Financial Review

Profit Performance

A review of the profit performance of the individual businesses is contained in the Operating Review and further detailed disclosures are contained in the financial statements accompanying this report.

FINANCE COSTS

Group net finance costs were £5.4 million (H1 2007: £4.8 million) including the non-cash cost for the unwinding of discounts on provisions of £2.0 million (H1 2007: £2.0 million), and a credit in respect of the mark to market gain on our interest rate hedges of £2.1 million (H1 2007: £0.9 million). The increase in net finance costs reflects the general increase in the level of net debt of the Group.

DAVID BROCKSOM
Finance Director

We have started to apply hedge accounting on our interest rate swaps progressively during the first half of the year once this has been possible on a case by case basis. The need to revalue individual hedges, up to the date when hedge accounting could be implemented and in respect of others where this has not been possible, has resulted in a mark to market gain of £2.1 million in the income statement. A credit to reserves of £0.5 million was made in respect of movements in the market value of individual hedges from the dates when hedge accounting was implemented.

JOINT VENTURES

Coal4Energy, our joint venture with Hargreaves Services PLC, earned profits of £0.6 million in the first half of the year (H1 2007: £0.3 million).

We have also entered into a new joint venture, UK Strategic Partnership, with Strategic Sites Limited, which has acquired a small parcel of land at the Waverley AMP site, for development.

TAXATION

Corporation tax of £309,000 (H1 2007: £nil) has been charged in respect of the power generation business: the taxable profits of part of this business not being allowed to be offset against other losses. There have been no further tax charges or credits during the period due to the availability of substantial brought forward tax losses for offset against profits expected in the second half year.

There have been no movements in respect of deferred tax in the period (H1 2007: £13.0 million credit)

RETIREMENT BENEFIT OBLIGATIONS

The Group’s defined benefit obligations comprise two funded Industry Wide Schemes and an unfunded concessionary fuel scheme.

The Industry Wide Schemes have a combined deficit of £78.0 million (30 June 2007: £57.7 million; 31 December 2007: £49.8 million) on these schemes, which are closed to new entrants but are required to be open for future service. The deficit has increased over the first half by £28.2 million, primarily as a result of a fall of £42.8 million in the fund value as compared to the expected return, partially offset by an increase in the rate used to discount the liabilities of the scheme, which reduced the scheme liabilities by £12.3 million. During the first half there were payments to the scheme, in excess of current service costs, of £2.3 million.

The overall post service obligations also include an unfunded liability in respect of the concessionary fuel scheme of £23.7 million (30 June 2007: £22.0 million; 31 December 2007: £23.4 million).

DAVID BROCKSOM
Finance Director
27 August 2008