for each 100 preference shares. After enforcing conversion on those holders that did not specifically request redemption 99.9% of the preference shares were converted to 47,053,908 new 25 pence ordinary shares. As a result of this conversion Group Net Debt was reduced by Â£107.7million compared to year end 2005. Reported financial gearing was 76% (2005: 86%) or 61% (2005: 62%) on an adjusted basis after adding back deferred tax of Â£713.3 million. The loan to value ratio (net debt divided by property assets) was 38% (2005: 42%). Interest cover based upon profit before interest and tax and adjusted net finance costs was 2.2 times (2005: 2.2 times), or 1.94 times (2005: 2.0 times) based upon recurring income and allowing for the inclusion of capitalised interest. The market value of borrowings at the end of December 2005 was Â£54.3 million higher than the book value, equivalent, after tax relief, to a reduction in net asset value of 12 pence per share or 1.6%. Funds availability at 30 Junetotalled Â£771.7 million, comprised of Â£105.4 million of cash deposits and Â£666.3 million of undrawn bank facilities. Only Â£ 25 million of this total is uncommitted overdraft lines with the balance of undrawn facilities being fully committed and with Â£507.6 million remaining available to 2010/11. In April a new â‚¬200 million 5 year committed revolving credit facility was closed on behalf of Slough Commercial Properties GmbH to finance the acquisition cost of the KarstadtQuelle portfolio in Germany and to provide some additional finance for development purposes. In July a new â‚¬100 million 5 year committed revolving credit facility was closed on behalf of Slough BV and its subsidiaries to provide finance for the Group's new operations in Central Europe following the takeover of Grontmij Real Estate International at the end of 2005. Interest rate exposure As at 30 June 2006 87% (2005: 87%) of the debt portfolio attracted a fixed or capped rate of interest at a weighted average rate of 6.1% (2005: 6.2%). Much of this debt is in the form of fixed rate debt issues raised through Sterling Eurobonds and US dollar private placements. Such fixed rate debt issues are held in the balance sheet atamortised cost. Interest rate swaps, caps, collars and forward rate agreements are also used to convert variable rate bank debt to fixed rate. The 13% of debt remaining at a variable rate of interest brought the overall weighted average cost of debt down to 5.8% (2005 : 5.8%). Foreign currency translation exposure The Group's main currency exposure is the translation risk associated with converting net currency assets back into sterling in the Group consolidated accounts at each balance sheet date. At 30 June 2006, Â£519 million or 37% of foreign currency denominated net assets were exposed to currency movements. In July 2006, $500m was sold at 1.85 to increase the level of US dollar denominated liabilities. Following that transaction, the level of aggregate exposure to exchange rates was reduced to Â£248 million. Independent review report to Slough Estates plc Introduction We have been instructed by the company to review the financial information for the six months ended 30 June 2006 which comprises the consolidated interim balance sheet as at 30 June 2006 and the related consolidated interim statements of income, cash flows and changes in shareholders' equity for the six months then ended and related notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The Listing Rules of the Financial Services Authority require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. This interim report has been prepared in accordance with the basis set out in the note on page 33. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/ 4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the disclosed accounting policies have been applied. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance. Accordingly we do not express an audit opinion on the financial information. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Listing Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2006. PricewaterhouseCoopers LLP, Chartered Accountants Reading 22 August 2006 Notes: (a) The maintenance and integrity of the Slough Estates plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions. Slough Estates plc Group income statement For the six months ended 30 June 2006 Half year Half year Year to 31 to to December 2005 30 June 30 June 2006 2005 Note Â£m Â£m Â£m Revenue 2 169.1 232.5 405.2 Rental income from investment properties 141.2 120.8 259.2 Surrender premiums - 38.1 42.6 Interest received on finance lease assets 0.4 0.4 0.9 Property operating expenses 1 (21.9) (20.1) (45.1) Net rental income 119.7 139.2 257.6 Proceeds on sale of trading properties 1.6 49.0 57.3 Carrying value of trading properties sold (1.4) (26.1) (34.2) Trading property rental income 4.3 1.6 3.3 Property operating expenses relating to trading properties (2.0) (0.4) (0.6) Net income from trading properties 2.5 24.1 25.8 Income from sale of utilities and gas 21.6 22.6 41.9 Cost of sales (21.1) (23.6) (42.8) Gain from sale of gas interests - - 99.7 Net income/(loss) from utilities and gas 0.5 (1.0) 98.8 Other investment income 5.7 3.3 5.5 Administration expenses 1 (10.7) (10.0) (20.7) (Loss)/gain on disposal of property assets (0.8) (3.0) 14.4 Gain on disposal of joint ventures - - 7.8 Net valuation gains 3 262.6 137.6 409.1 Operating income 379.5 290.2 798.3 Finance costs 5 (69.2) (58.3) (124.9) Exceptional cost of refinancing 5 - (125.6) (126.0) (69.2) (183.9) (250.9) Finance income 6 23.9 7.7 21.4 Share of profit from joint ventures and associate after tax 4 3.9 5.0 13.5 Profit before tax 338.1 119.0 582.3 Taxation - current 7 (5.1) (13.5) (44.4) - deferred 7 (89.2) (32.1) (149.8) (94.3) (45.6) (194.2) Profit for the period 243.8 73.4 388.1 Attributable to equity shareholders 242.3 71.6 385.1 Attributable to minority interests 1.5 1.8 3.0 243.8 73.4 388.1 Basic earnings per ordinary share 9 55.2p 17.1p 91.7p Diluted earnings per ordinary share 9 52.5p 16.7p 85.0p Slough Estates plc Statement of recognised income and expense (SORIE) For the six months ended 30 June 2006 Half year Half year Year to to 30 to 30 31 June June December 2006 2005 2005 Note Â£m Â£m Â£m Revaluation gains and losses on properties in the course of development 3 5.2 7.5 48.4 Exchange differences arising on translation of overseas operations (23.3) 14.7 25.4 Actuarial gains/(losses) on defined benefit pension schemes 8.2 (3.0) (4.0) Increase in value of available-for-sale investments 2.1 - 10.8 Tax on items taken directly to equity (4.1) (5.7) (25.4) Net (loss)/gain recognised directly in equity (11.9) 13.5 55.2 Transfer to income statement on sale of available-for-sale investments (2.7) - (1.1) Profit for the period 243.8 73.4 388.1 Total recognised income and expense for the period 229.2 86.9 442.2 Adoption of IAS 39 - (103.6) (103.9) Total recognised income and expense for the period after restatement 229.2 (16.7) 338.3 Attributable to - equity shareholders 227.7 (18.5) 334.8 - minority interests 1.5 1.8 3.5 229.2 (16.7) 338.3 Statement of changes in equity For the six months ended 30 June 2006 Half year Half year Year to to 30 to 30 31 June June December 2006 2005 2005 Note Â£m Â£m Â£m Shareholders' funds at 1 January 2,440.4 2,165.1 2,165.1 Preference share conversions 106.5 7.1 7.1 Issue of ordinary shares 3.1 1.4 1.5 Fair value of share based payments 0.6 - 2.6 Purchase of shares in ESOP (4.0) (2.6) (2.6) Issue of shares in ESOP - 0.9 0.9 2,546.6 2,171.9 2,174.6 Total recognised income and expense for the period 227.7 (18.5) 334.8 Ordinary dividends paid 8 (51.6) (41.6) (69.0) Shareholders' funds at end of period 17 2,722.7 2,111.8 2,440.4 Slough Estates plc Group balance sheet 30 June 30 June 31 December As at 30 June 2006 2006 2005 2005 Note Â£m Â£m Â£m Non-current assets Goodwill 10 0.7 0.6 0.7 Investment properties 11 4,614.2 3,816.8 4,440.1 Development and owner occupied properties 12 482.6 337.4 436.3 Plant and equipment 13 45.7 44.2 45.0 Finance lease receivables 10.8 10.8 10.9 Available-for-sale investments 45.6 44.5 54.7 Investments in joint ventures and associate 14 79.0 94.1 100.1 Deferred tax asset - 0.3 - Total non-current assets 5,278.6 4,348.7 5,087.8 Current assets Inventories 1.4 1.8 1.6 Trading properties 201.8 104.7 123.6 Finance lease receivables 0.1 0.1 0.1 Tax recoverable 8.4 - 8.1 Trade and other receivables 114.1 121.9 162.8 Non-current assets classified as held for sale 108.3 87.3 - Cash and cash equivalents 105.4 178.3 172.6 Total current assets 539.5 494.1 468.8 Total assets 5,818.1 4,842.8 5,556.6 Non-current liabilities Borrowings 15 2,137.4 1,634.6 2,250.2 Obligations under finance leases 0.4 0.5 0.5 Deferred tax provision 16 715.7 488.6 635.9 Provisions for liabilities and charges 16 19.7 30.5 29.6 Other payables 2.6 14.8 7.1 Total non-current liabilities 2,875.8 2,169.0 2,923.3 Current liabilities Borrowings 15 47.8 331.1 14.7 Liabilities relating to non-current assets held for sale - 55.0 - Tax liabilities 6.4 9.4 7.2 Trade and other payables 156.1 148.0 162.4 Total current liabilities 210.3 543.5 184.3 Total liabilities 3,086.1 2,712.5 3,107.6 Net assets 2,732.0 2,130.3 2,449.0 Equity Share capital 117.8 105.7 137.5 Share premium account 364.7 250.3 256.8 Own shares held (10.3) (6.9) (6.9) Other reserves 1,661.6 1,283.2 1,471.6 Revenue reserves 588.9 479.5 581.4 Total shareholders' equity 2,722.7 2,111.8 2,440.4 Minority interests 9.3 18.5 8.6 Total equity 2,732.0 2,130.3 2,449.0 Net assets per ordinary share Basic 9 581p 501p 579p Diluted 9 579p 472p 542p Slough Estates plc Group cash flow statement For the six months ended 30 June 2006 Half year Half year Year to 31 to 30 June to 30 June December 2006 2005 2005 Note Â£m Â£m Â£m Cash inflow generated from operations 18 81.8 154.1 237.3 Interest received on deposits 5.9 6.2 10.3 Dividends received from joint ventures and associate 31.6 2.8 2.8 Dividends received from available-for-sale investments 1.8 0.7 1.5 Interest paid (including penalty on bond repayment in 2005) (60.6) (99.9) (156.7) Dividend paid to preference shareholders (5.2) (5.6) (10.8) Minority dividends paid (0.5) (3.9) (4.2) Tax paid (6.6) (49.8) (91.8) Funding pension scheme deficit (1.0) (15.0) (16.2) Net cash inflow/(outflow) from operating activities 47.2 (10.4) (27.8) Cash flows from investing activities Purchase of subsidiary undertakings - - (9.3) Purchase and development of investment properties (125.5) (189.8) (587.4) Proceeds from sale of investment properties 51.6 14.2 118.6 Amount received from property swap - - 0.8 Legal costs paid in relation to property swap - (0.6) (0.6) Purchase of property, plant and equipment (60.8) (66.6) (142.4) Proceeds from sale of property, plant and equipment 0.1 3.7 7.6 Purchase of available-for-sale investments (2.7) (2.7) (11.9) Proceeds from disposal of available-for-sale investments 11.9 4.7 16.4 Proceeds from the disposal of gas interests - - 110.5 Repayment of loans by purchaser of gas interests - - 12.3 Investment and loans to joint ventures and associate (5.0) (5.3) (16.5) Investment in term deposits - 180.6 185.6 Proceeds from the disposal of an investment in joint venture - - 20.8 Net cash used in investing activities (130.4) (61.8) (295.5) Cash flows from financing activities Dividends paid to ordinary shareholders (51.6) (41.6) (69.0) Net increase in borrowings 72.7 71.2 340.0 Proceeds from the issue of ordinary shares 18 2.6 0.7 1.5 Purchase of own shares (4.0) (1.0) (1.0) Net cash from financing activities 19.7 29.3 271.5 Net decrease in cash and cash equivalents (63.5) (42.9) (51.8) Cash and cash equivalents at the beginning of the period 166.9 218.1 218.1 Effect of foreign exchange rate changes (0.3) (0.1) 0.6 Cash and cash equivalents at the end of the period 103.1 175.1 166.9 Cash and cash equivalents per balance sheet 105.4 178.3 172.6 Bank overdrafts (2.3) (3.2) (5.7) Cash and cash equivalents per cash flow 103.1 175.1 166.9 Slough Estates plc Notes to the financial statements Slough Estates plc ("the Group") is a limited company incorporated in England. These financial statements are presented in millions and in sterling since that is the currency in which the majority of the Group's transactions are denominated. The results for the year ended 31 December 2005 have been audited whilst the results for the six months ended 30 June 2005 and 30 June 2006 are unaudited. The Interim Report is unaudited and does not constitute statutory accounts within the meaning of S240 of the Companies Act 1985. The auditors have carried out a review of the 30 June 2006 financial information and their report is set out on page 28. The financial information for the year to 31 December 2005 are an abridged statement of the financial statements for that year which were prepared under International Financial Reporting Standards (IFRS) and were delivered to the Registrar of Companies. The auditors' opinion on these accounts was unqualified and did not contain a statement made under S237(2) or S237(3) of the Companies Act 1985. The accounting policies used for the audited financial statements at 31 December 2005 have been used in the preparation of the interim financial statements. The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may ultimately differ from these estimates. Slough Estates plc Notes to the financial statements 1. Segmental analysis For management purposes the Group's primary reporting format is the geographic location of its properties as set out below. Geographical segments United Kingdom Continental North America* Total Europe Half Half Half Half Half Half Half Half year year Year year year Year year year Year year year Year 2006 2005 2005 2006 2005 2005 2006 2005 2005 2006 2005 2005 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Segment revenue 113.7 106.2 222.8 19.6 33.7 55.3 35.8 92.6 127.1 169.1 232.5 405.2 Net rental income 79.0 73.1 154.7 12.4 10.0 20.1 28.3 56.1 82.8 119.7 139.2 257.6 Net income from trading properties - 0.6 0.6 2.5 6.5 9.1 - 17.0 16.1 2.5 24.1 25.8 Net income/(loss) from utilities and gas 0.5 0.8 1.2 - - - - (1.8) 97.6 0.5 (1.0) 98.8 Other investment income 2.9 3.6 4.0 - - - 2.8 (0.3) 1.5 5.7 3.3 5.5 Administration expenses (7.1) (7.1) (15.0) (1.8) (1.4) (2.7) (1.8) (1.5) (3.0) (10.7) (10.0) (20.7) (Loss)/gain on disposal of property assets (0.9) (2.6) (2.8) 0.1 - - - (0.4) 17.2 (0.8) (3.0) 14.4 Gain on disposal of joint Ventures - - - - - - - - 7.8 - - 7.8 Net valuation gains 213.5 122.3 314.9 9.3 4.6 8.1 39.8 10.7 86.1 262.6 137.6 409.1 Operating income 287.9 190.7 457.6 22.5 19.7 34.6 69.1 79.8 306.1 379.5 290.2 798.3 Net finance expense (35.9) (39.2) (81.1) (4.5) (3.3) (6.2) (4.9) (8.1) (16.2) (45.3) (50.6) (103.5) Exceptional cost of refinancing - (125.6) (126.0) - - - - - - - (125.6) (126.0) Share of profit/(loss) from joint ventures and associate after tax 2.8 1.6 8.3 0.1 (0.1) (0.2) 1.0 3.5 5.4 3.9 5.0 13.5 Profit before tax 254.8 27.5 258.8 18.1 16.3 28.2 65.2 75.2 295.3 338.1 119.0 582.3 Taxation (94.3) (45.6) (194.2) Net profit after tax 243.8 73.4 388.1 * includes the 2005 results of Canada and gas interests in Australia. As at 31 December 2005, the Group changed the method by which certain costs are allocated between 'property operating expenses' and 'administration expenses' to give a fairer presentation of the nature of the underlying costs. The change was made in the 2005 annual financial statements. The same basis of allocation has been used in respect of the six months to 30 June 2006 and, accordingly, to enable comparability, the amounts previously presented for the six months to 30 June 2005 have been restated on the same basis. The effect of the change has been to increase administration expenses and reduce property operating expenses by Â£2.3 million in the six months ended 30 June 2005. This change has had no effect on profit before tax or earnings per share. 2. Revenue Half year Half year to 30 June Year to 31 December to 30 June 2005 2005 2006 Â£m Â£m Â£m Rental income from investment properties 133.8 115.2 245.6 Surrender premiums - 38.1 42.6 Interest received on finance lease assets 0.4 0.4 0.9 Service charge income 7.4 5.6 13.6 Total property investment revenue 141.6 159.3 302.7 Proceeds on sale of trading properties 1.6 49.0 57.3 Trading property rental income 4.3 1.6 3.3 Sale of electricity, water and steam 21.6 19.1 38.1 Sale of gas - 3.5 3.8 Total revenue 169.1 232.5 405.2 Notes to the financial statements continued 3. Net valuation gains The total valuation gains and losses for the period are shown in the financial statements as follows: Half year Half year Year to to 30 June to 30 June 31 December 2006 2005 2005 Â£m Â£m Â£m Income statement 262.6 137.6 409.1 Statement of recognised income and expense 5.2 7.5 48.4 Total valuation gains of Group companies reported 267.8 145.1 457.5 and arising on the following properties: Investment properties 263.4 143.9 423.3 Development and owner occupied properties 4.4 1.2 34.2 267.8 145.1 457.5 The valuation gains and losses of joint ventures and associate are included within their results on the face of the income statement and are excluded from the above figures. 4. Share of profit from joint ventures and associate after Half year Half year Year to 31 December tax to 30 June to 30 June 2005 2006 2005 Group share of: Â£m Â£m Â£m Revenue 8.4 5.1 17.1 Net rental income 3.5 4.5 8.6 (Loss)/profit on sale of trading properties (0.1) (0.2) 0.8 Finance costs (2.1) (1.3) (3.2) 1.3 3.0 6.2 Valuation gains 2.6 2.4 10.5 Profit before tax 3.9 5.4 16.7 Current tax - (0.5) (0.9) Deferred tax - 0.1 (2.3) Group share of profit after tax 3.9 5.0 13.5 Analysed between: Investment properties 4.2 5.3 13.0 Trading properties (0.3) (0.3) 0.5 3.9 5.0 13.5 Notes to the financial statements continued 5. Finance costs Half Half Year to 31 year year December to 30 to 30 2005 June June 2006 2005 Â£m Â£m Â£m Interest on loans and overdrafts 63.1 58.2 116.9 Interest on convertible redeemable preference shares 4.1 6.6 13.2 Unwinding of discount on the pensions liability less return on assets - 0.7 0.5 Unwinding of discount on other provisions - 0.2 0.2 Total borrowing costs 67.2 65.7 130.8 Less amount charged to :the development of trading properties (0.8) (0.4) (0.7) :the development of investment and development properties(9.9) (8.5) (17.9) : the development of other assets - (0.5) (0.5) Net borrowing costs 56.5 56.3 111.7 Fair value losses on interest rate swaps and other derivatives 0.5 2.0 0.2 Swaption close out costs - - 2.3 Borrowing close out cost relating to property disposals - - 1.9 Exchange differences 12.2 - 8.8 Total finance costs before exceptional cost 69.2 58.3 124.9 Exceptional cost of refinancing - 125.6 126.0 Total finance costs 69.2 183.9 250.9 6. Finance income Half Half Year to 31 year year December to 30 to 30 2005 June June 2006 2005 Â£m Â£m Â£m Interest received on bank deposits 3.4 6.0 9.9 Fair value gains on interest rate swaps and other derivatives 6.1 0.7 1.5 Unwinding of discount on amounts receivable 0.9 0.4 1.4 Return on pension assets less unwinding of discount on the pensions liability 0.2 - - Exchange differences 11.6 0.6 8.6 Other 1.7 - - Total finance income 23.9 7.7 21.4 Notes to the financial statements continued 7. Taxation Half year Half year to Year to 31 to 30 June 30 June December 2006 2005 2005 Â£m Â£m Â£m Current tax Corporation tax charge at 30 per cent (2005 30 per cent) 5.1 13.5 8.5 Tax in respect of property disposals - - 35.9 5.1 13.5 44.4 Deferred tax Origination and reversal of timing differences 9.0 10.9 19.1 Charged/(released) in respect of property disposals in the period 1.5 (0.9) 11.5 On valuation surplus 70.1 38.8 130.5 Total deferred tax in respect of investment properties 80.6 48.8 161.1 Released in respect of Quail West - 12.7 10.6 Other deferred tax 8.6 (29.4) (21.9) Total deferred tax 89.2 32.1 149.8 Total tax on profit on ordinary activities 94.3 45.6 194.2 A contingent tax asset of Â£104.5million relating to unused indexation allowances has not been recognised in the financial statements due to the restrictions in IFRS. 8. Dividends Half year Half year Year to to 30 to 31 June 30 June December 2006 2005 2005 Â£m Â£m Â£m Ordinary dividends paid Final dividend for the year ended 31 December 2005 at 11p per share 51.6 - - Interim dividend for the year ended 31 December 2005 at 6.5p per - - 27.4 Final dividend for the year ended 31 December 2004 at 9.85p per - 41.6 41.6 51.6 41.6 69.0 The Board have proposed an interim dividend of 6.9p per share (2005 6.5p). This dividend has not been accrued in the financial statements. The preference dividend paid during the period of Â£5.2 million (2005 half year Â£5.6 million and 2005 full year Â£10.8 million) is included in 2006 and 2005 within finance costs. Notes to the financial statements continued 9. Earnings and net assets per ordinary share Half Half Year to year year 31 to 30 to 30 December June June 2005 2006 2005 Earnings per share The weighted average number of shares used for the calculation of the earnings per share is as follows: Weighted average number of shares in issue Shares m 441.1 420.7 421.8 Less the weighted average number of shares held by the ESOP Shares m (2.2) (1.7) (1.7) Basic weighted average number of shares a Shares m 438.9 419.0 420.1 Dilution adjustments: Preference shares Shares m 28.9 47.1 47.1 Share options and save-as-you-earn schemes Shares m 1.5 1.5 1.5 Diluted weighted average number of shares b Shares m 469.3 467.6 468.7 Earnings used for the calculation of earnings per share is as follows: Attributable profit c Â£m 242.3 71.6 385.1 Interest on preference shares Â£m 4.1 6.6 13.2 d Â£m 246.4 78.2 398.3 Revaluation surpluses including joint ventures and associate net of minority Â£m (264.3) (140.5) (419.2) Add back exceptional cost of refinancing Â£m - 125.6 126.0 Profits and losses on sale of investment properties and joint ventures net of borrowing close out costs and minorities Â£m 0.8 3.0 (20.3) Add back profit on the sale of Quail West Â£m - (17.0) (16.1) Add back fair value of derivatives Â£m (5.6) 1.3 1.0 Add back profit from the sale of gas interests Â£m - - (99.7) Add back exceptional surrender premium Â£m - (36.6) (36.4) Tax on above exceptional items Â£m - (15.4) 28.6 Deferred tax relating to investment properties including valuation surpluses Â£m 80.6 48.8 151.9 Adjusted diluted earnings e Â£m 57.9 47.4 114.1 Adjusted basic earnings f Â£m 53.8 40.8 100.9 Earnings per ordinary share Basic c/a pence 55.2 17.1 91.7 Basic - adjusted f/a pence 12.3 9.7 24.0 Diluted d/b pence 52.5 16.7 85.0 Diluted - adjusted e/b pence 12.3 10.1 24.3 Net assets per ordinary share The number of shares used for the calculation of the net assets per share is as follows: Number of shares in issue Shares m 471.0 422.9 423.0 Less number of shares held by the ESOP Shares m (2.2) (1.7) (1.7) Basic number of shares h Shares m 468.8 421.2 421.3 Dilution adjustments: Preference shares Shares m - 47.1 47.1 Share options and save-as-you-earn schemes Shares m 1.4 1.5 1.5 Diluted number of shares i Shares m 470.2 469.8 469.9 Equity used for the calculation of net assets per ordinary share is as follows: Total equity attributable to ordinary shareholders Â£m 2,733.0 2,118.7 2,447.3 Less shares held by the ESOP Â£m (10.3) (6.9) (6.9) Restated equity j Â£m 2,722.7 2,111.8 2,440.4 Adjustment to exclude deferred tax on investment properties and revaluation surpluses Â£m 713.3 513.2 649.2 Adjusted equity attributable to ordinary shareholders k Â£m 3,436.0 2,625.0 3,089.6 Dilution adjustment for preference shares Â£m - 106.4 107.7 Adjusted diluted equity attributable to ordinary shareholders m Â£m 3,436.0 2,731.4 3,197.3 Diluted equity attributable to ordinary shareholders n Â£m 2,722.7 2,218.2 2,548.1 Net assets per ordinary share Basic j/h pence 581 501 579 Basic adjusted for deferred tax on investment property k/h pence 733 623 733 Diluted n/i pence 579 472 542 Diluted adjusted for deferred tax on investment property m/i pence 731 581 680 Notes to the financial statements continued 9. Earnings and net assets per ordinary share (continued) The Group has also presented an adjusted basic earnings per share figure to exclude the impact of profits and losses on the sale of investment properties (net of taxation and minority interests), profit on the sale of Quail West, loss on the refinancing of bonds, revaluation surpluses on investment properties and deferred tax that would arise on the sale of investment properties. The directors consider that this adjusted figure gives a more meaningful comparison for the periods shown in the consolidated financial statements. Deferred tax has been excluded from the adjusted calculation as the Group has no plans to sell a significant proportion of its investment properties, and in any case, it is generally very unusual for UK capital allowances to be recaptured on the disposal of a property. Profits and losses on the sale of investment properties and the loss on the bond repayment are excluded from adjusted earnings as these are non-recurring items. Net assets per share are calculated on the equity shareholders' funds of Â£ 2,722.7 million ( 2005 half year Â£2,111.8 million and full year 2005 Â£2,440.4 million). Adjusted net assets per share have been calculated on the same number of shares but shareholders' funds exclude deferred tax liability of Â£713.3 million (2005 half year Â£513.2 million and full year 2005 Â£649.2 million) as it is the opinion of the directors that deferred tax on capital allowances and valuation surpluses in relation to investment properties is unlikely to crystallise materially in practice. 10. Goodwill The goodwill arises as a result of the acquisitions in 2005 of Mainland BV and Grontmij Real Estate International BV both incorporated in the Netherlands. The main activity of these companies is the development and sale of trading properties. The goodwill of Â£0.7 million is tested for impairment at each period end and any resulting write down will be taken to the income statement. 11. Investment properties Investment properties consist of completed land and buildings and properties in the course of redevelopment. They exclude trading properties, properties occupied by Group companies and land held for development and developments in the course of construction. Trading properties shown as current assets on the balance sheet are not externally valued. Continental North UK Europe America Total Â£m Â£m Â£m Â£m At 1 January 2006 3,371.8 346.8 721.5 4,440.1 Exchange movement - 2.4 (52.5) (50.1) Additions 96.9 14.9 7.5 119.3 Disposals (35.5) (0.1) - (35.6) Transfer from development and owner occupied properties 1.7 - 5.4 7.1 Transfer to trading property (2.1) (19.6) - (21.7) Surplus on valuation 210.7 10.5 42.2 263.4 Total investment properties 3,643.5 354.9 724.1 4,722.5 Less classified as held for sale and shown in current assets (108.3) - - (108.3) At 30 June 2006 3,535.2 354.9 724.1 4,614.2 At 30 June 2005 2,929.7 256.2 630.9 3,816.8 The Group's properties were externally valued as at 30 June 2006 by CB Richard Ellis, DTZ Debenham Tie Leung or Colliers CRE in the United Kingdom, in the USA by Walden-Marling Inc., in Belgium by De Crombrugghe & Partners s.a., in France by CB Richard Ellis and in Germany by DTZ Debenham Tie Leung. The valuation basis is fair value, conforms to international valuation standards and was arrived at by reference to market evidence of the transaction prices for similar properties. All the valuers listed above are qualified valuers who hold a recognised and relevant professional qualification and have recent experience in the relevant location and category of the properties being valued. Trading properties are not externally valued and are shown at the lower of cost and net realisable value. Notes to the financial statements continued 12 Development and owner occupied properties Continental North UK Europe America Total Â£m Â£m Â£m Â£m At 1 January 2006 188.2 34.3 215.5 438.0 Exchange - 0.2 (16.2) (16.0) Additions 33.9 0.3 39.6 73.8 Disposals (2.2) - - (2.2) Revaluation surplus during period 7.2 (1.3) (1.5) 4.4 Transfer to trading property (6.4) - - (6.4) Transfer to investment property (1.7) - (5.4) (7.1) At 30 June 2006 219.0 33.5 232.0 484.5 Depreciation At 1 January 2006 1.7 - - 1.7 Additions 0.2 - - 0.2 At 30 June 2006 1.9 - - 1.9 Net book value at 30 June 2006 217.1 33.5 232.0 482.6 Net book value at 30 June 2005 147.1 33.8 156.5 337.4 Land for or under development and owner occupied buildings are valued on the same basis as investment properties. The valuers are detailed on the previous page within note 11. The external valuation is included on the balance sheet under the following headings: 30 June 30 June 31 December 2006 2005 2005 Â£m Â£m Â£m Investment properties 4,614.2 3,816.8 4,440.1 Development and owner occupied properties 482.6 337.4 436.3 Non-current assets classified as held for sale 108.3 - - Total assets externally valued 5,205.1 4,154.2 4,876.4 Group's share of investment properties within joint ventures and associate 114.3 122.2 113.5 Notes to the financial statements continued 13. Plant and equipment Other plant, fixtures and Utilities plant fittings Total Â£m Â£m Â£m Cost At 1 January 2006 48.6 12.7 61.3 Additions 1.5 1.4 2.9 Disposals - (0.2) (0.2) At 30 June 2006 50.1 13.9 64.0 Depreciation At 1 January 2006 7.6 8.7 16.3 Additions 1.3 0.8 2.1 Disposals - (0.1) (0.1) At 30 June 2006 8.9 9.4 18.3 Net book value at 30 June 2006 41.2 4.5 45.7 Net book value at 31 December 2005 41.0 4.0 45.0 Net book value at 30 June 2005 40.6 3.6 44.2 Notes to the financial statements continued 14. Investments in joint ventures and associate The Group's investments in joint ventures and associate and their results are accounted for using the equity method of accounting. Under the equity method of accounting the Group accounts for its share of the joint ventures' and associate's profits and losses after tax in the income statement. 30 June 30 June 31Dec 2006 2005 2005 Â£m Â£m Â£m Cost or valuation at 1 January 100.1 84.1 84.1 Echange movement (1.4) 1.7 2.2 Additions 8.0 6.1 15.7 Disposals - - (12.6) Dividends received (31.6) (2.8) (2.8) Valuation surplus 2.6 2.4 10.5 Deferred taxation on valuation surplus - 0.1 (2.3) Share of profits net of current taxation (excluding valuation surplus) 1.3 2.5 5.3 Cost or valuation at end of period 79.0 94.1 100.1 Summarised financial information of the Group's share of joint ventures and associate 30 June 30 June 31 Dec 2006 2005 2005 Â£m Â£m Â£m Balance sheet Investment properties 114.3 122.2 113.5 Total non-current assets 114.3 122.2 113.5 Trading properties 38.4 17.2 24.3 Other receivables 13.7 11.9 14.1 Cash 8.4 3.8 4.4 Total current assets 60.5 32.9 42.8 Total assets 174.8 155.1 156.3 Mortgages and loans 76.6 40.0 34.0 Deferred taxation 11.7 12.5 15.6 Other liabilities 1.9 3.3 1.7 Total non-current liabilities 90.2 55.8 51.3 Other liabilities 5.6 5.2 4.9 Total current liabilities 5.6 5.2 4.9 Total liabilities 95.8 61.0 56.2 Group's share of net assets 79.0 94.1 100.1 Group's share of revenue 8.4 5.1 17.1 Group's share of profit for the period 3.9 5.0 13.5 The Group has consolidated its interest in joint ventures and associate using the equity method of accounting as it is unable to control the individual ventures, even of those where its interest is greater than 50 per cent, under the terms of the venture agreements. Notes to the financial statements continued 15. Borrowings 30 June 30 June 31 December 2006 2005 2005 Â£m Â£m Â£m Maturity profile of Group debt In one year or less 47.8 331.1 14.7 In more than one year but less than two 35.6 35.7 49.2 In more than two years but less than five 722.1 271.9 544.5 In more than five years but less than ten 312.8 438.1 567.1 In more than ten years 1,066.9 888.9 1,089.4 Total Group debt 2,185.2 1,965.7 2,264.9 Split between secured and unsecured borrowings Secured (on land and buildings) 77.8 92.0 86.6 Unsecured 2,107.4 1,873.7 2,178.3 2,185.2 1,965.7 2,264.9 Maturity profile of undrawn borrowing facilities In one year or less 47.8 54.5 44.8 In more than one year but less than two 17.4 20.4 18.5 In more than two years 601.1 334.6 471.0 Total available undrawn facilities 666.3 409.5 534.3 Currency profile of Group net debt (borrowings less cash) Sterling 1,196.3 1,066.3 1,237.3 US dollars 511.6 510.7 533.5 Canadian dollars 7.9 7.4 8.3 Euros 364.0 203.0 313.2 Total net debt 2,079.8 1,787.4 2,092.3 Fair value of borrowings and financial instruments Book value 2,177.1 1,969.6 2,262.1 Net fair market value 2,254.6 2,111.7 2,413.5 Pre-tax mark-to-market adjustment 77.5 142.1 151.4 Tax relief at 30 per cent (23.2) (42.6) (45.4) After tax mark-to-market adjustment 54.3 99.5 106.0 Notes to the financial statements continued 16. Provisions for liabilities and charges Pension Deferred Other deficit tax liabilities Total Â£m Â£m Â£m Â£m Balance at 1 January 2006 29.4 635.9 0.2 665.5 Exchange movement (0.1) (11.9) - (12.0) Charge to income statement 0.7 89.2 - 89.9 (Credit)/charge to SORIE (8.2) 2.5 - (5.7) Paid (2.3) - - (2.3) Balance at 30 June 2006 19.5 715.7 0.2 735.4 Balance at 30 June 2005 30.2 488.6 0.3 519.1 30 June 30 June 31 Dec 2006 2005 2005 Deferred taxation in respect of : Â£m Â£m Â£m Investment properties 713.3 513.2 649.2 Pension scheme deficit (5.8) (10.0) (8.1) Other reserves 8.2 (14.6) (5.2) 715.7 488.6 635.9 17. Summary of movement in equity Retained Balance profit Preference Balance 1 January for SORIE* Shares Dividend Reserve share 30 June 2006 Exchange period issued Other paid transfers c onversions 2006 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Revaluation reserve net of deferred tax 1,419.6 (11.2) - 3.9 - - - 192.7 - 1,605.0 Equity reserve -share based payments reserve 2.9 - - - - - - (0.1) - 2.8 Fair value reserve - available-for-sale investments 10.2 (0.4) - (1.1) - - - - - 8.7 Unrealised surplus reserve 47.4 - - - - - - - - 47.4 Translation reserve net of deferred tax (8.5) - - 6.2 - - - - - (2.3) Total other reserves 1,471.6 (11.6) - 9.0 - - - 192.6 - 1,661.6 Revenue reserve 581.4 (17.9) 242.3 5.9 - - (51.6) (192.6) 21.4 588.9 Ordinary share capital 105.7 - - - 0.3 - - - 11.8 117.8 Preference shares 31.8 - - - - - - - (31.8) - Share premium 256.8 - - - 2.8 - - - 105.1 364.7 Own shares held (6.9) - - - - (3.4) - - - (10.3) Total equity attributable to equity shareholders 2,440.4 (29.5) 242.3 14.9 3.1 (3.4) (51.6) - 106.5 2,722.7 Minority interests 8.6 (0.3) 1.5 - - - (0.5) - - 9.3 Total equity 2,449.0 (29.8) 243.8 14.9 3.1 (3.4) (52.1) - 106.5 2,732.0 * SORIE is the term used for the Statement of Recognised Income and Expense Notes to the financial statements continued 18. Notes to Group cash flow statement (1) Reconciliation of cash generated from operations Half year to Half year to Year to 31 30 June 30 June December 2006 2005 2005 Â£m Â£m Â£m Net operating income 379.5 290.2 798.3 Less gain from sale of gas interests separately disclosed - - (99.7) Adjustments for: Depreciation of property, plant and equipment 2.3 2.9 5.1 Loss/(profit) on sale of investment properties 0.8 3.0 (14.0) Profit on disposal of property, plant and equipment - - (0.4) Profit on disposal of joint venture - - (7.8) Revaluation surplus on investment properties (262.6) (137.6) (409.1) Other income reallocated (5.7) (3.3) (5.5) Other provisions 0.9 (18.7) (17.8) 115.2 136.5 249.1 Changes in working capital: (Increase)/decrease in trading properties (53.4) 26.4 14.3 Decrease in inventories 0.2 0.1 0.3 Decrease/(increase) in debtors 27.9 (10.5) (21.6) (Decrease)/increase in creditors (8.1) 1.6 (4.8) Net cash inflow generated from operations 81.8 154.1 237.3 (2) Issue of shares Ordinary Share share capital premium Total Â£m Â£m Â£m Balance at 1 January 2006 105.7 256.8 362.5 Issued on conversion of preference shares 11.8 105.1 116.9 Ordinary shares issued for cash 0.3 2.3 2.6 Ordinary shares issued - cash not yet received - 0.5 0.5 Balance at 30 June 2006 117.8 364.7 482.5 (3) Reconciliation of net cash flow to movement in net debt Half year to Half year to Year to 31 30 June 30 June December 2006 2005 2005 Â£m Â£m Â£m Decrease in cash in the period (63.5) (42.9) (51.8) Increase in debt (72.7) (71.2) (340.0) Decrease in term deposits - (180.6) (185.6) Change in net debt resulting from cash flows (136.2) (294.7) (577.4) Translation difference 42.8 (52.1) (33.4) Conversion of preference shares 106.5 - - Net debt assumed on purchase of subsidiaries - (4.8) (11.4) Net debt disposed of on sale of subsidiary - - 50.0 Non-cash adjustment (0.6) (0.5) (84.8) Movement in net debt in the period 12.5 (352.1) (657.0) Net debt at 1 January 2006 (2,092.3) (1,325.3) (1,325.3) Restate for IAS 32 - inclusion of preference shares - (110.0) (110.0) Net debt at 30 June 2006 (2,079.8) (1,787.4) (2,092.3) Notes to the financial statements continued 18. Notes to Group cash flow statement continued (4) Analysis of net debt At Conversion of At 1 January Cash Non-cash preference Exchange 30 June 2006 Flow movement* shares movement 2006 Â£m Â£m Â£m Â£m Â£m Â£m Cash and cash equivalents 172.6 (66.9) - - (0.3) 105.4 Overdrafts (5.7) 3.4 - - - (2.3) Loan capital (2,259.2) (72.7) (0.6) 106.5 43.1 (2,182.9) (2,092.3) (136.2) (0.6) 106.5 42.8 (2,079.8) * The non-cash adjustment relates to the movement in borrowing costs which are deducted from borrowings in the balance sheet and amortised to the income statement over the term of the borrowings. 19. Commitments Contractual obligations to purchase, construct, develop, repair, maintain or enhance: 30 June 30 June 31 Dec 2006 2005 2005 Â£m Â£m Â£m Properties 351.9 208.4 309.0 Utilities plant - 0.5 0.6 Other 9.3 0.2 10.6 Total capital commitments 361.2 209.1 320.2

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