Final Results

Scottish & Southern Energy PLC
31 May 2006

                                                                     31 May 2006

               PRELIMINARY RESULTS FOR THE YEAR TO 31 MARCH 2006

'During 2005/06 Scottish and Southern Energy continued its focus on delivering a
strong operational performance and on securing value from its investment in new
assets.  This has enabled the company to deliver another set of very sound
financial results and add to its well-established track record of sustained real
growth in the dividend.  In summary:

•         The full-year dividend will increase by 9.4% to 46.5p per share,
          including the recommended final dividend of 32.7p per share.

•         Adjusted profit before tax* grew by 19.2%, from £719.7m to £858.2m.

•         Adjusted earnings per share* increased by 16.1%, from 62.8p to 72.9p.

•         There are exceptional items totalling £127.4m, comprising
          distributions from the administration of TXU businesses and profit 
          from the sale of Thermal Transfer.

•         The integration of the Scotland and the Southern gas networks is on
          schedule, following their acquisition by Scotia Gas Networks, in which 
          SSE has a 50% stake, in June 2005.

•         SSE's energy supply business has grown to over 6.7 million customers
          at the end of March 2006 - a net gain of 600,000 during the year and 
          of 2.2 million since 2002.

•         SSE's decisions to delay price rises have saved a typical gas and
          electricity customer around £100 since the start of 2004, compared 
          with what they would have paid had SSE increased prices at the same 
          time as the UK's largest energy supplier.  Prices will be held at 
          their current levels until at least the start of 2007.

•         SSE has started the investment of around £225m in the installation of
          flue gas desulphurisation (FGD) equipment at its coal-fired generation 
          plant.

•         Work has commenced on the £140m project to construct what will be
          Scotland's first large-scale conventional hydro-electric scheme for 
          50 years, at Glendoe near Loch Ness.

•         SSE delivered 140MW of new wind farm capacity during 2005/06, and has
          acquired two new developments, comprising 98MW of capacity, subject to 
          planning consent and network capacity being secured.

•         SSE has entered into a partnership with Mitsui Babcock, Siemens UK and
          UK Coal to undertake the front end engineering design of a 500MW 
          cleaner coal plant at its Ferrybridge Power Station.

•         The development of SSE's energy services business has reached an
          important milestone with the launch on 1 June 2006 of a new gas boiler
          installation and maintenance service.


SSE's core objective is the delivery of sustainable long-term real dividend
growth. Our means of achieving this is unchanged and unchanging: maintaining and
investing in energy networks; adding to our generation portfolio; growing our
energy supply business; and developing further our presence in contracting,
connections, gas storage and telecoms.  This approach continued to serve us well
during 2005/06 and we will maintain it during 2006/07 and beyond.  With our
major investment programme, focused on the UK's key priorities of reliable and
lower carbon energy supplies, we have excellent opportunities to enhance and
create value.  The prospects for sustained real growth in the dividend therefore
remain excellent.'


Sir Robert Smith
Chairman



*This preliminary results statement describes adjusted profit before tax before
exceptional items, net finance income from pension assets (IAS 19), the impact
of IAS 32 and IAS 39 and after the removal of taxation on profits from
jointly-controlled entities and associates.  It also describes adjusted earnings
and earnings per share before exceptional items, net finance income from pension
assets (IAS 19), the impact of IAS 32 and IAS 39 and deferred tax.  In addition,
it describes adjusted operating profit before exceptional items, net finance
income from pension assets (IAS 19), the impact of IAS 32 and IAS 39, and after
the removal of taxation and interest on profits from jointly controlled entities
and associates.

FINANCIAL OVERVIEW

These are the first preliminary results that SSE has reported under
International Financial Reporting Standards and the comparative results for the
year to 31 March 2005 have been re-stated in line with the new standards. SSE
focuses on profit before tax before exceptional items, net finance income from
pension assets (IAS 19), the impact of IAS 32 and IAS 39, and after the removal
of taxation on profits from jointly controlled entities and associates.


                                                                 March 06              March 05
                                                                       £m                    £m

Statutory Profit before Tax                                         896.9                 789.3

Movement in derivatives                                              70.9                   0.0
Exceptional items                                                 (127.4)                (72.5)
Tax on JVs and Associates                                            29.9                  15.3
Interest on convertible debt                                          3.6                   0.0
Return on pension scheme assets                                   (115.7)               (107.1)
Interest on pension scheme liabilities                              100.0                  94.7
Adjusted Profit before Tax                                          858.2                 719.7

Adjusted current tax charge                                       (231.5)               (182.0)
Adjusted Profit after Tax                                           626.7                 537.7

Statutory profit after tax                                          642.3                 559.8
Number of shares for basic and                                      859.5                 857.2
adjusted eps

Adjusted EPS*                                                        72.9                  62.8

Basic EPS                                                            74.7                  65.3

Dividend Per Share                                                   46.5                  42.5


Adjusted profit before tax*

Adjusted profit before tax grew by 19.2%, from £719.7m to £858.2m. SSE's
statutory operating profit included an adverse movement on IAS 39 operating
derivatives of £14.4m.  Additionally, there was an adverse movement of £43.5m
arising from financial derivatives used by Treasury which was compounded by a
further adverse movement on joint venture financing derivatives of £13.0m.  This
meant that the impact of IAS 39 revaluations ('Movement in derivatives') was a
charge of £70.9m.

There was profit growth throughout SSE's business. The most significant growth
was achieved in Generation and Supply, which continues to benefit from the
expansion of SSE's electricity generation portfolio and the increase in the
number of energy supply customers achieved over the past four years.

Adjusted Earnings Per Share*

To monitor financial performance over the medium-term, SSE focuses on adjusted
earnings per share, which increased by 16.1%, from 62.8p to 72.9p.

Dividend

The Board is declaring a final dividend of 32.7p, compared with 30.3p in the
previous year, an increase of 7.9%, making a full-year dividend of 46.5p, an
increase of 9.4%.  This compares with 27.5p in 2000, since when the dividend has
increased by 69.1%, which represents a compound annual growth rate of 9.2%.

Overall, SSE continued to perform well during 2005/06 and significant
opportunities for investment in new assets have been identified for 2006/07 and
beyond.  These investments are aligned to the UK's key priorities of delivering
reliable energy supplies and reducing carbon emissions.  They mean that SSE is
well-positioned to achieve its target of at least 4% real growth in the dividend
payable to shareholders in each of the years to March 2008, with sustained real
growth thereafter.

ENERGY SYSTEMS

Key Points:

•         Operating profit* (excluding gas distribution) up 9.2% to £367.9m.
•         Investment in electricity networks of £172.1m.
•         Fewer Customer Minutes Lost in electricity in Scottish Hydro and SEPD.
•         Fewer Customer Interruptions in electricity in Scottish Hydro and
          SEPD.
•         Investment in Scotia Gas Networks completed in June 2005.
•         SSE's share of SGN's adjusted operating profit was £102.7m.


Energy Systems Introduction

SSE owns Southern Electric Power Distribution, Scottish Hydro Electric Power
Distribution and Scottish Hydro Electric Transmission.  These companies are the
subject of incentive-based regulation by the Office of Gas and Electricity
Markets (Ofgem), which sets for periods of five years the prices they can charge
for the use of their electricity networks, their capital expenditure and their
allowed operating expenditure.  In broad terms, Ofgem seeks to strike the right
balance between attracting investment in electricity and gas networks,
encouraging companies to operate them as efficiently as possible and ensuring
that prices for customers are no higher than they need to be.  As at 31 March
2006, SSE estimates that Ofgem's valuation of the assets of SSE's distribution
and transmission businesses (the Regulated Asset Value or 'RAV') was around
£2.55bn.

SSE also has an equity interest of 50% in, and provides corporate and management
services to, Scotia Gas Networks (SGN), which owns Southern Gas Networks and
Scotland Gas Networks, companies which own and operate the medium and low
pressure gas distribution networks in their parts of the UK.  They are the
subject of incentive-based regulation by Ofgem similar to that which applies in
electricity.  SGN estimates that the RAV of the networks it owns was around
£3.0bn as at 31 March 2006.

Energy Systems Overview

Operating profit* in Energy Systems, excluding gas distribution, increased by
9.2%, from £336.8m to £367.9m.  SSE's share of SGN's operating profit in the 10
months from 1 June 2005 was £102.7m.  In total, Energy Systems contributed 46.4%
of SSE's total operating profit*.

Southern Electric Power Distribution

During 2005/06, Southern Electric Power Distribution's operating profit*
increased by 12.2% to £226.1m. This reflected an increase in the number of units
of electricity distributed compared with the previous year and follows the
introduction of the new Distribution Price Control for 2005-10 and improved
performance under Ofgem's incentives framework.  SEPD distributed 34.9TWh of
electricity, an increase of 0.75TWh.

The average number of minutes of lost electricity supply per customer was 71,
compared with 84 in the previous year. The number of supply interruptions per
100 customers was 78, compared with 98 in the previous year.  Performance in
respect of both minutes lost and interruptions was ahead of targets set by Ofgem
under its Information and Incentives Project (IIP) which gives financial
benefits to distribution network operators that deliver good performance for
customers.  This together with income earned under other incentive arrangements
is expected to lead to additional revenue of over £8m in 2007/08.

Scottish Hydro Electric Power Distribution and Scottish Hydro Electric
Transmission

Operating profit* for Scottish Hydro Electric Power Distribution and Scottish
Hydro Electric Transmission increased by 4.9% to £141.8m. This reflected an
increase in the number of units distributed and follows the introduction of the
new Price Control for 2005-10 and improved performance under Ofgem's incentives
framework.  In the Scottish Hydro Electric area, 8.9TWh of electricity were
distributed during 2005/06, compared with 8.7TWh in the previous year.

The average number of minutes of lost electricity supply per customer was 65,
compared with 86 in the previous year, making performance in 2005/06 the best
since records began in the 1960s. The number of interruptions per 100 customers
was 79, compared with 89 in the previous year. Performance in respect of both
minutes lost and interruptions was ahead of Ofgem's IIP targets.  This together
with income earned under other incentive arrangements is expected to lead to
additional revenue of over £4m in 2007/08.

Electricity Network Investment

The key responsibility of SSE's Power Systems businesses is to maintain safe and
reliable supplies of electricity and to restore supplies as quickly as possible
in the event of interruptions. During the Price Control period 2000-05, SSE
invested £780m in its electricity networks.  A further £172.1m was invested in
2005/06.  In the course of the year, SSE added 974km to the length of its
networks, taking the total to over 127,000km.  It also rebuilt 378km of its
networks as part of its programme of replacing 'open wire' overhead lines and
low voltage Consac cable.

The Price Control Review for 2005-10 resulted in significantly increased
allowances for capital expenditure to maintain and improve the electricity
networks, and SSE's increased investment programme is now under way.

As a result, SSE forecasts that the RAV of its distribution and transmission
businesses has increased by around £80m (nominal) to £2.55bn as at 31 March
2006.  In addition, SSE expects to deliver an increase in capital expenditure,
of over 20%, during 2006/07 and to sustain capital expenditure at this level
until 2010.  On this basis, the RAV is expected to grow by around £500m (or
around £120m in real terms), excluding any major transmission investment, during
the 2005-2010 Price Control period.

Future Transmission Developments

Since the introduction of British Electricity Trading and Transmission
Arrangements (BETTA) in April 2005, National Grid has been Great Britain System
Operator, responsible for balancing the supply and demand of electricity across
Great Britain. Scottish Hydro Electric Transmission remains responsible for
operating, maintaining and investing in the transmission network in its area,
which serves around 70% of Scotland. These arrangements are working well.

In March 2006, Ofgem published the third of six consultation documents that will
form part of the Transmission Price Control Review for 2007-12.  The objectives
of the Review are to develop incentives for investment in electricity
infrastructure, ensuring they are best able to provide efficient and timely
investment and allocate risk appropriately.  In this context, key issues include
the arrangements for remunerating investment in the transmission network,
including the major upgrades likely to be required in the future to accommodate
the generation of renewable energy.  SSE is encouraged by Ofgem's previous work
in relation to approving investment for such infrastructure development.

As the licensed transmission company for the north of Scotland, SSE has to
ensure there is sufficient network capacity for those seeking to generate
electricity from renewable sources, in response to the Renewables Obligation.
The project to replace the electricity transmission line connecting Beauly in
the Highlands with Denny in the Central Belt of Scotland is in line with that
responsibility.  It is likely that the construction of its part of the
replacement line will require an investment by SSE of around £250m.

SSE's applications to Scottish Ministers for consent to build its part of the
line were submitted in September 2005, but it is not yet clear how long it will
take for the applications to make their way through the planning process.

Electricity Distribution and Transmission Priorities in 2006/07

During 2006/07, SSE's first objective in power systems will be to maintain safe
and reliable supplies of electricity and to restore supplies as quickly as
possible in the event of interruptions.  This will be supported by a significant
increase in investment in the networks, targeted at upgrading them where the
greatest number of customers will benefit.  SSE will also continue to work
closely with Ofgem to secure a satisfactory outcome from the Transmission Price
Control Review.  It will also seek to make progress with the replacement of its
part of the Beauly-Denny transmission line.

Scotia Gas Networks - Financial

In June 2005, Scotia Gas Networks plc (SGN), in which SSE holds 50% of the
equity, acquired the Scotland and the Southern gas distribution networks from
National Grid Transco. They comprise 73,000km of gas mains, delivering gas to
around 5.6m industrial, commercial and domestic customers.

SGN funded the acquisitions through: £540.0m of shareholder subordinated debt;
£427.8m of equity; and £2,250m of non-recourse bank borrowings. SSE's actual
investment, including the shareholder subordinated debt, was £505.0m, which was
£35.0m lower than was expected when the acquisitions were completed.  In return
for this investment of £505.0m, SSE recognises 50% of the distributable earnings
from SGN.  SSE is also providing SGN with corporate and management services. The
acquisitions have made SSE the second largest energy distribution business in
the UK.

In the first ten months, SSE's share of SGN's adjusted operating profit was
£102.7m.  Net of all items of interest, its contribution to SSE's profit before
tax* was £48.6m.   This was despite high gas prices leading to significantly
increased 'shrinkage' costs.

Significant benefits have already arisen as a result of the synergies between
SGN and SSE, as a provider of corporate and management services.  For example,
the two organisations share around 400 items of common stock, which gives them
the ability to make larger-scale purchases.

In October 2005, Scotland Gas Networks plc and Southern Gas Networks plc issued
a combination of fixed rate, floating rate and index-linked bonds totalling
£2.2bn, with an average maturity of 17 years. The transaction was heavily
over-subscribed and was a benchmark transaction for the UK gas distribution
sector. It was also the largest corporate financing in Europe in 2005 at the
date of issue. With a rate of interest that is below that envisaged when the
decision was made to acquire the two networks, the success of the bonds issue
will give SGN significant financial benefits over the long term.

The proceeds were used by SGN to repay substantially the bank borrowings that
were arranged to fund the purchase of the networks in June. As at 31 March 2006,
SGN's net debt, which is non-recourse to SSE's balance sheet, was £2.1bn.

Scotia Gas Networks - Operational

SGN's over-riding goal is to distribute gas safely and reliably. During 2005/06,
it secured a reduction of 29% in the rate of lost time incidents.  It has also
embarked on a major programme of performance improvement.  This has already
delivered some early results, such as a fall of 52% to 166 in the number of
complaints from customers sent to energywatch for resolution in 2005/06,
compared with the previous year.

As part of their licence conditions, all gas network companies are required to
commission quarterly independent customer satisfaction surveys relating to
planned replacement work or unplanned repair work.  In the results compiled in
January 2006, overall satisfaction in Scotland was 4.04 and in Southern it was
4.00 (on a scale of 1.00 being 'very dis-satisfied' and 5.00 being 'very
satisfied').

SGN's focus on delivering a high standard of service to customers is reflected
in its decision to undertake a pilot programme within its Operations Division in
which the existing functionally-based structure is replaced by a
geographically-based structure.  This is expected to enable more local, and
customer-focused, management of the business' operations and to help secure cost
savings.

Looking to the longer-term shape of the business, SGN will be undertaking major
investment to upgrade its gas networks.  The efficient and economic delivery of
this capital investment will increase further SGN's RAV.  To support this
programme and its other activities in the most efficient way possible, it has
in-sourced the work of around 700 people in gas contracting and gas connections
who were previously employed by third party contractors.

Scotia Gas Networks Priorities in 2006/07

SSE's priority in gas distribution will be to provide SGN with the corporate and
management services to support its ongoing reform of procedures, processes and
practices.  These are designed to secure cost savings and efficiencies.  They
will involve, for example, more work in gas mains replacement being brought
in-house.  As part of this, SSE is supporting the introduction of new front
office management systems, reducing the total number of systems from 56 to 11,
which will be very important.  SSE will also support SGN during the Gas
Distribution Price Control Review, in which the existing Price Control is being
extended for one year from 1 April 2007 and then reset for the next Price
Control period from 1 April 2008.

GENERATION AND SUPPLY

Key Points:

•         Operating profit* up 14.5% to £444.8m.
•         Gas-fired power station availability 87% and coal-fired power station
          availability 92%
•         Good performance in new BETTA arrangements.
•         Investment at Ferrybridge, Fiddler's Ferry and Glendoe.
•         Partnership to undertake front end engineering design of 500MW cleaner
          coal plant at Ferrybridge.
•         Acquisition of options to develop new wind farms.
•         Net gain of 600,000 customers during 2005/06 following policy of
          responsible pricing.
•         Further reduction, of 15%, in complaints to energywatch.

Generation and Supply Introduction

A series of market reforms in Great Britain, culminating in the introduction of
BETTA in 2005, means that wholesale gas and wholesale electricity are traded
like any other commodities.  SSE purchases gas and, where appropriate, some
electricity via bilateral contracts and through trading - the latter
complementing the electricity produced from its own generation portfolio.
Within its integrated business model, SSE's power stations are used to support
performance in electricity supply.  Generation and Supply is, therefore,
assessed as a single value chain.

Following the acquisition of an additional stake in Barking Power Ltd and the
completion of the Hadyard Hill wind farm in early 2006, SSE owns over 10,000
megawatts (MW) of electricity generation capacity, including its share of joint
ventures.  This comprises almost 4,400MW of gas-fired capacity, 4,000MW of
coal-fired capacity, over 1,500MW of hydro and wind capacity and 150MW of
oil-fired capacity.  As at 31 March 2006, SSE supplied electricity and gas to
over 6.7 million homes, offices and businesses within the UK's competitive
energy supply market.

Generation and Supply Overview

Operating profit* in Generation and Supply rose by 14.5%, from £388.6m to
£444.8m, contributing 43.9% of SSE's total operating profit during 2005/06.  The
underlying financial performance of Generation and Supply has been reported
excluding the impact of IAS 39 derivative movements (see 'Financial Overview'
above) as SSE believes this better represents underlying business performance.

During 2005/06, SSE's power stations (wholly-owned and owned by joint ventures)
generated 41.1TWh of electricity, compared with 38.8TWh in the previous year.
SSE supplied 49.9TWh of electricity to industrial, commercial and domestic
customers, compared with 47.7TWh in the previous year.  Its number of energy
supply customers grew by 600,000 during the year to over 6.7 million.

There were four main reasons for the growth in operating profit: ongoing
benefits from the acquisition in July 2004 of the Ferrybridge and Fiddler's
Ferry power stations; the successful deployment of SSE's Scottish power stations
in the new Great Britain electricity market (BETTA); the abolition of the Hydro
Benefit subsidy previously paid by SSE's Generation and Supply business; and
sustained growth in energy supply customer numbers.

These reasons for growth were, however, offset by three factors: the impact of
high wholesale energy prices, driven partly by the price of carbon emissions
allowances following the introduction of the EU Emissions Trading Scheme (EU
ETS) in January 2005; SSE's decision to protect its customers from the worst
impacts of volatile wholesale energy prices by delaying increases in the price
of gas and electricity; and lower output from SSE's hydro electric schemes,
which was below the long-term average, having been significantly above the
long-term average in the previous year.

The Hydro Benefit subsidy previously paid from SSE's generation activities was
abolished on 1 April 2005 and was replaced by a separate scheme to assist
customers with the high costs of distributing electricity in the north of
Scotland. The abolition contributed £37.0m to SSE's profit from its generation
activities during 2005/06. The profitability of its distribution businesses was
unaffected.

EU ETS and BETTA

Since its launch in January 2005, the EU ETS has seen the price of carbon
allowances fluctuate, with a peak of around 30 Euros a tonne in the first few
months of 2006. SSE's emissions allowance, of around 20 million tonnes, was
reasonable in comparison to the rest of the UK electricity generation sector,
but was lower than the level of emissions that SSE requires in practice. As part
of the cost of generating electricity, higher prices of carbon allowances add
upward pressure to electricity prices.  SSE's policy is to ensure it has minimal
exposure to fluctuations in the price of carbon allowances.

SSE is one of a number of companies which has submitted an application to the
European Court of First Instance under Article 230 of the EC Treaty challenging
the European Commission's decision to reject the UK government's proposed
amendment to the UK Phase I National Allocation Plan.

Uncertainty also surrounds the longer-term impacts of EU ETS, not least because:
the first phase has less than two years left to run; the details of the second
phase, due to start in 2008, have not been finally determined; and it is not yet
certain that there will be an EU ETS after the end of the second phase in 2012.
In its submission to the UK government's review of energy policy, SSE argued
that there should be confirmation that there will be a long-term carbon pricing
framework from 2012 onwards, accompanied by as much clarity as possible on the
second phase of the EU ETS.

Since the BETTA arrangements were introduced in April 2005, SSE has benefited
from its ability to deploy its flexible power stations in Scotland to meet
demand from the electricity market in England and Wales. This positive impact
from Scottish-based generation contributed over £20m to operating profit.

Gas-fired Generation - Operations

Good performance in BETTA is dependent on power stations being available to
generate electricity in response to customer demand and market conditions.
SSE's principal wholly-owned gas-fired power stations are Fife, Keadby, Medway
and Peterhead.  During 2005/06 as a whole, they achieved 87% of their maximum
availability to generate electricity, excluding planned outages, compared with
94% in the previous year.  The plant delivered better performance during the
second half of the year, following problems with reliability during the first
half, and availability improved to 92%, up from 83% in the first six months.
The issues are being dealt with through well-established long-term service
agreements with contractors.  In addition, the number of unplanned outages at
SSE's four main gas-fired power stations was down by 40% during 2005/06.

Gas-fired Generation - Investment

In January 2006, SSE acquired an additional 8.35% stake in Barking Power Ltd
from the administrators of TXU Europe Power Ltd for £14.7m.  The acquisition
gives SSE a total stake of 30.4% in the 1,000MW combined cycle gas turbine
station, which was commissioned in 1995, and effectively added 84MW to the
portfolio of electricity generation assets owned by SSE.

The acquisition of an additional stake in Barking Power Ltd complemented SSE's
other investments in coal and biomass generation and in renewable energy.  SSE
believes there is significant value in the diversity of its electricity
generation portfolio and expects to make new investments in gas-fired generation
plant to go alongside its plans in coal and biomass generation and in
renewables.

The launch of the EU ETS has underlined the need to develop new technologies to
reduce and capture carbon dioxide emissions caused by the use of fossil fuels
and SSE is committed to looking for opportunities to participate in appropriate
developments.

In June 2005, SSE and its partner BP announced they are undertaking detailed
front-end engineering design work on the world's first industrial-scale project
to generate 'de-carbonised' electricity from hydrogen. The planned project would
convert natural gas to hydrogen and carbon dioxide gases, then use the hydrogen
gas as fuel for a power plant at Peterhead Power Station with a capacity now
expected to be 475MW, and export the carbon dioxide to a North Sea oil reservoir
for increased oil recovery and ultimate storage.  SSE's interest in the project
is limited to its onshore aspects.

The current phase of work is expected to be completed in the second half of 2006
/07, which will then allow a final investment decision to be taken. The full
project could require investment by SSE of around £150m and is subject to,
amongst other things, the establishment of an appropriate policy and regulatory
framework which encourages the capture of carbon from fossil fuel-based
electricity generation and its long-term storage.

Coal and Biomass Generation - Operations

SSE acquired the Ferrybridge and Fiddler's Ferry power stations, each with a
capacity of almost 2,000MW, and associated coal stocks, for £136.0m in July
2004. This equated to around £20 per kilowatt of installed capacity. The £123.3m
paid by SSE for fuel in transit and contracts to supply fuel has now been more
than recovered from the value of the contracts.

The stations achieved 92% of their maximum availability to generate electricity,
excluding planned outages, during the year, compared with 88% in the previous
year.  The winter of 2005/06 demonstrated the value of coal as part of SSE's
diverse generation portfolio.  Against a background of very high wholesale gas
prices, coal-fired plant met 50% of average weekday demand, compared with 40%
under more normal conditions.  The diversity of its primary fuel sources enabled
SSE to manage its exposure to changes in primary fuel prices by balancing its
gas portfolio with a coal portfolio.  As part of SSE's single value chain in
Generation and Supply, this diversity also enabled SSE to delay increases in
electricity and gas prices for domestic customers.

The stations also 'co-fire' fuels from renewable sources (biomass) in order to
displace fossil fuels, thus reducing the impact of carbon emissions resulting
from their operation. The resulting output of electricity qualifies for
Renewables Obligation Certificates (ROCs).  During 2005/06, their output
qualifying for ROCs was around 795GWh, an increase of 9.8% on the previous year.

Coal and Biomass Generation - Investment

Following investment of around £20m, SSE has developed additional facilities to
increase further the ability to co-fire fuels from renewable sources at both
power stations. The installation of new 'direct injection' burners at the
stations gives them the ability to generate a total of up to 1,500GWh per year
of output qualifying for ROCs.

SSE has opted in to the Large Combustion Plant Directive (LCPD) all of the
capacity at Fiddler's Ferry and half of the capacity at Ferrybridge and, in line
with that, is installing Flue Gas Desulphurisation (FGD) equipment in an
investment estimated to be around £225m. Following the installation of the FGD
equipment, which is expected to be completed during 2008, restrictions on the
stations' ability to generate electricity between 2008 and 2015 will be lifted
and they will be able to remain open beyond 2015.

SSE believes that installing FGD represents a good investment opportunity and a
step forward in environmental terms. It will also extend the contribution of its
coal-fired plant to the security of the UK's energy supplies and means that SSE
will continue to have the country's most diverse generation portfolio.

To complement the investment in FGD, SSE is investing £16m in installing
re-designed high-pressure turbines and static blades at all four units at
Fiddler's Ferry and at two units at Ferrybridge.  This will increase their
thermal efficiency by around 1.4%, resulting in significant fuel savings and
delivering reductions in emissions of carbon dioxide.

In Budget 2006, the government stated that carbon abatement technologies which
enable fossil fuels to be used with substantially reduced carbon emissions,
could make an important contribution to meeting the UK's energy policy
objectives.  SSE has entered into a partnership with Mitsui Babcock, Siemens and
UK Coal with a view to installing 'cleaner coal' technology at Ferrybridge,
comprising a 500MW Supercritical Boiler, with a thermal efficiency of over 45%,
and the subsequent deployment of post-combustion carbon capture equipment.

The partnership's priorities will include the identification of secure supplies
of coal, which may provide opportunities for deep-mined coal in the UK.  The
partners expect to make a final decision on whether to make this investment in
early 2007.  Installation of the Supercritical Boiler and related plant to meet
all established environmental standards would require investment by SSE of
around £250m.

As the UK Energy Minister observed, the winter of 2005/06 demonstrated the value
of coal as part of the UK's diverse electricity generating mix.  He also pointed
out that cleaner generation is essential if coal is to survive the shift to more
sustainable forms of energy.  If SSE proceeds with the installation of the
Supercritical Boiler at Ferrybridge, it will take its investment in cutting
emissions from its coal-fired power plant to over £500m.

Hydro and Wind Generation - Operations

The output of refurbished hydro electric stations with capacity of up to 20MW
qualifies for ROCs and therefore attracted a premium price of around £44/MWh
during 2005/06.  In total, SSE has 404MW of capacity in its sub-20MW stations
(including the new 3.5MW Kingairloch plant which was officially opened by the
Secretary of State for Scotland in August 2005 and the new 7MW plant at
Fasnakyle, which has now been completed).

The ability to qualify for ROCs provided an incentive for SSE to invest in the
refurbishment of its smaller hydro electric stations and a total of 66 hydro
electric stations were refurbished under a programme, which began in 2002 and
which was completed in September 2005. This represents a major landmark in SSE's
£350m programme of investment in refurbishing its existing hydro electric power
stations and in developing new hydro capacity.

Water running off into reservoirs during 2005/06 was 7% below the long-term
average and significantly lower than in the previous year, when it was 14% above
the long-term average.  Total hydro output was 3,054GWh, also lower than the
long-term average, and compared with 3,544GWh in the previous year.  Within
this, SSE's ROC-qualifying hydro output during the year was 1,428GWh, compared
with 1,448GWh in the previous year.

The Tangy, Spurness, Artfield Fell and Hadyard Hill wind farms also contributed
127GWh of ROC-qualifying output during the year, compared with 42GWh from SSE's
then operational wind farms in 2004/05.

Assuming average 'run off' and typical wind conditions, SSE expects that the
ROC-qualifying output from its hydro and wind generation for 2006/07 as a whole
will be over 1,800GWh.

The completion of the programme of hydro refurbishment and of the Hadyard Hill
wind farm (see 'Wind Generation' below) means that SSE now has 566MW of
ROC-qualifying capacity and so is more than half way towards its target of
having around 1,000MW of such capacity, which it hopes to achieve before the end
of this decade.  Future developments will, however, depend on the progress of
planning applications.

Hydro and Wind Generation - Investment

The Renewables Obligation Order 2005 came into force on 1 April 2005 and
increased the UK's target for electricity generated from renewable sources to
15.4% by 2015/16. This confirmed the important part that hydro and wind
generation will have to play in the future, and the framework for investment in
renewable energy, based around the Obligation, remains positive.

In July 2005, SSE received consent for, and decided to proceed with, the
construction of what will be the UK's second largest conventional hydro-electric
station at Glendoe, near Loch Ness. With an installed capacity of around 100MW,
Glendoe will produce in an average year around 180GWh of electricity qualifying
for ROCs. When synchronised, it will be able to generate electricity at full
load within 30 seconds. The development of Glendoe will require investment of
around £140m.

The Prime Minister and the First Minister of Scotland visited the site in
February 2006 to mark the start of construction work. If the project goes
according to schedule, it will begin generating electricity commercially from
the winter of 2008/09.

SSE's first wind farm, at Tangy in Argyll (13MW), has been operating since 2003.
Its second wind farm, at Spurness (9MW) on the Orkney Islands, was officially
opened in March 2005, and its third wind farm, Artfield Fell (20MW) in
Wigtownshire, was officially opened by the Energy Minister in July 2005.

Construction work at the wind farm at Hadyard Hill in Ayrshire was completed and
in March 2006 it became the first ever wind farm in the UK to generate over
100MW of electricity.  With a total installed capacity of 120MW, it takes SSE's
portfolio of wind farms to 162MW.  This will increase to 168MW following the
completion in 2007 of the construction work to add 6MW to the existing wind farm
at Tangy. These schemes comprise the first phase of SSE's wind energy
development plans and, on the completion of the extension at Tangy, will have
required investment of £125m.

SSE is also continuing to develop plans for the next phase of its investment in
wind energy.  During 2006/07, it hopes that its applications in respect of seven
wind farms in Scotland with a total capacity of 361MW will be determined and
approved.  This includes Drumderg (32MW), Gordonbush (87MW), Blackcraig (69MW),
Fairburn (35MW) and Achany (40MW).

It also includes sites at Toddleburn (36MW) and Calliachar (62MW) which SSE has
acquired, subject to planning consent for both projects being secured and grid
capacity becoming unconditional at Calliachar. The development of these seven
sites, if consented, will require investment of over £400m over the next few
years.

Nevertheless, the process for considering other applications for consent to
build wind farms, including those proposed by SSE, is proving to be arduous and
prolonged. The applications to build wind farms at Drumderg (32MW) and
Gordonbush (87MW) have both been in the planning process for almost three years,
but have yet to be finally determined - a rate of progress which is slow and
disappointing.

The Drumderg proposal is the subject of a Public Inquiry which got under way
during March 2006.  The Highland Council agreed The Highland Renewable Energy
Strategy and Planning Guidelines in May 2006 and the proposed wind farm at
Gordonbush is located in a preferred area for wind farm developments.

Beyond this programme of investment, other opportunities are also being
examined.  In line with that, SSE and Viking Energy, the company formed to
represent Shetland Island Council's interests in large-scale wind energy
development in Shetland, have signed a Memorandum of Understanding which is
expected to lead to the establishment of a joint venture aimed at developing on
the Shetland Islands a wind farm with a capacity of up to 600MW. Viking Energy's
involvement would make the scheme the largest community-backed wind farm
development in the world.

A planning application for consent to build the wind farm is expected to be
submitted during 2006.  In advance of that, RSPB has commented that the proposal
has avoided the most important designated wildlife areas in Shetland and that '
the degree of co-operation with conservation organisations on research and
survey into wildlife has established a new level of best practice'.  The
proposal is subject to, amongst other things, being able to demonstrate to Ofgem
the viability of a sub-sea cable from Shetland to the mainland of Scotland.

SSE's proposal to develop a 250MW wind farm on the Western Isles has been
complicated by Scottish Ministers' decision to refer to the Scottish Land Court
the interposed lease over the site of the proposed wind farm.  Ministers have
said that they are unable to say how long it will take the Court to make its
determination or even whether the process will end there, as any decision will
be subject to appeal.

New Technologies

Investment in the research, development and demonstration of new technologies
for generating electricity from renewable sources is a key part of the
government's energy policy, and is part of SSE's strategy to remain the UK's
leading generator of electricity from renewable sources.

It is investing around £10m in a project, with Talisman Energy UK, to deploy two
5MW demonstrator wind turbines in deep water in the Moray Firth. Subject to
suitable weather conditions being available, the turbines will be deployed in
the water during the summer of 2006 with electricity being generated from 2007.
In addition, SSE's marine energy venture, Renewable Technology Ventures Ltd
(RTVL), is on course to deploy its 2.4MW tidal underwater turbine demonstrator
at the European Marine Energy Centre in Orkney during 2007/08.

SSE is also investing up to £2.4m in a fund to support renewable energy projects
and technologies being developed by companies in the east of Scotland.  The fund
will be managed by a subsidiary of Sigma Technology Group.  The ten-year fund
will have a total initial value of up to £6m and an investment period of three
years.  SSE expects that its investment will yield business development
opportunities in technologies which have the potential to help the UK meet its
targets for reducing emissions of carbon dioxide while being capable of
generating significant amounts of electricity.  Its first investment was in
Edinburgh-based Ocean Power Delivery.

SSE's investment in the project to generate 'de-carbonised' electricity from
hydrogen at Peterhead Power Station fully complements its diverse interests in
generating electricity from renewable sources, as does its consideration of the
issues surrounding the development of 'clean coal' technologies at Ferrybridge,
including research by Heriot Watt University on the prospects for carbon capture
near the station.

With interests in emerging technologies, including micro generation technologies
(see 'Energy Services' below), allied to its established capability in
generating electricity from the more mature technologies of hydro, onshore wind
and biomass, SSE has the broadest range of interests in the UK in zero- and
low-carbon electricity generation technologies.

Generation Priorities for 2006/07

During 2006/07, SSE's key objective in generation will be to ensure that its
diverse portfolio of power stations is available to generate electricity in
response to customer demand and market conditions, while complying fully with
all safety standards and environmental regulations.

It will also be working to ensure that the installation of flue gas
desulphurisation equipment at Fiddler's Ferry and Ferrybridge and the
development of the Glendoe hydro electric scheme proceed on time and on budget.
It also hopes to secure consent for the construction of additional wind farm
capacity at up to seven sites with a total capacity of 361MW and to identify new
opportunities to invest in gas-fired generation.  There are also significant
decisions to be taken in terms of whether to go ahead with the projects to
generate 'de-carbonised' electricity at Peterhead and to install a Supercritical
Boiler and post-combustion carbon capture equipment at Ferrybridge.

Energy Supply

SSE's energy supply business had over 6.7 million customers as at 31 March 2006,
a net gain of 600,000 during 2005/06. SSE now has 2.2 million more customers
than at the start of 2002, an increase of almost 50%. Within the overall total,
SSE's business customers now cover almost 400,000 sites throughout Great
Britain.

SSE's policy is to seek to protect its domestic customers from the worst impacts
of volatile wholesale energy prices and to delay for as long as possible any
increases in prices for gas and electricity.  It has, therefore, increased
prices for domestic customers more slowly than its major competitors.  When the
latest increase was announced in March 2006, SSE gave a commitment to hold
electricity and gas prices at their revised levels until at least the start of
2007. SSE's decisions to delay price rises have saved a typical gas and
electricity customer around £100 since the start of 2004, compared with what
they would have paid had SSE increased prices at the same time as the UK's
largest energy supplier.

The outlook for gas and electricity prices remains uncertain.  Nevertheless, SSE
will seek to maintain its reputation for responsible pricing and for protecting
its customers from the worst impacts of volatile wholesale energy markets.  It
believes that this reputation for restraint has contributed to the sustained
growth in the number of energy supply customers which has been achieved in
recent years, and will support the achievement of additional growth in the
future.

According to the Domestic Retail Market Report published by Ofgem in February
2006, SSE's three regional brands - Scottish Hydro Electric, Southern Electric
and SWALEC - have been the most successful of the 'incumbent' electricity
suppliers in the 14 regions in Great Britain in maintaining their market share
within the competitive market.

In support of the Scottish Hydro Electric brand SSE announced in March 2006 a
major three-year sponsorship of the Camanachd Cup.  This complements the
well-established sponsorship of the Southern Electric Premier Cricket League.
These programmes will be followed by a SWALEC-supported sports initiative in
south Wales.

Customer Service

Equally important to success in Energy Supply is maintaining the highest
possible standards of customer service. The leading annual independent study, by
JD Power, published in November 2005, found that SSE has the highest level of
customer satisfaction among UK electricity suppliers and the second highest
among gas suppliers.

Despite the significant growth in customer numbers, SSE secured during 2005/06 a
reduction of almost 15% in the number of customer complaints sent to energywatch
for resolution, to 1,692 - the third successive year in which a significant
reduction in the number of complaints has been achieved.  In the statistics
published by energywatch in March 2006, SSE had the lowest rate of complaints in
respect of all three categories: account and billing matters; direct selling;
and transfers between companies.

SSE believes that a high quality of service will become an increasingly
important part of its customer proposition - and that customers' expectations of
the service their energy supplier should provide will increase.  In line with
this, it has implemented a new Domestic Energy Customer Charter, the first of
its kind in the UK.  It makes a series of specific commitments in respect of
customer service, such as a pledge to respond to letters from customers within
five days of receipt and the right to independent arbitration where necessary to
resolve issues.

The introduction of the Charter is part of the wider performance improvement
programme in SSE's Customer Service division.  This programme is geared to
improving significantly customers' experience in dealing with SSE and, amongst
other things, reducing the number of customers lost to other suppliers - an area
in which there is scope for SSE to improve.

The programme involves a major re-organisation and simplification of the
division, around the customer lifecycle, with over 30 process re-designs.  These
include, for example, increasing the frequency of reviews of direct debit
payments being made by customers, to every six months, so they can be satisfied
their payments are in line with their actual energy consumption.  As part of the
project, it is expected that the introduction of computer-telephony integration
(CTI) will be completed well before the end of 2006.  It will, amongst other
things, reduce the number of 'menu' options customers have to deal with before
they speak to a customer service adviser.

Product Development

Energy supply remains intensely competitive, and key to long-term success will
be greater success in gaining and retaining customers' loyalty, and the
performance improvement programme is designed to achieve that, as is product
development.  In line with this, SSE has launched energyplus pulse. For every
customer who switches gas and electricity supply to energyplus pulse, SSE
donates £10 a year to the British Heart Foundation.

It forms part of the energyplus suite of 'loyalty' products which are available
from SSE and which now have, in total, over 700,000 customers.  In a highly
competitive market, SSE believes that its ability to offer a range of 'loyalty'
products positions it well to retain customers for the long term.

In addition, SSE has continued to look at options for new products, given the
importance of developments in this field as a key contributor to long-term
success in energy supply.  For example, for customers who like peace of mind and
wish to guard against future uncertainty in energy prices, SSE has introduced a
'fixed price' tariff for gas and electricity.  While the fixed price is higher
than the revised prices which took effect on 1 May 2006, it is guaranteed until
2010.

Energy Services

An increasing number of supply customers are likely to seek a wider range of
energy-related services, covering renewable, sustainable and energy efficient
products.  In Budget 2006, the government said that supplying energy on an
energy services basis helps shift the focus of producers and customers from the
supply of units of electricity and gas to the supply of the overall services for
which energy is used.

SSE is very well-positioned to capture a significant proportion of this
developing market over the remainder of this decade because it combines
established contracting, private networks, connections and appliance retail
businesses with a portfolio of micro generation technologies.

In terms of micro generation technologies, SSE has invested £1.12m to increase
its stake in Edinburgh-based Swift Turbines to 10% of the share capital, with
options over a further 20%, and £2.0m to increase its stake in solarcentury to
13.3% of the share capital.  Swift Turbines has developed what is believed to be
the world's first feasible rooftop-mountable wind energy system and London-based
solarcentury is the largest independent solar photovoltaics company in the UK.
In addition to its investments, SSE is working with both companies to market the
provision and installation of the technologies to an increasing number of
customers in the UK.

SSE is also launching a new domestic boiler installation and maintenance and
repair service for gas central heating systems.  The initial offering is being
made in 13 postcode areas covering 3.5 million households.  The product features
an annual inspection, full breakdown and emergency cover and a 24-hour, 365-day
manned customer helpline.  It covers customers' entire gas central heating
system, including the boiler, pipe work, radiators, cylinders and tanks.

The establishment by SSE of an Energy Services unit anticipated a growing demand
for services 'beyond the meter'. Its ability to provide these services is a
natural long-term complement to its existing business of distributing and
supplying energy to the meter.

Energy Supply Priorities in 2006/07

During 2006/07, SSE will seek to capitalise on its strong regional brands, its
best-in-sector customer service, its responsible pricing policy and its range of
value-adding offers to increase further its number of energy supply customers.
Amongst other things, this will require a continuing focus on delivering the
highest possible standard of service to customers and completing the delivery of
the performance improvement programme in the Customer Service division, with the
explicit aim of increasing customer loyalty.  SSE is committed to keeping
domestic electricity and gas prices at their current levels until at least the
start of 2007.

As the energy supply market evolves to include more energy services, SSE will
seek to increase further its activity in gas and electricity infrastructure,
microgeneration and in particular the provision and maintenance of gas boilers.
It will actively encourage the UK government, in the context of its review of
energy policy, to develop further the framework for energy services in general,
including micro generation.

CONTRACTING, CONNECTIONS AND METERING

Key points:

•         Operating profit* up 5.2% to £50.4m.
•         Acquisition of Harrison Smith in February 2006.
•         Secured Leeds City Council street lighting PFI.
•         50,800 electrical and gas connections completed.
•         Number of 'out-of-area' electricity networks up to 19, with agreement
          on a further 12.

Introduction to Contracting, Connections and Metering

SSE's contracting business, Southern Electric Contracting, has three main areas
of activity:  industrial, commercial and domestic electrical contracting;
electrical and instrumentation engineering; and street and highway lighting.  It
is one of the largest electrical contracting businesses in the UK and operates
from  48 regional offices throughout Great Britain and trades as SWALEC
Contracting in Wales, Hydro Contracting in Scotland, Eastern Contracting in the
east of England and Harrison Smith in the north of England.

SSE's national Connections business provides all utility infrastructures and
connections for new developments.  It finances, plans and constructs projects
and owns and operates gas, electricity and telecommunications networks
throughout the country.

During the Distribution Price Control Review for 2005-10, Ofgem reviewed the
price control treatment of the provision, installation and maintenance of meters
and separated it from the electricity distribution RAV.  This resulted in a
reduction in SSE's RAV of £23m on 1 April 2005.

Contracting, Connections and Metering Overview

Contracting, Connections and Metering delivered operating profit* of £50.4m
during 2005/06, an increase of 5.2%.  This includes £3.4m of operating profit
from Thermal Transfer, SSE's specialist contracting business, which was sold to
ETDE on 31 March 2006 for £20m.

Contracting

The sale of Thermal Transfer will allow SSE's core contracting business,
Southern Electric Contracting (SEC), to develop its mechanical and electrical
capability. It is continuing to make significant progress.

It acquired the Yorkshire-based plumbing and heating contractor, Harrison Smith
(Batley) in February 2006 in a transaction with a value of around £1.2m.  The
acquisition has given SEC the scope to offer a more comprehensive range of
electrical, heating and plumbing services to customers in the north of England.
It followed the acquisition in January 2005 of the electrical contracting
division of what was previously Eastern Contracting, a business which is now a
fully-integrated part of SEC.

SEC's joint venture with Interserve, 'PriDE', has now completed the first year
of a seven year contract worth around £400m to provide mechanical and electrical
maintenance for over 100 Ministry of Defence sites in London and the south east
of England.  The profit contribution of the venture in its first year was in
line with that expected when the contract was awarded.

In partnership with the asset finance division of The Royal Bank of Scotland,
SEC also has contracts with a value of over £700m to replace and maintain
streetlights for four local authorities in England under the Private Finance
Initiative. This includes the largest-ever street lighting PFI in the UK, agreed
with Leeds City Council in February 2006.   SSE has contracts with 28 local
authorities to maintain around one million lighting units, making it the UK's
largest street-lighting contractor and operating profit from SSE's lighting
services activities grew by over 50% during 2005/06.

Connections

The Connections business completed 42,900 electrical connections during 2005/06.
Its rate of connecting new premises to its gas networks continued to grow, and
during the year, it connected a further 7,900 premises, up 12.9% on the previous
year, taking the total number of gas connections now owned by SSE to more than
35,000.

In addition, the Connections business has continued to expand its portfolio of
electricity networks outside the Southern Electric and Scottish Hydro Electric
Power Distribution areas. It now owns and manages 19 electricity networks
outside SSE's two electricity distribution areas, a gain of three during the
year.  The three new networks are at Waterfront Edinburgh, Braehead Glasgow and
Doncaster Interchange. It has also won during 2005/06 a total of 12 new
contracts to provide energy infrastructure, including schemes for Cardiff
International Sports Village, Dagenham and Warrington Golden Square.  These
projects further demonstrate SSE's capability to provide energy networks to
customers across the whole of the UK and will take its total number of '
out-of-area' electricity networks to 31.

Metering

SSE's Metering business provides services to most electricity suppliers with
customers in central southern England and the north of Scotland.  It supplies,
installs and maintains domestic meters and carries out metering work in the
commercial, industrial and generation sector.  It also offers data collection
services to the domestic and SME sectors.

In total, SSE owns 3.6 million meters and changes around 250,000 meters each
year as they reach the end of their useful life or to meet customer requests for
changed functionality.  Each year, it collects around 5.1 million electricity
readings and 1.3 million gas readings.  It is focused on providing an efficient
service in SSE's two licensed electricity distribution areas.

Contracting, Connections and Metering Priorities in 2006/07

The priorities for SEC in 2006/07 are to complete the integration of the
Harrison Smith business and to make a successful start to the Leeds PFI.  It is
also important to ensure that there continues to be good performance in other
long-term contracts, such as the Ministry of Defence 'PriDE' contract.  Given
such a significant proportion of its business is 'repeat', its over-riding
priority is to deliver a high standard of service to all customers in all of the
sectors in which it operates.

The connections business' focus will be on the successful delivery of a growing
number of utility connections and on continuing to expand its range of
electricity networks outside the Southern Electric and Scottish Hydro Electric
Power Distribution areas.  In particular, it expects to construct and energise
12 new out-of-area networks.    The Metering business will continue to focus on
delivering a good service at competitive prices.

GAS STORAGE

Key points:

•         Operating profit* up 43.7% to £27.3m.
•         100% availability to meet customers' nominations.
•         Nine wells drilled at the Aldbrough development.
•         'Leaching' under way at five caverns.

Introduction to Gas Storage

SSE owns and operates the UK's largest onshore gas storage facility at Hornsea
in East Yorkshire. Nine man made salt cavities have been leached into a salt
layer 1.8 kilometres below the surface creating 325 million cubic metres of gas
storage space.  Gas can be withdrawn at a rate of 18 million cubic metres per
day, the equivalent of the requirements of around four million homes. The
services offered at Hornsea provide customers with a reliable source of
flexibility with which to manage their supply/demand balance and exploit market
opportunities.

Gas Storage Operations

Gas Storage delivered an operating profit* of £27.3m during 2005/06, an increase
of 43.7% compared with the previous year. The value of, and demand for, gas
storage facilities in the UK remains high and, in a volatile gas market, SSE has
continued to enter into new contracts to provide storage at a significantly
higher value than the contracts they replace.

The facility at Hornsea has a good record of reliability and during 2005/06 was
100% available to customers except in instances of planned maintenance.  This
enables customers to manage their gas market risks and exploit gas trading
opportunities.

Gas Storage Investment

SSE's joint venture with Statoil (UK), in which SSE is investing £150m, to
develop what will become the UK's largest onshore gas storage facility at
Aldbrough, is continuing to make good progress. With a total new capacity of
around 420 million cubic metres, of which SSE will have the ownership interest
in 280 million cubic metres, Aldbrough will provide essential additional gas
storage for the UK energy industry.

Nine caverns will be used to store gas at Aldbrough.  They are being created by
directionally drilling from a central processing area down to the salt strata.
Seawater is then pumped into the boreholes to dissolve the salt and form the
caverns. This is the process known as 'leaching'. All nine wells have been
drilled and the leaching is at full capacity, taking place at five caverns.  The
process will take another three years to complete, with the first cavern
expected to be ready to store gas in 2007.

Gas Storage Priorities in 2006/07

All storage capacity at Hornsea for 2006/07 was sold before the end of March
2006.   SSE's priorities in Gas Storage during the year are to ensure that
Hornsea maintains its excellent record of reliability and to ensure that the
Aldbrough development remains on course to begin storing gas in 2007, with the
completion of the leaching of the first storage cavern by the end of this
financial year.

TELECOMS

Key points:

•         Operating profit* up 22.1% to £13.2m.
•         Increased sales to major customers.
•         Improved project delivery.

Introduction to Telecoms

SSE Telecom provides radio sites for local authorities, mobile operators and
emergency services throughout central southern England and the north of
Scotland, enabling customers to improve their network coverage and capacity.
Its subsidiary, Neos Networks, operates a 7,500km UK-wide telecoms network,
including 1,100km of underground and overhead fibre optic cable installed on
SSE's electricity network, providing networking services to other telecoms
providers, companies and public sector organisations.

Telecoms Operations

SSE's combined Telecoms business (SSE Telecom and Neos) achieved an operating
profit* of £13.2m during 2005/06, compared with £10.8m in the previous year, an
increase of 22.1%. The business offers customers a national telecoms network,
and has a UK-wide sales force and a broad range of products including Ethernet,
SDH Leased Lines and Dark Fibre.  As a subsidiary of SSE, it is also able to
position itself as one of the UK's most financially secure telecoms network
operators, which gives a significant competitive advantage.

The improvement in performance during 2005/06 was mainly the result of higher
sales, and important contracts have recently been signed with a diverse range of
major organisations, such as Opal Telecom (part of the Carphone Warehouse),
College of Law (the largest provider of legal education and training in Europe)
and Savvis (for easyJet).  During the year, the business also secured further
improvements in the quality of project delivery.

Telecoms Priorities in 2006/07

SSE's priority in Telecoms in 2006/07 is to continue to grow its sales, using
its already-established nationwide network, with its competitive range of
products targeted at commercial and public sector customers.

EXCEPTIONAL ITEMS

TXU Europe Group plc

In August 2005, SSE received its second net distribution payment, of £41.6m,
from the administrators of TXU Europe Group plc and certain of its subsidiaries,
with regard to its claim of £294.2m in respect of a 14-year contract originally
entered into in 1997. A third net distribution payment, of £50.5m, was received
in January 2006.  To these has been added SSE's share (£16.7m) of the
distributions paid by the administrator to Barking Power Ltd, the operators of
Barking Power Station, in which SSE now has a total stake of 30.4%.  This gives
a total receipt during 2005/06 of £108.8m.

These payments followed the first net distribution payments of £159.1m to SSE
and SSE's share of £22.3m to Barking Power Ltd, which were received from the
administrator in March 2005. Following the second and third payments, SSE
expects to receive further distributions later in 2006 and that, in total, well
over 90% of its claim will be settled.

Thermal Transfer

In March 2006, SSE completed the sale of Thermal Transfer to ETDE, the
electrical contracting/maintenance subsidiary of the French-owned Bouygues
Construction.  The profit on the disposal was £18.6m.

CAPITAL EXPENDITURE

Investment and capital expenditure, excluding acquisitions, totalled £502.1m
during 2005/06, compared with £383.5m in the previous year, an increase
foreshadowed in the Annual Report 2005.

Capital expenditure in Power Systems was £172.1m, compared with £171.5m in the
previous year.  A major part of the ongoing capital expenditure programme is
focused on the replacement of parts of the electricity network that date back to
the 1960s.

In addition, there was investment of £133.6m for growth in Generation during the
year, with the refurbishment work carried out at hydro electric power stations,
the development of new hydro electric and wind energy schemes leading to the
production of ROC-qualifying electricity and investment in biomass co-firing and
other developments at Fiddler's Ferry and Ferrybridge.

As well as Power Systems and Generation, £46.7m was invested in the ongoing
development of the new gas storage facility at Aldbrough.  In addition, in
February 2006, SSE acquired a building in Havant for £10.5m which it is now
refurbishing and which will become its regional base for southern England.  This
will enable SSE to bring together in a single, higher-quality building employees
who currently work in separate sites in Portsmouth and Havant, which will be
vacated and sold.

Within the overall total, capital expenditure for growth was £287.7m during 2005
/06, including £133.6m of the overall capital expenditure in Generation As
previously stated, capital expenditure will continue to be significant during
the rest of this decade, with investment in generation, including FGD
installation, electricity networks and gas storage, and is expected to be over
£650m in 2006/07. All investments are expected to achieve returns which are
greater than the cost of capital and are expected to enhance earnings.

FINANCIAL MANAGEMENT

Treasury Policy

SSE's operations are financed by a combination of retained profits, bank
borrowings, long-term debt issuance and commercial paper.  As a matter of
policy, a minimum of 50% of SSE's interest rate exposure is kept at fixed rates
of interest.  Within this policy framework, SSE borrows as required, at both
fixed and floating rates, with interest rate swaps and forward rate agreements
being used to achieve the desired profile.  All borrowings in foreign currencies
are swapped back into Sterling.  At 31 March 2006, 83.2% of SSE's borrowings
were at fixed rates, after taking account of interest rate swaps.

Liquidity policy requires SSE to ensure that it has committed borrowings and
facilities equal to at least 105% of forecast borrowings over a rolling 12 month
period.  SSE had undrawn committed bank facilities of £650m, with a weighted
average period, until maturity, of 3.7 years as at 31 March 2006.

As the United Kingdom is SSE's main area of operation, foreign currency risk is
limited mainly to procurement contracts, fuel purchases and commodity hedging
transactions.  Its policy is to hedge all material foreign exchange exposures
through the use of forward currency purchases and/or derivative instruments.
Indirect exposures created by SSE's gas purchases are similarly hedged on an
ongoing basis.

Net Debt and Cash Flow

During 2005/06, SSE's net debt increased by £736.4m to £2,166.4m.  Net debt
includes £26.2m owed by the  PFI streetlighting companies, which is non-recourse
to SSE.  The increase followed: the £505m acquisition cost of the 50% stake in
SGN; increased capital expenditure for growth, principally in electricity
generation and gas storage, totalling £287.7m; and an adverse movement in
working capital.  This reflected higher commodity costs incurred during the year
which were lagged by cash collections from electricity and gas customers.
Working capital is forecast to improve in 2006/07 as this lag is reversed during
the year.

There was a cash inflow of £92.1m from the administration of TXU businesses.  In
April 2004, SSE acquired over 300,000 electricity and gas customers and the
customer debt book from Atlantic Electric & Gas for £85.3m.  In the two years
since the acquisition, all of the money which SSE paid for the customer debt
book has been collected.

Borrowings and Facilities

The objective for SSE is to maintain a balance between continuity of funding and
flexibility, with a range of maturity dates. Its average age of debt as at 31
March 2006 was 12.7 years, compared with 12.0 years as at 31 March 2005.

The maturity profile continues to reflect the medium-to-long term nature of
SSE's underlying assets and means that its debt structure continues to be in a
strong position going forward, with around £1.85bn of borrowings in medium to
long-term funding in the form of issued Bonds and European Investment Bank
borrowings.  A total of 18.7% of SSE's borrowings will mature in the 12 months
to March 2007.

In February 2006, SSE issued a £325m long-dated sterling bond for Southern
Electric Power Distribution to pre-finance pending maturities and to provide
funding for its capital expenditure programme.  This bond, which matures in
2037, has a coupon of 4.625%, which will help to reduce significantly SSE's
interest costs over the long term.

Net Finance Costs

The basis of the presentation of net finance costs has changed under IFRS and
the table below reconciles published net finance costs to adjusted net finance
costs, which SSE believes is a more meaningful measure. In line with that, SSE's
adjusted net finance costs in 2005/06 was £155.3m, compared with £90.9m in the
previous year.  Of the £155.3m, SGN interest was £54.1m (net of loan stock
interest payments to SSE).


                                                                             March 06       March 05
                                                                                   £m             £m

Published net finance costs (Note 6)                                             89.4           61.3
add/(less)
        Share of JCE*/Associate interest                                         97.3           17.2
        Convertible debt IAS 32 adjustment                                      (3.6)              -
        Interest on pension plan liabilities                                  (100.0)         (94.7)

        Return on pension plan assets                                           115.7          107.1
        Movement on derivatives                                                (43.5)              -
Adjusted net finance costs                                                      155.3           90.9

*Jointly Controlled Entities

The average interest rate for SSE, excluding JCE/Associate interest, during the
year was 5.42%, compared with 5.91% in the previous year. Its underlying
interest cover was 9.2 times, compared with 9.0 times in the previous year;
including interest related to SGN, it was 6.6 times.

TAX

To assist the transparency of SSE's tax position, the adjusted current tax
charge is calculated as follows:


                                                                             March 06        March 05
                                                                                   £m              £m

Published tax charge                                                            254.6           229.5
add back:
        Share of JCE/Associate tax                                               29.9            15.3

less:
        Deferred tax                                                           (37.7)          (35.6)
        Tax on exceptional items and re-measurements                           (15.3)          (27.2)

Adjusted current tax charge                                                     231.5           182.0


The effective adjusted current tax rate, based on adjusted profit before tax,
was 27.0%, compared with 25.3% in the previous year. The headline tax charge was
28.3%, compared with 29.1% in the previous year.

BALANCE SHEET

SSE maintains one of the strongest balance sheets in the global utility sector,
which continues to give it significant competitive advantage in terms of cost of
funding and supporting new developments.

During the year, the trustees of both the Southern Electric scheme and the
scheme for employees at Fiddler's Ferry and Ferrybridge agreed to merge their
final salary schemes. The merger has no impact on members' benefits. The merger
has created an enlarged pension scheme with a more balanced investment strategy
and lower costs, giving increased security for all members.

In line with the IAS 19 treatment of pension scheme assets, liabilities and
costs, pension scheme liabilities of £284m and a pension scheme asset of £90.2m
are recognised in the balance sheet at 31 March 2006, gross of deferred tax.
Overall, this represents an improvement of £33.8m compared with the position at
March 2005.

During 2005/06, employer cash contributions to the Scottish Hydro Electric
pension scheme amounted to £9.2m. Contributions to the Southern Electric pension
scheme amounted to £46.5m during the year. This includes a contribution towards
the deficit of £31.7m that was agreed in March 2005, in addition to an ongoing
contribution rate of 19.9% of salaries. As part of the Distribution Price
Control for 2005-2010, it was agreed that allowance for 76% of deficit repair
contributions should be included in price controlled revenue.

At 31 March 2006, there was a net asset arising from IAS 39 of £46.5m, before
tax, compared with a net asset of £31.8m, before tax, at 1 April 2005.

PURCHASE OF OWN SHARES

The Directors of SSE have not exercised their authority to purchase, in the
market, the company's own shares during 2005/06. The Directors are, however,
seeking renewal of their authority to purchase, in the market, the Company's own
shares at the Annual General Meeting on 27 July 2006. It remains the policy of
the Board of SSE to take opportunities to return value to shareholders through
the purchase of the Company's own shares should the conditions be appropriate.

CORPORATE RESPONSIBILITY

Safety and the Environment

SSE aims to create value for shareholders by running the business with a strong
emphasis on safety and on caring for the environment. During 2005/06, the actual
number of lost time and reportable accidents within the company was 17, the same
as in the previous year. This equates to 1.38 per 1,000 employees, compared with
1.54 per 1,000 employees in the previous year which, on this basis, was SSE's
best-ever safety performance.

The number of serious, or potentially serious, road traffic accidents involving
employees driving company vehicles fell from 24 in 2004/05 to 17 in 2005/06.
Performance in 2005/06 equates to 0.28 accidents per 100 vehicles compared with
0.42 in the previous year.

SSE's target for any given year is zero reportable environmental incidents.
There were no such incidents during the 2005/06.

Corporate Responsibility Index and Business in the Environment Index

Business in the Community's Corporate Responsibility Index provides an
authoritative benchmark for companies to evaluate their management practice in
four key areas of corporate responsibility  (community, environment, marketplace
and workplace) and performance in a range of environmental and social impact
areas material to their business.

The results of the Index for 2005, in which over 130 companies participated,
were published in May 2006.  SSE's score was 97.5%, compared with 93.0% in the
previous year.  This placed SSE joint 7th in the Index, compared with joint 14th
in the previous year, and made it the joint top-ranked company in its sector.

Within the main Index is the Business in the Environment Index.  SSE's score was
99.20%, compared with 98.80% in the previous year, making SSE best in its
sector.

STRATEGY AND OUTLOOK

In a sector which remains subject to significant change, SSE continues to focus
on enhancing and creating value for shareholders from its energy and
infrastructure-related businesses in the UK. The businesses have been expanded
in recent years through incremental growth and investment in assets, and they
are well-placed to deliver further growth.  That growth will be based on SSE's
core strengths, amongst which the achievement of continuous improvement and the
delivery of operational excellence in all activities continue to be fundamental.

There are excellent opportunities to grow these businesses further through the
major investment programme planned for the rest of this decade, which will add
significantly to SSE's asset base in energy networks, electricity generation,
energy supply and gas storage. All of this investment is in line with the UK's
key goals of delivering reliable and lower carbon energy supplies.

SSE can take advantage of these opportunities because of its
carefully-maintained financial strength.  SSE is, therefore, in a very good
position to expand its businesses further through incremental growth and
investment in assets and, most importantly of all, to deliver sustained real
growth in the dividend.

Investor Timetable
Publication of Annual Report on SSE website           6 June 2006
AGM                                                   Bournemouth, 27 July 2006
Ex-dividend date                                      23 August 2006
Record date                                           25 August 2006
Payment date                                          22 September 2006
Interim results                                       15 November 2006


Enquiries to:

Scottish and Southern Energy plc
Alan Young - Director of Corporate Communications         + 44 (0)870 900 0410
Denis Kerby - Investor and Media Relations Manager        + 44 (0)870 900 0410

Financial Dynamics
Andrew Dowler                                             + 44 (0)20 7831 3113


There will be an analysts' presentation starting at 09:45GMT at the offices of
Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB.


Webcast facility:                This is available by going to: www.scottish-southern.co.uk then click on
                                 Investor Centre.


Telephone conference call:
                                    UK Dial in:                         0800 073 1340
                                    International dial in:              [phone]

                                    Replay facility (for one week)
                                    UK local rate no: UK dial-in: 0845 245 5205

                                    UK International no: International dial-in:[phone]

                                    UK PIN (access) no: 9847778



Income Statement
for the year ended 31 March 2006

                                                               2006                                 2005
                                                Before  Exceptional                  Before  Exceptional
                                           exceptional    items and             exceptional    items and
                                             items and      certain               items and      certain
                                               certain  re-measure-                 certain  re-measure-
                                           re-measure-        ments             re-measure-        ments
                                                 ments     (note 5)      Total        ments     (note 5)      Total
                                 Note               £m           £m         £m           £m           £m         £m

Revenue                            4          10,145.2            -   10,145.2      7,424.6            -    7,424.6
Cost of sales                                (8,816.4)       (14.4)  (8,830.8)    (6,257.2)       (61.0)  (6,318.2)
Gross profit                                   1,328.8       (14.4)    1,314.4      1,167.4       (61.0)    1,106.4
Operating costs                                (482.4)            -    (482.4)      (407.6)            -    (407.6)
Other operating income                               -         92.1       92.1            -        111.2      111.2
Gain on disposal of subsidiary                       -         18.6       18.6            -            -          -
Operating profit before jointly                  846.4         96.3      942.7        759.8         50.2      810.0
controlled entities and
associates
Jointly controlled entities and
associates:
Share of operating profit                        167.1         16.7      183.8         50.8         22.3       73.1
Share of interest                               (97.3)            -     (97.3)       (17.2)            -     (17.2)
Share of movement on derivatives                     -       (13.0)     (13.0)            -            -          -
Share of tax                                    (28.8)        (1.1)     (29.9)        (8.6)        (6.7)     (15.3)
Share of profit on jointly                        41.0          2.6       43.6         25.0         15.6       40.6
controlled entities and
associates
Operating profit                   4             887.4         98.9      986.3        784.8         65.8      850.6
Finance income                     6             164.9            -      164.9        126.8            -      126.8
Finance costs                      6           (210.8)       (43.5)    (254.3)      (188.1)            -    (188.1)
Profit before taxation                           841.5         55.4      896.9        723.5         65.8      789.3
Taxation                           7           (244.3)       (10.3)    (254.6)      (209.0)       (20.5)    (229.5)
Profit for the year                              597.2         45.1      642.3        514.5         45.3      559.8

Attributable to:
Equity holders of the parent                     597.2         45.1      642.3        514.6         45.3      559.9
Minority interest                                    -            -          -        (0.1)            -      (0.1)
                                                 597.2         45.1      642.3        514.5         45.3      559.8

Basic earnings per share           9                                     74.7p                                65.3p
Diluted earnings per share         9                                     72.9p                                64.5p

Dividends paid in the year         8                                   £378.8m                              £330.8m


The accompanying notes are an integral part of these accounts.



Balance Sheet
as at 31 March 2006


                                                                                          2006        2005
                                                                    Note                    £m          £m
  Assets
  Property, plant and equipment                                                        4,646.6     4,386.1
  Intangible assets:
    Goodwill                                                                             293.4       292.6
    Other intangible assets                                                              297.2       107.8
  Investments in associates and jointly controlled entities                              703.1       212.0
  Other investments                                                                        3.3         1.4
  Retirement benefit assets                                          13                   90.2        98.9
  Deferred tax assets                                                                     86.0        97.9
  Derivative financial assets                                                             24.8           -
  Non-current assets                                                                   6,144.6     5,196.7

  Inventories                                                                            164.2       134.1
  Trade and other receivables                                                          1,662.9     1,073.7
  Cash and cash equivalents                                                               49.9       232.2
  Derivative financial assets                                                            157.6           -
  Current assets                                                                       2,034.6     1,440.0
  Total assets                                                                         8,179.2     6,636.7

  Liabilities
  Loans and other borrowings                                                             417.3        29.4
  Trade and other payables                                                             1,834.6     1,361.0
  Current tax liabilities                                                                165.4       138.0
  Provisions                                                         11                    2.8        20.3
  Derivative financial liabilities                                                        59.8           -
  Current liabilities                                                                  2,479.9     1,548.7

  Loans and other borrowings                                                           1,797.6     1,653.6
  Deferred tax liabilities                                                               919.1       888.3
  Provisions                                                         11                   79.0        91.0
  Trade and other payables                                                               396.7       266.3
  Retirement benefit obligations                                     13                  284.0       326.5
  Derivative financial liabilities                                                        77.5           -
  Non-current liabilities                                                              3,553.9     3,225.7
  Total liabilities                                                                    6,033.8     4,774.4
  Net assets                                                                           2,145.4     1,862.3

  Equity:
  Share capital                                                                          430.2       429.4
  Share premium                                                      12                   90.7        81.6
  Capital redemption reserve                                         12                   13.7        13.7
  Equity reserve                                                     12                   14.6           -
  Hedge reserve                                                      12                    6.6           -
  Retained earnings                                                  12                1,589.6     1,338.0
  Total equity attributable to equity holders of the parent                            2,145.4     1,862.7
  Minority interest                                                                          -       (0.4)
  Total equity                                                                         2,145.4     1,862.3



Statement of recognised income and expense
For the year ended 31 March 2006
                                                                                           2006        2005
                                                                                             £m          £m

Losses on effective portion of cash flow hedges (net of tax)                             (11.7)           -
Actuarial loss on retirement benefit schemes (net of tax)                                 (9.9)      (12.7)
Other movements                                                                           (5.9)       (1.2)
Net expense recognised directly in equity                                                (27.5)      (13.9)
Profit for the year                                                                       642.3       559.8
Total recognised income and expense for the year                                          614.8       545.9
Cumulative adjustment for the adoption of IAS 32 and 39                                    36.8           -
Total                                                                                     651.6       545.9

Attributable to:
Equity holders of the parent                                                              614.8       546.0
Minority interest                                                                             -       (0.1)
                                                                                          614.8       545.9

Cash Flow Statement
for the year ended 31 March 2006

                                                                                        2006          2005
                                                                                          £m            £m
Cash flows from operating activities
Profit for the year after tax                                                          642.3         559.8
Taxation                                                                               254.6         229.5
Movement on financing and operating derivatives                                         57.9             -
Finance costs                                                                          210.8         188.1
Finance income                                                                       (164.9)       (126.8)
Share of jointly controlled entities and associates                                   (43.6)        (40.6)
Gain on disposal of subsidiary                                                        (18.6)             -
Pension service charges less contributions paid                                       (22.3)         (1.0)
Depreciation and impairment of assets                                                  200.1         270.6
Amortisation and impairment of intangible assets                                         3.9           3.5
Deferred income released                                                              (16.4)        (62.3)
(Increase)/Decrease in inventories                                                    (30.8)           9.5
(Increase) in receivables                                                            (585.1)       (177.9)
Increase in payables                                                                   436.8         339.4
(Decrease) in provisions                                                              (14.5)        (29.9)
Cash invested in own shares for employee share awards                                  (9.5)         (2.8)
Charge in respect of employee share awards                                               4.0           1.6
Profit on disposal of property, plant and equipment                                    (5.2)         (7.7)
Loss on disposal of replaced assets                                                      5.2             -
Cash generated from operations                                                         904.7       1,153.0

Dividends received from jointly controlled entities                                      8.0          12.5
Finance income received                                                                 51.4          20.5
Finance costs paid                                                                   (119.5)        (92.5)
Income taxes paid                                                                    (217.9)       (152.9)
Net cash from operating activities                                                     626.7         940.6

Cash flows from investing activities
Purchase of property, plant and equipment                                            (529.4)       (345.0)
Purchase of software                                                                   (1.2)         (2.3)
Deferred income received                                                                 7.9           3.1
Proceeds from sale of property, plant and equipment                                     16.3          19.5
Net proceeds from sale of subsidiary                                                    17.3             -
Proceeds from sale of investments                                                          -           2.9
Loans to jointly controlled entities                                                       -         (1.0)
Loans to associates                                                                    (0.7)             -
Investment in Scotia Gas Networks plc (note 10)                                      (505.0)             -
Loans repaid by jointly controlled entities                                             10.8          10.8
Loans repaid by associates                                                               7.3           2.7
Investment in associate                                                               (15.0)             -
Increase in other investments                                                          (1.9)             -
Purchase of businesses and subsidiaries                                                (0.6)       (339.0)
Net cash from investing activities                                                   (994.2)       (648.3)

Cash flows from financing activities
Proceeds from issue of share capital                                                     9.9           9.7
Dividends paid to company's equity holders                                           (378.8)       (330.8)
New borrowings                                                                         552.4         331.3
Repayment of borrowings                                                                    -        (98.3)
Net cash from financing activities                                                     183.5        (88.1)

Net (decrease)/increase in cash and cash equivalents                                 (184.0)         204.2

Cash and cash equivalents at the start of year                                         227.8          23.6
Net (decrease)/increase in cash and cash equivalents                                 (184.0)         204.2
Cash and cash equivalents at the end of year                                            43.8         227.8



Notes on the Financial Statements
For the year ended 31 March 2006

1. Financial Statements

The financial information set out in this announcement does not constitute the
Group's statutory accounts for the years ended 31 March 2006 or 2005 within the
meaning of Section 240 of the Companies Act 1985.  Statutory accounts for 2005,
which were prepared under UK Generally Accepted Accounting Practices (UK GAAP),
have been delivered to the Registrar of Companies and those for 2006, prepared
under International Financial Reporting Standards as adopted by the EU (adopted
IFRS), will be delivered in due course.  The auditors have reported on those
financial statements; their reports were (i) unqualified; (ii) did not include
references to any matters to which the auditors drew attention by way of
emphasis without qualifying their reports; and (iii) did not contain statements
under sections 237(2) or (3) of the Companies Act 1985. This preliminary
announcement was authorised by the Board on 30 May 2006.

2.  Basis of preparation

The financial statements set out in this announcement and the financial
statements of the Group have been prepared on the historical cost basis except
that the following assets and liabilities are stated at their fair value:
derivative financial instruments and financial instruments classified as
available for sale. The financial statements have also been prepared in
accordance with International Financial Reporting Standards and its
interpretations as adopted by the European Union (adopted IFRS).  The financial
statements are presented in pounds sterling.

The financial statements are the first annual financial statements of the Group
prepared in accordance with adopted IFRS and the Group has applied a number of
the exemptions contained within IFRS 1 First-Time Adoption of International
Financial Reporting Standards including:

* IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial
Instruments: Recognition and Measurement, have been adopted retrospectively as
at 1 April 2005 but, as permitted by the transition provisions of IFRS 1, the
Group has not restated comparative information.

* Business Combinations which took place prior to 1 April 2004 have not been
reassessed under IFRS 3 Business Combinations.

* The Group has elected, under IAS 16 Property, Plant and Equipment, to measure
a category of assets, Hydro Civil Assets, based on deemed cost.

* The application of IFRS 2 Share-based Payments, has been restricted to equity
instruments that were granted on or after 7 November 2002 and had not vested by
1 January 2005.

In accordance with IAS 1 Presentation of Financial Statements, the Group has
disclosed additional information in respect of jointly controlled entities and
associates, exceptional items and certain re-measurements on the face of the
income statement to aid understanding of the Group's financial performance. An
item is treated as exceptional if it is considered unusual by nature and scale
and of such significance that separate disclosure is required for the financial
statements to be properly understood.

The impact of the transition to adopted IFRS, and the significant accounting
policies of the Group which have altered as a result of the adoption of IFRS,
were explained in the interim results statement for the six month period ended
30 September 2005 which was published on 16 November 2005. This is explained in
detail in the Group's Statutory Financial Statements for the year ended 31 March
2006.

3. Basis of consolidation of the Group

The financial statements consolidate the financial statements of Scottish and
Southern Energy plc and its subsidiaries together with the Group's share of the
results and net assets of its jointly controlled entities and associates.

The results of subsidiary undertakings acquired or sold are consolidated from
the date that control commences until the date control ceases using the
acquisition method of accounting.

The Group's share of the total recognised gains and losses of associates are
included on an equity accounted basis from the date that significant influence
commences until the date significant influence ceases.

Investments in jointly controlled entities are accounted for under the equity
method of accounting from the date that joint control commences until the date
joint control ceases. Jointly controlled operations are businesses which use
assets and liabilities that are separable from the rest of the Group. In these
arrangements, the Group accounts for its own share of property, plant and
equipment, carries its own inventories, incurs its own expenses and liabilities
and raises its own finance.

Notes on the Financial Statements
for the year ended 31 March 2006

4. Segmental information

Primary reporting format - business segments

The primary segments are as reported for management purposes and reflect the
day-to-day management of the business. The Group's primary segments are the
distribution and transmission of electricity in the North of Scotland, the
distribution of electricity the South of England (together referred to as Power
Systems), the generation and supply of electricity and sale of gas in Great
Britain (Generation and Supply). The Group's 50% equity share in Scotia Gas
Networks plc, a business which distributes gas in Scotland and the South of
England (note 10), is included as a separate segment where appropriate due to
its significance.

Analysis of revenue and operating profit by segment is provided below. All
revenue and profit before taxation arise from operations within Great Britain
and Ireland.

a) Revenue by segment

                                                               Intra-       Intra-
                                    Total         Total       segment      segment    External    External
                                  revenue       revenue       revenue      revenue     revenue     revenue
                                     2006          2005          2006         2005        2006        2005
                                       £m            £m            £m           £m          £m          £m
Power Systems
  Scotland                          261.1         258.9         104.1        188.1       157.0        70.8
  England                           415.9         369.2         204.0        185.5       211.9       183.7
                                    677.0         628.1         308.1        373.6       368.9       254.5
Generation and Supply             9,287.8       6,766.1          27.4         15.7     9,260.4     6,750.4
Other businesses                    783.3         645.5         267.4        225.8       515.9       419.7
                                 10,748.1       8,039.7         602.9        615.1    10,145.2     7,424.6

Revenue from the Group's investment in Scotia Gas Networks plc (the Group's
share being £261.5m) is not recognised as revenue under equity accounting.

b) Operating profit by segment

                                                                             2006
                                         Adjusted         JCE /            Before     Exceptional     Total
                                                      Associate       exceptional       items and
                                                       share of         items and     certain re-
                                                   interest and        certain re    measurements
                                                        tax (i)     -measurements
                                               £m            £m                £m              £m        £m
 Power Systems
   Scotland                                 141.8             -             141.8               -     141.8
   England                                  226.1             -             226.1               -     226.1
                                            367.9             -             367.9               -     367.9
Scotia Gas Networks plc                     102.7        (97.9)               4.8           (9.1)     (4.3)
Energy Systems                              470.6        (97.9)             372.7           (9.1)     363.6

Generation and Supply                       444.8        (28.2)             416.6            89.4     506.0
Other businesses                            106.0             -             106.0            18.6     124.6
                                          1,021.4       (126.1)             895.3            98.9     994.2
Unallocated expenses (ii)                   (7.9)             -             (7.9)               -     (7.9)
                                          1,013.5       (126.1)             887.4            98.9     986.3

                                                                              2005
                                          Adjusted        JCE /             Before     Exceptional     Total
                                                      Associate        exceptional       items and
                                                       share of          items and     certain re-
                                                       interest            certain    measurements
                                                            and    re-measurements
                                                            tax
                                                            (i)
                                                £m           £m                 £m              £m        £m
 Power Systems
   Scotland                                  135.2            -              135.2               -     135.2
   England                                   201.6            -              201.6               -     201.6
                                             336.8            -              336.8               -     336.8

Generation and Supply                        388.6       (26.5)              362.1            65.8     427.9
Other businesses                              93.6          0.7               94.3               -      94.3
                                             819.0       (25.8)              793.2            65.8     859.0
Unallocated expenses (ii)                    (8.4)            -              (8.4)               -     (8.4)
                                             810.6       (25.8)              784.8            65.8     850.6

(i) The adjusted operating profit of the Group is reported after removal of the
Group's share of interest, movements on financing derivatives and tax from
jointly controlled entities and associates. The share of Scotia Gas Networks plc
interest includes loan stock interest payable to the consortium shareholders.
The Group has accounted for its 50% share of this, £28.8m, as finance income
(note 6). The gas distribution network businesses owned by Scotia Gas Networks
plc were acquired on 1 June 2005 (note 10).

(ii) Unallocated expenses comprise corporate office costs which are not directly
allocable to particular segments.

Notes on the Financial Statements
for the year ended 31 March 2006

5.  Exceptional items and certain re-measurements

i) Exceptional items

During the year, net dividends of £92.1m (2005 - £159.1m) were received in
relation to the administration of TXU Europe Energy Trading Limited which had
been placed into administration in 2002. The net receipts of £92.1m (2005 -
£111.2m, after extinguishing debtor balances) have been shown separately in the
income statement. In addition to this, the Group's share of the net dividend
from the administration of TXU Europe Energy Trading Limited recognised as
income by an associate company, Barking Power Limited, amounting to £16.7m,
(2005 - £22.3m) is shown separately within share of operating profit from
jointly controlled entities and associates.

In the year, a gain on disposal of Thermal Transfer Limited, a wholly owned
subsidiary, of £18.6m was recognised. There is no tax effect on this exceptional
item.

The financial statements to 31 March 2005 included an exceptional impairment
charge in respect of Peterhead Power Station of £61.0m.

ii) Certain re-measurements

Certain re-measurements arising from the adoption of IAS 39 are disclosed
separately to aid understanding of the underlying performance of the Group. This
category includes the movement on derivatives as described in note 14.

These transactions can be summarised thus:
                                                                                    2006          2005
                                                                                      £m            £m
Exceptional items
  Distributions from TXU administrator                                             108.8         133.5
  Peterhead impairment                                                                 -        (61.0)
  Disposal of Thermal Transfer                                                      18.6             -
                                                                                   127.4          72.5
Certain re-measurements
  Movement on operating derivatives (note 14)                                     (14.4)             -
  Movement on financing derivatives (note 14)                                     (43.5)             -
  Share of movements on derivatives in jointly controlled entities (note          (13.0)             -
10)
                                                                                  (70.9)             -
Profit before taxation                                                              56.5          72.5
Taxation (i)                                                                      (11.4)        (27.2)
Impact on profit for the year                                                       45.1          45.3


(i) Taxation includes £1.1m (2005 - £6.7m) recognised within share of associates
and jointly controlled entities on the face of the Income Statement.


Notes on the Financial Statements
for the year ended 31 March 2006

6. Net finance costs


                                                                                   2006          2005
                                                                                     £m            £m
Finance income:
Return on pension scheme assets                                                   115.7         107.1
Interest income from short term deposits                                            3.3           3.2
Other interest receivable (i)                                                      45.9          16.5
Total finance income                                                              164.9         126.8

Finance costs:
Bank loans and overdrafts                                                        (40.1)        (33.6)
Other loans and charges                                                          (71.1)        (60.2)
Interest on pension scheme liabilities                                          (100.0)        (94.7)
Accretion of convertible debt component                                           (3.6)             -
Less: interest capitalised                                                          8.3           3.4
Notional interest arising on discounted provisions                                (4.3)         (3.0)
Finance costs excluding movement on financing derivatives                       (210.8)       (188.1)
Movement on financing derivatives (note 14)                                      (43.5)             -
Total finance costs                                                             (254.3)       (188.1)

Net finance costs                                                                (89.4)        (61.3)


(i) Included within other interest receivable are credits from jointly
controlled entities of £39.2m (2005 - £11.5m), including £28.8m in respect of
loan stock interest receivable from Scotia Gas Networks plc (2005 - £nil).

Adjusted net finance costs are arrived at after the following adjustments:
                                                                                    2006          2005
                                                                                      £m            £m
Net finance costs                                                                 (89.4)        (61.3)
(add)/less:
 Share of interest from jointly controlled entities and associates                (97.3)        (17.2)
 Accretion of convertible debt component                                             3.6             -
 Movement on financing derivatives (note 14)                                        43.5             -
 Return on pension scheme assets (note 13)                                       (115.7)       (107.1)
 Interest on pension scheme liabilities (note 13)                                  100.0          94.7
Adjusted net finance costs                                                       (155.3)        (90.9)


Notes on the Financial Statements
for the year ended 31 March 2006

7. Taxation

Analysis of charge recognised in the income statement:

                                                   2006                                   2005

                                    Before                                 Before
                               Exceptional  Exceptional               Exceptional  Exceptional
                                 items and    items and                 items and    items and
                               certain re-  certain re-               certain re-  certain re-
                                  measure-     measure-                  measure-     measure-
                                     ments        ments        Total        ments        ments      Total
                                        £m           £m           £m           £m           £m         £m
Current tax
UK corporation tax                   218.1         27.6        245.7        176.1         33.3      209.4
Adjustments in respect of            (0.4)            -        (0.4)        (4.0)            -      (4.0)
previous years
Total current tax                    217.7         27.6        245.3        172.1         33.3      205.4

Deferred tax
Current year                          14.6       (17.3)        (2.7)         30.2       (12.8)       17.4
Adjustments in respect of             12.0            -         12.0          6.7            -        6.7
previous years
Total deferred tax                    26.6       (17.3)          9.3         36.9       (12.8)       24.1

Total taxation charge                244.3         10.3        254.6        209.0         20.5      229.5

The charge for the year can be reconciled to the profit per the income statement
as follows:

                                                                  2006       2006        2005       2005
                                                                    £m          %          £m          %
Group profit before tax                                          896.9                  789.3
Less: share of results of associates and jointly                (43.6)                 (40.6)
controlled entities
Profit before tax                                                853.3                  748.7
Tax on profit on ordinary activities at standard UK              256.0       30.0       224.6       30.0
corporation tax rate of 30% (2005 - 30%)
Tax effect of:
  Expenses not deductible for tax purposes                         0.7        0.1         3.6        0.5
  Non taxable income                                             (4.8)      (0.6)           -          -
  Adjustments to tax charge in respect of previous years          11.6        1.3         2.7        0.4
  Consortium relief not paid for                                 (8.6)      (1.0)           -          -
  Utilisation of tax losses                                      (0.3)          -           -          -
  Advance corporation tax                                            -          -       (1.4)      (0.2)

Group tax charge and effective rate                              254.6       29.8       229.5       30.7


The adjusted current tax charge is arrived at after the following adjustments:

                                                                  2006       2006        2005       2005
                                                                    £m          %          £m          %

Total taxation charge                                            254.6       28.3       229.5       29.1
Effect of adjusting items (see below)                                -        1.5           -        2.8
Total taxation charge on adjusted basis                          254.6       29.8       229.5       31.9
(add)/less:
 Share of current tax from jointly controlled entities and        13.8        1.6         9.9        1.4
associates
 Exceptional items                                              (27.6)      (3.2)      (20.5)      (2.9)
 Tax on movement on derivatives                                   17.3        2.0           -          -
 Deferred tax                                                   (26.6)      (3.2)      (36.9)      (5.1)

Adjusted current tax charge and effective rate                   231.5       27.0       182.0       25.3


The adjusted effective rate is based on adjusted profit before tax being:
                                                                             2006                   2005
                                                                               £m                     £m
Profit before tax                                                           896.9                  789.3
(add)/less:
 Exceptional items and certain re-measurements                             (55.4)                 (65.8)
 Share of tax from jointly controlled entities and                           28.8                    8.6
associates
 Accretion of convertible debt component                                      3.6                      -
 Return on pension scheme assets (note 13)                                (115.7)                (107.1)
 Interest on pension scheme liabilities (note 13)                           100.0                   94.7

Adjusted profit before tax                                                  858.2                  719.7


Notes on the Financial Statements
for the year ended 31 March 2006

8. Dividends

                                                                                 2006                  2005
                                                                                   £m                    £m
Amounts recognised as distributions from equity
Final dividend for the previous year of 30.3p (2005 - 26.4p) per share          260.0                 226.1
Interim dividend for the current year of 13.8p (2005 - 12.2p) per share         118.8                 104.7
                                                                                378.8                 330.8

Proposed final dividend for the current year of 32.7p (2005 - 30.3p) per        281.3                 260.0
share


The proposed final dividend is subject to approval by shareholders at the Annual
General Meeting and has not been included as a liability in these financial
statements. The final dividend paid, £260.0m (30.3p, 2005 - 26.4p), was declared
on 17 May 2005, approved at the Annual General Meeting on 28 July 2005 and was
paid to shareholders on 23 September 2005. An interim dividend of £118.8m
(13.8p, 2005 - 12.2p) was paid on 24 March 2006.

9. Earnings per share

Basic earnings per share

The calculation of basic earnings per share at 31 March 2006 is based on the net
profit attributable to ordinary shareholders and a weighted average number of
ordinary shares outstanding during the year ended 31 March 2006. All earnings
are from continuing operations.

Adjusted earnings per share

Adjusted earnings per share has been calculated by excluding the charge for
deferred tax, net finance income relating to pensions, items disclosed as
exceptional, and the impact of IAS 39.


                                                                     2006       2006       2005       2005
                                                                            Earnings              Earnings
                                                                 Earnings  per share   Earnings  per share
                                                                       £m      pence         £m      pence

Basic                                                               642.3       74.7      559.9       65.3
Exceptional items and certain re-measurements (note 5)             (45.1)      (5.2)     (45.3)      (5.3)
Basic excluding exceptional items and certain                       597.2       69.5      514.6       60.0
re-measurements
Adjusted for:
Deferred tax (note 7)                                                26.6        3.1       36.9        4.3
Deferred tax from share of jointly controlled entities and           15.0        1.7      (1.3)      (0.1)
associates results
Return on pension scheme assets (note 13)                         (115.7)     (13.4)    (107.1)     (12.4)
Interest on pension scheme liabilities (note 13)                    100.0       11.6       94.7       11.0
Accretion of convertible debt component                               3.6        0.4          -          -
Adjusted                                                            626.7       72.9      537.8       62.8

Basic                                                               642.3       74.7      559.9       65.3
Convertible debt interest (net of tax)                               10.5        1.2        3.3        0.4
Dilutive effect of convertible debt                                     -      (3.0)          -      (1.2)
Diluted                                                             652.8       72.9      563.2       64.5
Exceptional items and certain re-measurements                      (45.1)      (5.0)     (45.3)      (5.2)
Diluted excluding exceptional items and certain                     607.7       67.9      517.9       59.3
re-statements


The weighted average number of shares used in each calculation is as follows:
                                                                               2006               2005
                                                                          Number of          Number of
                                                                             shares             shares
                                                                         (millions)         (millions)

For basic and adjusted earnings per share                                     859.5              857.2
Effect of exercise of share options                                             1.7                1.9
                                                                              861.2              859.1
Effect of dilutive convertible debt                                            33.3               14.2
For diluted earnings per share                                                894.5              873.3


Notes on the Financial Statements
for the year ended 31 March 2006

10. Acquisition of Gas Distribution Networks by Scotia Gas Networks plc

At 1 June 2005, Scotia Gas Networks plc, an entity of which the Group holds 50%,
acquired the Scotland and the South of England gas distribution networks from
National Grid Transco.

The total value of the acquired businesses after finalisation of the completion
process was £3,217.8m. The transaction was initially funded by non-recourse
borrowings with the balance funded by the shareholders. The Group's share of the
initial transaction cost at 1 June 2005 was £483.9m which consisted of £270.0m
of subordinated loans and £213.9m of equity funding. The non-recourse funding of
this transaction was replaced by the issue of listed debt by the distribution
network entities of £2,219.8m on 21 October 2005.

At 31 March 2006, the Group, through Scotia Gas Networks plc, had invested
£521.9m in the gas distribution networks, consisting of £270.0m of subordinated
loans, £235.0m of equity funding and £16.9m of capitalised interest.

The Group's investment in Scotia Gas Networks plc at 31 March 2006 is £455.0m
consisting of the £521.9m invested less the opening liability on financing
derivatives (£62.6m, see below) and the loss after interest, tax and movement on
derivatives (£4.3m). In the ten months from acquisition, the Group's share of
the results of Scotia Gas Networks plc contributed £102.7m to the Group's
underlying operating profit (note 4) and £48.6m after interest (excluding loan
stock interest payable and financing derivatives). The Group's share of the
mark-to-market impact of the financial derivatives held by the Scotia Gas
Network companies is included in note 14.

Scotia Gas Networks plc entered into a contingent interest rate swap on 30
August 2004 subject to the acquisition of the gas networks in Scotland and the
South of England being completed. From 1 April 2005, 50% of the fair value of
the swap has been reflected in the Group's accounts including the Groups share
of the fair value loss on financing derivatives up to 1 June 2005, when the
transaction to acquire the distribution networks was concluded. Since 1 June
2005, the Group's share of this loss has been reflected as part of the share of
losses on financing derivatives within the results of Scotia Gas Networks plc.
On 21 October 2005, the formerly contingent swap was closed off by the issue of
a new 'mirror' swap, both of which are marked to market under IAS 39. The issue
of the listed debt at 21 October 2005 was achieved at the same time as entering
a number of interest rate and currency swaps, all of which are designated as
being effective hedges. From 1 June 2005, the Group's share of the movement on
financing derivatives in Scotia Gas Networks plc is a charge of £13.0m (£9.1m
after tax).

The investment in the jointly controlled entity is accounted for using the
equity method.

The acquisition of the Scotland and the South of England gas distribution
networks by Scotia Gas Networks plc at 1 June 2005 can be represented as
follows:


                                                   Carrying    Fair Value    Accounting          Fair
                                                   Value of   Adjustments        policy      Value of
                                                   acquired            on    alignments      acquired
                                                   entities   acquisition                    entities                   
                                                         £m            £m            £m            £m

Property, plant and equipment                       3,117.8          31.9             -       3,149.7
Net current liabilities                              (76.6)          39.6             -        (37.0)
Retirement benefit obligations                       (60.9)           5.9             -        (55.0)
Deferred tax                                        (271.0)         176.6       (667.9)       (762.3)
Other provisions                                     (30.3)        (15.7)             -        (46.0)
Net assets                                          2,679.0         238.3       (667.9)       2,249.4
Goodwill (i)                                          401.0       (100.5)         667.9         968.4
                                                    3,080.0         137.8             -       3,217.8

Satisfied by cash:
Bank facility                                                                                 2,250.0
Equity investment by shareholders                                                               967.8
                                                                                              3,217.8

The Group's share of the equity investment                                                      483.9
(50%):

Represented by:
Share capital                                                                                   213.9
Loan Stock                                                                                      270.0
                                                                                                483.9

The fair value adjustments reflect the assessment of fair value based on the
regulatory value of the businesses and the fair value of current liabilities and
provisions including the deferred tax liability. The accounting policy
adjustments reflect the adoption of Group policies on deferred taxation. The
adjustments have been made effective at the date of acquisition and the
subsequent movements in deferred taxation have been recognised in the current
year.

(i) Goodwill has been subject to impairment test review.


Notes on the Financial Statements
for the year ended 31 March 2006

11.  Provisions

                                             Onerous
                                   energy  contracts     Decommissioning          Other           Total
                                                 (i)                (ii)          (iii)
                                                  £m                  £m             £m              £m
At 1 April 2005                                 53.4                37.1           20.8           111.3
Acquired in the year                               -                   -            0.2             0.2
Charged in the year                              2.5                 1.8            2.4             6.7
Revised decommissioning value                      -              (14.2)              -          (14.2)
Utilised during the year                      (17.3)                   -          (4.3)          (21.6)
Disposal in the year                               -                   -          (0.6)           (0.6)
At 31 March 2006                                38.6                24.7           18.5            81.8

At 31 March 2006
Non-current                                     38.6                24.7           15.7            79.0
Current                                            -                   -            2.8             2.8
                                                38.6                24.7           18.5            81.8
At 31 March 2005
Non-current                                     38.6                37.1           15.3            91.0
Current                                         14.8                   -            5.5            20.3
                                                53.4                37.1           20.8           111.3


(i) The onerous energy contracts provision relates to future losses on purchase
contracts designated as own use under IAS 39. These losses will be incurred over
a maximum period to 2011 when the contracts terminate.

(ii) Provision has been made for the estimated net present cost of
decommissioning certain generation and gas storage assets. The estimate is based
on a forecast of clean-up costs at the time of decommissioning discounted for
the time value of money. The timing of costs provided is dependent on the lives
of the facilities. The provision held in respect of the decommissioning assets
at Fiddler's Ferry and Ferrybridge has been reassessed following the Group's
decision to invest in flue gas desulphurisation plant at these stations, which
is expected to extend the useful lives of the stations by between 15 and 20
years. Accordingly, this change in the timing of the expected decommissioning
expenditure has been reflected in the carrying value of the provision.

(iii) Other provisions include balances held in relation to restructuring,
insurance and warranty claims. In addition, the Group has an unapproved,
unfunded retirement benefit provision for pensions for certain directors and
former directors and employees.

12. Reserves

                                          Share      Capital
                                        premium   redemption    Equity  Retained        Hedge
                                        account      reserve   reserve  earnings      reserve        Total
                                             £m           £m        £m        £m           £m           £m

At 31 March 2005                           81.6         13.7         -   1,338.0            -      1,433.3
Cumulative adoption of IAS 32 and             -            -      14.6       3.9         18.3         36.8
39
At 1 April 2005                            81.6         13.7      14.6   1,341.9         18.3      1,470.1
Profit for the year                           -            -         -     642.3            -        642.3
Effective portion of changes in               -            -         -         -       (11.7)       (11.7)
fair value of cash flow hedges
Premium on issue of shares                  9.1            -         -         -            -          9.1
Actuarial losses on retirement                -            -         -     (9.9)            -        (9.9)
benefit schemes (net of tax)
Dividends to shareholders                     -            -         -   (378.8)            -      (378.8)
Employee share awards
 - credit in respect of employee              -            -         -       4.0            -          4.0
share awards
 - investment in own shares                   -            -         -     (9.5)            -        (9.5)
Other movements                               -            -         -     (0.4)            -        (0.4)

At 31 March 2006                           90.7         13.7      14.6   1,589.6          6.6      1,715.2


The hedge reserve comprises the effective portion of the cumulative net change
in the fair value of cash flow hedge derivative instruments related to hedged
transactions that have not yet occurred.

On adoption of IAS 32, the convertible bond was analysed into an equity
component, which is disclosed as the equity reserve, and a debt component, which
is recorded as part of non-current loans and borrowings.


Notes on the Financial Statements
for the year ended 31 March 2006

13. Pensions

Valuation of combined Pension Schemes

                                               Long- term rate       Value  Long- term rate          Value
                                                     of return       at 31        of return          at 31
                                                expected at 31       March   expected at 31          March
                                                    March 2006        2006       March 2005           2005
                                                             %          £m                %             £m

Equities                                                   7.7     1,258.5              8.2        1,025.7
Government bonds                                           4.2       321.8              4.7          172.2
Corporate bonds                                            4.9       211.4              5.4          301.2
Other investments                                          5.0       225.6              5.3          152.2
Total fair value of plan assets                                    2,017.3                         1,651.3
Present value of defined benefit obligations                     (2,211.1)                       (1,878.9)
Deficit in the scheme                                              (193.8)                         (227.6)
Deferred tax thereon                                                  58.1                            68.3
Net pension liability                                              (135.7)                         (159.3)

Movements in the defined benefit obligation during the year:
                                                                                           2006         2005
                                                                                             £m           £m

At 1 April                                                                            (1,878.9)    (1,691.5)
Movements in the year:
 Service costs                                                                           (22.9)       (20.9)
 Member contributions                                                                     (7.7)        (6.7)
 Benefits paid                                                                             86.1         81.3
 Interest on pension scheme liabilities                                                 (100.0)       (94.7)
 Losses on curtailments                                                                   (0.6)        (1.0)
 Actuarial losses                                                                       (287.1)       (72.4)
 Liabilities assumed on business combinations                                                 -       (73.0)

At 31 March                                                                           (2,211.1)    (1,878.9)


Movements in scheme assets during the year:
                                                                                           2006         2005
                                                                                             £m           £m

At 1 April                                                                              1,651.3      1,495.8
Movements in the year:
 Expected return on pension scheme assets                                                 115.7        107.1
 Assets distributed on settlement                                                        (86.1)       (81.3)
 Employer contributions                                                                    55.7         21.9
 Member contributions                                                                       7.7          6.7
 Assets acquired in business combinations                                                     -         47.0
 Actuarial gains                                                                          273.0         54.1

At 31 March                                                                             2,017.3      1,651.3


Balance sheet disclosure

The net pension (deficit) / surplus of the schemes have been offset in this
note. The following is an analysis of the retirement benefit obligations and
assets for financial reporting purposes.

                                                                                      2006        2005
                                                                                        £m          £m
Retirement benefit obligations                                                     (284.0)     (326.5)
Retirement benefit assets                                                             90.2        98.9
                                                                                   (193.8)     (227.6)


Notes on the Financial Statements
for the year ended 31 March 2006

14. Financial Assets / Liabilities

The Group adopted IAS 32 and IAS 39 retrospectively as at 1 April 2005 but, as
permitted by the transition provisions of IFRS 1, the Group has not restated
comparative information. For financial reporting purposes, the Group has
classified derivative financial instruments into two categories, operating
derivatives and financing derivatives. Operating derivatives include all
qualifying commodity contracts including those for electricity, gas, oil, coal
and carbon. Financing derivatives include all fair value and cash flow interest
rate hedges, non-hedge accounted (mark-to-market) interest rate derivatives,
cash flow foreign exchange hedges and non-hedge accounted foreign exchange
contracts. Non-hedge accounted contracts are treated as held for trading. The
carrying value is the same as the fair value for all instruments. All balances
are stated gross of associated deferred taxation.


                                             At   Net Movement:   Net Movement:                        At
                                        1 April          Income           Hedge                  31 March
                                           2005       Statement    Reserve (ii) Transfer (i)         2006
                                             £m              £m              £m           £m           £m
Operating derivatives (iii)               130.1          (14.4)          (32.4)            -         83.3
Financing derivatives (iv)              (102.2)          (41.0)            15.5         89.5       (38.2)

Financial assets/liabilities               27.9          (55.4)          (16.9)         89.5         45.1
Hedged items (v)                            3.9           (2.5)               -            -          1.4
Net balance sheet                          31.8          (57.9)          (16.9)         89.5         46.5


The net movement reflected in the Income Statement can be summarised thus:
                                                                                                2006
                                                                                                  £m
Operating derivatives
Total result on operating derivatives (vi)                                                     176.1
Less: amounts settled in the year (vii)                                                      (190.5)
Movement in unrealised derivatives                                                            (14.4)

Financing derivatives (and hedged items)
Total result on financing derivatives (vi)                                                    (47.3)
Less: amounts settled in the year (vii)                                                          3.8
Movement in unrealised derivatives                                                            (43.5)
Total                                                                                         (57.9)


(i) Represents previously contingent interest rate swap held and entered into by
Scotia Gas Networks plc and transferred at date of acquisition of the gas
distribution networks, at 1 June 2005, to the investment in the jointly
controlled entity.

(ii) Gains or losses transferred to the hedge reserve represent amounts in
respect of mark-to-market movements on effective cash flow hedge relationships
which have not matured. Where hedge accounting is discontinued, any cumulative
gain or loss on the hedging instrument previously recognised in equity remains
in equity until the forecast transaction occurs. If the transaction is no longer
expected to occur, the cumulative gain or loss recognised in equity is
recognised in the income statement.

(iii) These fair values represent the contracts which have not been designated
as own use purchase contracts in line with the provisions of IAS 39. The fair
values at the balance sheet date represent the unrealised gains and losses from
holding commodity contracts for future delivery. These fair values are subject
to change in commodity market prices.

(iv) The interest rate derivative instruments outstanding at the balance sheet
date had remaining lives of between 9 months and 31 years and fixed rates of
interest payable ranging from 4.01% to 8.22%.

(v) The fair value adjustments to loans and borrowings designated as the hedged
item in effective fair value hedge relationships are analysed. This detail has
been included to provide a full analysis of the impact of the adoption of IAS 39
in the financial year. See note 15.

(vi) Total result on derivatives (operating or financial) in the income
statement represents amounts in respect of realised gains or losses on
derivatives, mark-to-market movements on effective fair value hedge
relationships which have not matured, mark-to-market movements on other
derivatives held or acquired during the year and mark-to-market movements on the
ineffective portion of cash flow hedge relationships which have not matured.

(vii) Amounts settled in the year represent the unwind of opening unrealised
financial derivative assets or liabilities which have matured or been delivered
in the financial year and other derivatives transacted in the year which have
matured or been delivered.


Notes on the Financial Statements
for the year ended 31 March 2006

15.  Analysis of net debt

                                                        Decrease
                                              At         in cash        (Increase)/                  At
                                         1 April        and cash           decrease            31 March
                                            2005     equivalents            in debt                2006
                                              £m              £m                 £m                  £m

Cash and cash equivalents                  232.2         (182.3)                  -                49.9
Bank overdraft (i)                         (4.4)           (1.7)                  -               (6.1)
                                           227.8         (184.0)                  -                43.8

Loans and borrowings (ii)              (1,660.2)               -            (554.5)           (2,214.7)
Finance lease creditors                    (2.0)               -                0.4               (1.6)
Bank overdraft (i)                           4.4               -                1.7                 6.1
                                       (1,657.8)               -            (552.4)           (2,210.2)

Net debt                               (1,430.0)         (184.0)            (552.4)           (2,166.4)


(i) Bank overdrafts are reported on the balance sheet as part of current loans
and borrowings. For cash flow purposes, these have been included as cash and
cash equivalents.

(ii) The opening loans and borrowings are restated for £20.8m relating to the
equity component of the convertible bond. The closing loans and borrowings are
adjusted for £1.4m relating to fair value adjustments to borrowings per note 14.




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