Key Points

• Third quarter earnings per share up 37%* year on year
• Improved performance from US Division
• Southern Water refinancing and Thus demerger on schedule
  
  

* Before goodwill amortisation and exceptional items, prior year restated for deferred tax
** Before goodwill amortisation and exceptional items

ScottishPower Chief Executive, Ian Russell, said:
 
"I am pleased to report improved results with third quarter earnings per share up by some 37% over the same period last year.
 
The US Division is making good progress with third quarter operating profit double that of last year. The UK Division has improved customer service but has seen its profits reduced by the premium sought by British Energy in spite of the NETA marketplace. The Infrastructure Division continues to focus on cost cutting to improve its relative cost performance, with Southern Water's operating efficiency now recognised by OFWAT as the best of all water and wastewater companies in the UK.
 
The refinancing of Southern Water and the proposed demerger of Thus are progressing well. Both of these processes remain on schedule for completion by the end of the financial year and are further evidence of our success in refocusing our business as an integrated international energy and networks company."

Financial Overview
 
All figures below are before the impact of goodwill amortisation and exceptional items unless otherwise stated. "Nine months" relates to the nine months to 31 December 2001 and "third quarter" relates to the three months to 31 December 2001, unless otherwise stated.

Group turnover for the third quarter fell by £302 million to £1,487 million, with the US Division contributing revenues of £639 million compared to £925 million in the same period last year. The quarter on quarter fall in revenues is attributable to the reduction in wholesale power prices and volumes experienced in the western US. Turnover for the nine months grew by £208 million to £4,777 million, an increase of 5% on the same period last year. The US Division contributed additional revenues of £180 million for the nine months, with increased revenues in our unregulated business and the impact of rate increases in our regulated business. Turnover in the UK Division for the nine months was £56 million ahead of the equivalent period last year as a result of revenues from the Rye House power station and growth in gas wholesale and retail activity, offset in part by lower electricity retail volumes. The Infrastructure Division contributed additional revenues of £26 million for the nine months due to increased sales allowed under the regulatory contract. Sales by Thus increased by £52 million for the nine months through growth in business services revenues. Turnover for the nine months also included revenues of £132 million from Appliance Retailing, a reduction of £107 million on the equivalent period last year. Appliance Retailing is now reported as a discontinued operation.

Group operating profit improved by £82 million (33%) in the third quarter, with the US Division contributing additional operating profit of £99 million. The improvement in the US is due to regulatory rate increases and lower power costs experienced in the third quarter of this year, in addition to the impact of the Hunter plant outage on the third quarter results of 2000/01. Group operating profit for the nine months fell by £116 million to £582 million, primarily as a result of the $300 million additional excess net power costs in the US recognised in our half year results. The UK Division's profits were £24 million lower in the third quarter and £37 million lower than the first nine months of last year. This was due to the premium sought by British Energy in spite of the NETA marketplace, significantly lower wholesale electricity market prices and, for the nine months, due to the impact of the first quarter NETA system error. Infrastructure Division profitability increased by £4 million for the nine months and by £5 million in the third quarter as cost savings targets continue to be achieved. Thus continued to reduce its operating losses by £3 million in the quarter and £6 million for the nine months.
 
There were no exceptional items in the third quarter. The exceptional pre-tax costs of £120 million, recognised in the first quarter results, relate to costs associated with the disposal of and withdrawal from UK Appliance Retailing. In the equivalent period last year, an exceptional charge of £121 million was recognised in respect of the implementation of the PacifiCorp Transition Plan.
 
The net interest charge increased by £32 million to £283 million for the nine months as a result of lower US operating profits, the lag in recovering excess net power costs through the US regulatory process and the impact of higher UK debt.
 
Profit before tax for the nine months decreased by £141 million to £300 million and the tax charge of £64 million represented an effective tax rate (including deferred tax) of 21.5% on profits before goodwill amortisation and exceptional items.
 
Group earnings per share for the quarter were 10.56 pence compared with 7.71 pence for the equivalent period last year, an increase of 2.85 pence (37%), as a result of an improved third quarter performance from the US Division. Group earnings per share for the nine months were 5.88 pence lower at 14.11 pence, as a result of the impact of lower profits from the UK Division and the additional net power costs experienced in the US.
 
Free cash flow for the nine months was £268 million, a reduction of £389 million on the same period last year, due to lower US operating profits for the period and the impact on working capital of the costs of excess net power in the US. Capital spend in the nine months amounted to £848 million compared to £725 million for the equivalent period last year. Of this £408 million was invested in the US Division, including £177 million invested in new generation assets. A further £201 million was invested in Southern Water and £60 million in Thus. Net debt at 31 December 2001 was £887 million higher than 31 March 2001 at £6,172 million. Gearing (net debt/shareholders' funds) increased to 112%, from 90% at 31 March 2001.
 
The third quarter dividend of 6.835 pence per share takes dividends for the nine months to 20.505 pence per share, consistent with our stated aim of 5% annual increase in dividends to March 2003. The ADS dividend rate is confirmed as $0.3863 per ADS.

US Division
 
Management focus:

• maximising recovery of costs through the regulatory process
• reducing commodity price exposure
• achieving the allowed return on equity
• growing an unregulated merchant energy business

Operating profit for the US Division for the third quarter increased by £99 million to £178 million, as a result of regulatory rate increases and reductions in net power costs quarter on quarter, and the impact of the Hunter plant outage on last year's results. For the nine months, the US Division's operating profits were £199 million, £86 million lower than the equivalent period last year, with the benefit of regulatory rate increases more than offset by additional excess net power costs and new business costs relating to the build up to operation of the unregulated PacifiCorp Power Marketing (PPM) business, and other strategic initiatives such as our Structural Realignment Proposal, establishing a Regional Transmission Organisation and increased spend on risk management. 
 

We are actively pursuing recovery of excess net power costs recorded in deferred accounts. At the end of December 2001, net power costs and associated carrying charges held in deferred accounts under US GAAP totalled $407 million, including $95 million to be requested in a Wyoming rate case the company expects to file in April 2002. Of the deferred amount at the end of the quarter, recovery has been requested on $278 million plus carrying charges. Deferral applications have also been filed relating to a Utah coal mine closure and for excess power costs in Utah.
 
Since the half year results, we have filed additional rate case requests totalling $70 million in Oregon, Washington and California. A schedule of expected hearing dates for these and other regulatory actions are set out in an appendix to this announcement.
 
Over the course of the third quarter we took further steps to manage commodity price volatility and reduce exposure. We have made physical additions to our US generation portfolio and have entered into transactions which further help shape our system resource portfolio, including physical hedging products, and financial temperature-related instruments that reduce resource and price risk on hot summer days.
 
We are seeking state approvals to install a 120 MW permanent peaking facility in Utah designed to meet a portion of the region's peak summer demand. We have also purchased the regulated output of a 50 MW wind farm in Wyoming that went into service in November. We are evaluating the results of a comprehensive energy solicitation proposal that resulted in more than 50 responses from 30 prospective suppliers to meet Utah's energy requirements going forward. As a further step to mitigate commodity risks, "hydro-electric" hedges are in place for the next five years to limit volume and price risks related to Pacific Northwest hydro-electric generation availability. To provide longer-term solutions to the region's energy needs, we are working with regulators and other stakeholders to develop an Integrated Resource Plan. This is a comprehensive modelling and planning effort to identify the least cost and lowest risk plan to supply PacifiCorp with power over the next 20 to 25 years.
 
To further mitigate commodity price risk PacifiCorp has requested power cost adjustment mechanisms in Oregon, Utah, Idaho and California. Under these mechanisms, if granted by the commissions, all or part of actual power costs above or below the level in rates will be shared with customers.
 
We continue to work to ensure that PacifiCorp maximizes its opportunity to earn its allowed return on equity in all the states in which it operates. This process, as well as focusing on the continued drive on Transition Plan efficiencies, involves working with all our commissions to ensure rates reflect the full cost of the business going forward. Transition Plan progress at the end of the quarter shows $110 million of underlying transition related savings delivered since the start of the Plan against an end-of-year goal of $113 million. Manpower reductions are also on track with cumulative workforce reductions of 639 employees by the end of the third quarter.
 
In our unregulated business, PPM, we recently signed a 25-year agreement with Bonneville Power Administration to sell 90 MW of electricity from the Stateline wind generating plant on the Oregon-Washington border. PPM also signed one of the largest public utility wind power contracts with Seattle City Light in Washington state for 50 MW from 1 January 2002 rising to 175 MW in 2004 and has negotiated several long-term contracts with a range of other customers.
 
PPM is also continuing to expand its activities with the purchase in January 2002 of a 40% interest in an underground natural gas storage facility and hub service business. The hub is a major storage facility located 80 miles west of Edmonton, Alberta and is connected to the largest pipeline in the province. With the growing reliance upon natural gas as a fuel source, the demand for gas storage and related services is expected to increase over the next several years.

UK Division
 
Management focus:

• maximising the value of generation and supply assets through our commercial and asset-backed trading activities
• adding new generation at value creating prices
• improving customer service and reducing costs

The UK Division reported an operating profit of £24 million for the nine months, all of which was delivered in the third quarter. The reduction of £37 million for the nine months was due to the premium sought by British Energy, in spite of the NETA marketplace, for its output from Hunterston and Torness power stations, pending the resolution of the ongoing dispute regarding the Nuclear Energy Agreement (due to expire in 2005), the impact of significantly lower wholesale electricity market prices on generation margins, and the impact of the NETA system error of £10 million reported in the first quarter. The reduction was partly offset by the positive contribution from the Rye House power station. The performance in energy supply for the nine months improved on the equivalent period last year, as a result of margin growth in both electricity and gas, offset in part by the cost of investment in customer acquisitions. 
 

With our outlook for wholesale prices in the longer term remaining relatively low, without resolution of the British Energy dispute, we consider price competition, experienced in both the wholesale markets and in the supply customer base, will continue to have a significant impact on the Division's performance.
 
Our trading activities continue to perform well under NETA as we make full use of our flexible plant portfolio of some 5,000 MW capacity. In the nine months to December 2001, we estimate that ScottishPower earned one of the highest contributions of all UK generators per Balancing Market Unit in the short-term Balancing Market.
 
The supply of power through the Interconnector to Northern Ireland commenced successfully on 1 January 2002. The Interconnector is owned by Viridian Group plc. ScottishPower is supplying, under contracts with Viridian and its subsidiaries, 160 MW of base load. We were also successful in bidding at auction for additional capacity from April 2002. This will allow us to develop a position in the Northern Ireland wholesale and supply markets.
 
Our new 30 MW windfarm at Beinn an Tuirc was commissioned in December 2001, taking our UK installed wind capacity to 113 MW. Planning applications were submitted in the third quarter for 25 MW at Ardeer and an application for the 240 MW scheme at Whitelee, near Glasgow was submitted in January 2002. ScottishPower has projects in Scotland totalling 500 MW in planning or detailed environmental assessment, with a further 50 MW in joint venture projects in England & Wales.
 
We continue to improve services for our 3.5 million energy customers in the UK and this was recognised in November 2001, when we received an award from J.D. Power and Associates as the No.1 domestic gas supplier in the UK for customer satisfaction. We also launched a new web-site for customers the first in the UK where domestic and small business customers can generate an instant bill and pay for their energy on-line.

Infrastructure Division
 
Management focus:

• improving relative cost performance
• outperforming allowed regulatory returns
• releasing capital from Southern Water
  

The Infrastructure Division reported operating profits of £412 million for the nine months, an increase of £4 million on the equivalent period last year, of which £5 million was delivered in the third quarter. Power Systems' ongoing restructuring programme has delivered financial benefits of £31 million year to date, as a result of reduced operating costs. This has more than offset the regulatory price reductions in the first six months of the financial year and a gain on business disposals reported last year. Southern Water's operating profit fell by £12 million to £157 million for the nine months due to costs from new capital obligations and increased depreciation, partly offset by £8 million of cost savings.
 
Good progress continues to be made in Power Systems on delivery of the £75 million of cash cost savings in the three years to 2002/03 and the further £33 million of target savings by 2003/04 announced at the half year. As part of these efficiency initiatives our joint venture connections business with Alfred McAlpine Utility Services Ltd, named Core Utility Solutions Ltd, is on track to be operational during February 2002.
 
Levels of efficiency at Southern Water continue to improve and in OFWAT's report, published in December 2001, Southern Water was confirmed as being the most efficient company for water service operating efficiency and ranked second for sewerage service operating efficiency. Southern Water was the only water and sewerage company given an "A" rating in both water and sewerage operating efficiency. Operating expenditure during 2000/01 was confirmed as having reduced by 13%, making a total reduction of 31% in the five year period over double the industry average.
 
The refinancing of Southern Water is on schedule and we anticipate completion by the end of the financial year. The OFWAT consultation process closed on 25 January 2002. Southern Water is expected to begin marketing the bonds in late February 2002 with pricing and launch in March 2002.

THUS
 
In line with expectations, Thus reported operating losses of £43 million for the nine months, an improvement of £6 million on the equivalent period last year. The business bucked the trend in the telecoms sector producing strong growth in EBITDA, which improved from negative £22 million in the first nine months of the previous financial year to positive £5 million at December 2001.
 
On 19 December 2001, we announced that Thus had agreed the terms of an underwritten £90 million third party banking facility; that ScottishPower had agreed in principle to subscribe for new shares in Thus in return for repayment of debt; and that, consistent with our strategic focus on energy and networks, we would consider a demerger of our shareholding in Thus to ScottishPower shareholders.
 
This process remains on schedule. On 18 January 2002, Thus announced the terms of its proposed refinancing (which includes the introduction of a new holding company, Thus Group, above Thus) and launched an open offer to raise approximately £275 million before expenses. The open offer has been fully underwritten by ScottishPower, which has conditionally agreed to subscribe for the entire issue before clawback by Thus' independent shareholders (whose entitlement equates to some 20.6% of the new ordinary shares in the open offer) and other subscriptions of shares in connection with the open offer. The proceeds of the open offer will be used to repay Thus's drawings under the ScottishPower loan facility.
 
On 21 January 2002, ScottishPower held an Extraordinary General Meeting at which its shareholders approved a reduction of the company's share premium account which will create, on approval of the reduction by the Court, expected in March 2002, sufficient distributable reserves to facilitate payment of a dividend in specie to demerge Thus.
 
ScottishPower currently intends to put proposals to its shareholders which will enable it to effect the proposed demerger. The demerger terms are expected to be announced on or about 12 February 2002 and an Extraordinary General Meeting of the company is expected to be convened on or about 11 March 2002 with a view to obtaining approval for and completing the demerger by the end of the financial year.

Board and Management Changes
 
Alan Richardson, Executive Director US Division left the company on 31 December 2001. Judi Johansen, CEO PacifiCorp and Terry Hudgens, CEO PacifiCorp Power Marketing have been appointed to the Executive Team. Judi and Terry both report directly to Ian Russell, Chief Executive.
 
Philip J Carroll jnr joined the Board as non-executive director on 15 January 2002. Philip has long experience of the American and international energy and engineering sectors having spent four years with California based engineering, construction and services corporation Fluor, and previously 35 years at Shell Oil where he was President and CEO from 1993 to 1998.
 
Ken Vowles, Executive Director International, will retire from the Board of ScottishPower on 31 March 2002. His 40 year career in the power generation industry was recognised in June 2001 when he was awarded an OBE in the Queen's birthday honours. 

* Note: Date change from last calendar announcement made at the half year.
 
For further information:

Colin McSeveny, Group Media Relations Manager: 0141 636 4515
Andrew Jamieson, Head of Investor Relations: 0141 636 4527

31 January 2002