/s/ Scottish Power plc

(Registrant)

June 23, 2005

/s/ Donald McPherson

Donald McPherson

Assistant Secretary

Turnover

Operating profit

Operating profit excluding goodwill and exceptional

(Loss)/profit before tax

Profit before tax excluding goodwill and exceptional

(Loss)/earnings per ordinary share/per ADS

Earnings per ordinary share/per ADS excluding goodwill and exceptional

Dividends per ordinary share/per ADS

Report of the Directors

3      Ø      Chairman’s Statement

5      Ø      Chief Executive’s Review

12    Ø      Business Review

37    Ø      Financial Review

73    Ø      Risk Factors

81    Ø      Board of Directors and Executive Team

84    Ø      Corporate Governance

95    Ø      Remuneration Report of the Directors

106  Ø      Safe Harbor Statement

Accounts 2004/05

107  Ø      Accounting Policies and Definitions

112  Ø      Group Profit and Loss Account

113  Ø      Statement of Total Recognised

                 Gains and Losses

114  Ø      Group Cash Flow Statement

115  Ø      Group Balance Sheet

116  Ø      Notes to the Group Accounts

167  Ø      Company Balance Sheet

168  Ø      Notes to the Company Balance Sheet

169  Ø      Principal Subsidiary Undertakings

                 and Other Investments

170  Ø      Independent Auditors’ Report

171  Ø      Five Year Summary

172  Ø      Glossary of Financial Terms and US Equivalents

IFRS Financial Information

173  Ø      IFRS Financial Information

Investor Information

192  Ø      Investor Information

198  Ø      Financial Calendar

199  Ø      Shareholder Services

Index

Glossary of Terms

Introduction and Background

On 24 May 2005 we announced the decision to sell our regulated US business PacifiCorp to MidAmerican Energy Holdings Company (“MidAmerican”) for $9.4 billion following a strategic review.

The review examined PacifiCorp’s requirement for future capital investment, the scope to achieve further efficiency improvements and the potential to increase its rates of return. We assessed these factors against likely developments in the regulatory environment.

Following the completion of the review, the Board concluded that in view of the scale and timing of PacifiCorp’s capital investment requirements, relative to the profile of anticipated returns, shareholders’ interests would be best served by a sale of PacifiCorp and, following completion of the sale, the return of approximately $4.5 billion of the $5.0 billion net proceeds of the sale to shareholders.

The sale of PacifiCorp requires the approval of shareholders and a number of regulatory approvals in the US, which we anticipate will take 12-18 months to complete. During that time we expect that there will be no material changes to the running of the business. We shall seek shareholder approval at an Extraordinary General Meeting.

Business Progress

Looking ahead, we will focus our management and capital on our UK and Infrastructure Divisions and on our competitive US business, PPM Energy, each of which has strong growth prospects.

These businesses have been very successful achieving, in aggregate, an improvement in operating profit of 38% during the last two years. We intend to build on this excellent platform with targeted investment of some £4.5 billion by 2010 to create long-term value and further improvements in operational performance.

During the year ScottishPower performed satisfactorily, achieving profit before tax* of more than £1 billion for the first time, an increase of 10% on the previous year. The group’s earnings per share* of 40.22 pence were up by 10% on the previous 12 months, and the final quarter dividend was 7.65

pence, bringing the total dividends for the year to 22.50 pence, an increase of 10% on last year.

In the year ahead we remain committed to our strategy of investing for organic growth and improving operational performance in our three continuing businesses.

Staff

ScottishPower’s performance is due to the skills, knowledge and innovation of my colleagues throughout the company. Their professionalism and determination deserve my thanks and those of my Board. I would also like to emphasise ScottishPower’s continuing commitment to upholding the highest standards of health, safety, environmental stewardship and corporate responsibility.

Board Changes

After the 2005 AGM Philip Carroll, who joined the ScottishPower Board in January 2002, will retire from his position as Non-Executive Director. On behalf of the Board, I thank him for his diligent and committed service and wish him well.

Summary

We believe the decision to sell PacifiCorp to MidAmerican is the right one for our shareholders and the right one for ScottishPower.

Focusing our management and capital on our continuing businesses will enable us to pursue additional investment opportunities to achieve growth and create value for our shareholders. Our current dividend policy is to grow dividends broadly in line with earnings and we expect this to continue following the sale and return of capital to shareholders.

Charles Miller Smith Chairman

24 May 2005

1    Ø    Sale of PacifiCorp

5    Ø    Health and Safety

1    Sale of PacifiCorp

Introduction

In November 2004, the Board began a strategic review of PacifiCorp as a result of its performance and the significant investment it required in the immediate future.

Our review examined PacifiCorp’s future capital investment requirements, the likely development of its regulatory regimes, the scope for further operational efficiencies and improvements and the scale and timing of further improvements in its achieved rates of return. We also considered the opportunities for growth and returns that exist in our three other businesses.

The Board concluded that, in the light of the scale and timing of the capital investment required in PacifiCorp and the likely profile of returns from that investment, shareholders’ interests were best served by a sale of PacifiCorp and return of capital to shareholders.

The Board, therefore, has entered into a binding agreement for the sale of PacifiCorp to MidAmerican for $9.4 billion. The Board intends to return approximately $4.5 billion of the net proceeds of $5.0 billion from the sale of PacifiCorp, to shareholders. This capital return is anticipated to occur following completion of the sale. The details of the capital return will be communicated to shareholders in due course.

The sale of PacifiCorp enables us to focus our management and capital on the continued development of the Infrastructure Division, UK Division and PPM Energy. These businesses have driven our profit growth over the last two years and delivered overall returns ahead of our cost of capital. They have substantial opportunities for continued growth through capital investment and improved operational performance.

Financial Impact of the Sale and Return of Capital

MidAmerican will be acquiring the equity of PacifiCorp for $5,109.5 million and will be assuming net debt at completion expected to be approximately $4.3 billion, which gives a total sale price for PacifiCorp of $9.4 billion. Allowing for that net debt, with no material tax cost expected and after estimated costs, net proceeds from the sale are expected to be approximately $5.0 billion. ScottishPower intends to return

approximately $4.5 billion of the net proceeds from the sale to shareholders following the completion of the sale. The sale and return of capital is expected to be earnings accretive for ScottishPower from completion.

An exceptional impairment charge of £927 million, under UK GAAP, has been made in ScottishPower’s results for the year ended 31 March 2005. This impairment provision has been made to reduce the book value of PacifiCorp down to its expected net realisable value. Pending completion of the sale, PacifiCorp will be treated as a discontinued operation in the financial statements of ScottishPower. The impairment amount excludes foreign exchange gains of £485 million, achieved to date, which will be reflected in ScottishPower’s Income Statement under IFRS on completion of the sale of PacifiCorp to MidAmerican.

Going forward, our current dividend policy is to grow dividends broadly in line with earnings and we expect this to continue following the sale and return of capital to shareholders. Our financial strategy will be to retain an A category credit rating for the group and our principal operating subsidiaries. To achieve this rating, on completion of the sale, the group will target credit ratios of adjusted FFO/net debt of greater than 25% and FFO/interest cover of more than five times. ScottishPower will work closely with the rating agencies in order to ensure its rating objectives are achieved.

For the year ended 31 March 2005, PacifiCorp’s UK GAAP profit before tax, excluding goodwill amortisation and the exceptional item, was $581 million and net assets were $ 4.1 billion as at 31 March 2005. From the perspective of PacifiCorp, its unaudited earnings under US GAAP were $250 million for the same period.

Strategy for ScottishPower

Following the sale, ScottishPower will continue to develop its Infrastructure Division, UK Division and PPM Energy, where ScottishPower has strong positions, combined with a market and regulatory environment that it is anticipated will continue to provide attractive opportunities for organic growth and investment. These businesses have also driven ScottishPower’s recent profit growth and offer the most attractive returns. In aggregate, these three divisions have shown growth in operating profit of 38% over the last two years.

The Infrastructure Division can benefit from increases in allowed revenue as a result of the recently concluded Distribution Price Control Review and Transmission Price Control Extension. The resulting price controls provide increased revenue allowances for taxation and pension costs, reflect higher capital investment levels and introduce new incentive targets. The division has geared up across its activities to achieve and, where possible, outperform those new targets and to deliver the increased investment programme. We expect capital expenditure in the division to amount to approximately £1.7 billion to 2010, with 40% of that figure associated with growth in the business.

In our UK Division, over the medium-term, we aim to continue to grow profitably our customer base and generation assets. The growth in customer numbers is expected to deliver increased earnings via higher revenues and a reduction in our average cost to serve. We will support this growth in customer numbers with further investment in generation and gas storage and aim to invest approximately £1.4 billion of capital to 2010. This includes the continued expansion of our windfarm portfolio, where we aim to invest £1 billion by 2010. Some 75% of UK Division’s capital expenditure is expected to support growth, with targeted returns immediately following completion of each project for new investments of at least 300 basis points above the division’s weighted average cost of capital.

At PPM Energy we expect to see continued strong growth in the medium-term coming from our investments in windfarms and gas storage. Approximately £1.4 billion of capital is expected to be invested to 2010, almost all for growth, including £950 million for new wind capacity, taking our total to at least some 2,300 MW and £460 million in the same period to increase our gas storage capacity to 125 BCF. Returns of at least 300 basis points above PPM Energy’s weighted average cost of capital are expected immediately following completion of each project.

Details of the PacifiCorp Sale

The sale is subject to Securities and Exchange Commission, Department of Justice or Federal Energy Regulatory Commission, Federal Trade Commission and Nuclear Regulatory Commission approvals at federal level, without conditions that would have a material adverse effect on the PacifiCorp business. In addition it is subject to approval at state level in Utah, Oregon, Wyoming, Washington, Idaho and California provided such state approvals are not subject to conditions whose effect would be meaningfully adverse to the business of PacifiCorp. The directors of ScottishPower anticipate that such approvals should be forthcoming within 12 to 18 months. The sale is subject to further conditions to completion which include the representations and warranties of the parties remaining true and correct, the parties performing their covenants and obligations under the Agreement in all

material respects, and no material adverse effect in relation to PacifiCorp having occurred. The Agreement may be terminated prior to completion by mutual agreement of the parties or otherwise in certain circumstances including material breach of the representations, warranties or covenants of the parties, ScottishPower shareholders not approving the sale or the sale not having been completed by 23 May 2006 or in certain circumstances by 17 February 2007 and (by MidAmerican) where the Board of ScottishPower withdraws or adversely modifies its recommendation of the sale. ScottishPower has also agreed that it will not initiate, solicit or engage in negotiations concerning any alternative proposals relating to PacifiCorp other than in certain specified circumstances.

ScottishPower and MidAmerican have agreed certain break fee arrangements. In summary, ScottishPower has agreed to pay MidAmerican a break fee of $10 million if, prior to ScottishPower shareholders approving the sale, an alternative proposal relating to PacifiCorp or a proposal for the acquisition of control of ScottishPower is made or announced, is rejected by ScottishPower, and ScottishPower shareholders do not subsequently approve the sale at the relevant shareholders’ meeting or in any event before 1 September 2005 and the Agreement with MidAmerican is as a result terminated. If the break fee would otherwise become payable then its amount is increased to (a) $100 million (in total) if the ScottishPower Board instead of rejecting such proposal, recommends it or withdraws or adversely modifies its recommendation of the sale and (b) $250 million (in total) if within a year of the Agreement with MidAmerican terminating, ScottishPower enters into an agreement with respect to or consummates an alternative proposal relating to PacifiCorp or a proposal for the acquisition of control of ScottishPower. The maximum break fee payable by ScottishPower is therefore $250 million. A break fee of $250 million is payable by MidAmerican to ScottishPower if ScottishPower terminates the Agreement as a result of MidAmerican agreeing to or announcing a proposal to acquire certain competing utility and energy assets if the same directly or indirectly results in the failure to satisfy certain regulatory conditions to the sale and/or creates or imposes additional conditionality or costs which result in MidAmerican choosing not to complete or to terminate the Agreement.

Prior to sale it is envisaged that PacifiCorp will be managed and developed as currently, with no material changes to its operating plans, management structures, or boards.

Between now and closing of the sale, ScottishPower has agreed to invest additional equity in PacifiCorp to fund ongoing capital expenditure in line with PacifiCorp’s current plan. Pursuant to these arrangements, ScottishPower will invest $500 million during the financial year 2005/06. In addition ScottishPower has agreed to make further investments during the financial year 2006/07 of up to $525 million, contributed quarterly, although ScottishPower will be fully compensated for any such payments made in respect of the financial year

2006/07. Between now and the closing of the sale, ScottishPower is entitled to dividends from PacifiCorp in line with PacifiCorp’s current plan. Pursuant to these arrangements, it is expected that, ScottishPower will receive $215 million of dividends during the financial year 2005/06, and $242 million of dividends during the financial year 2006/07, these amounts to accrue monthly.

Due to the size of the sale, the approval of ScottishPower’s shareholders is required. Accordingly, a circular containing details of the sale and a notice convening a general meeting will be posted to shareholders in due course. It is expected that the details of the return of capital will be sent to shareholders around the time of completion of the sale. The sale, which is conditional on shareholders’ approval and on regulatory clearance, is expected to complete in 12 to 18 months.

2    Financial Results

We have achieved profit before tax* of over £1 billion for the first time, an increase of 10% compared with the prior year. These results reflect a 20% growth in our UK customer numbers complemented by investments in generation, continued efficiency in our UK network business, further returns from our US competitive wind and gas storage investments, and lower interest costs. These contributions more than made up for the lower profit at PacifiCorp.

We continue to see very attractive opportunities for profitable growth in our UK network business, where the finalisation of the Distribution Price Control Review places us in a good position to continue to outperform the targets and enhance returns. We are the leading developer of wind generation in the UK and the US with approximately 1,000 MW of plant in operation and some 700 MW of plant to be constructed in the remainder of 2005.

PacifiCorp’s financial performance was impacted by milder temperatures and lower thermal generation availability in the first half, and a lack of rainfall and snow held back the contribution from our hydroelectric generation plants in the second half. The lower than normal snow and rainfall over the winter months will also reduce hydroelectric generation availability during the first six months of 2005/06.

The Infrastructure Division delivered an increase in operating profit of 6% in the year and concluded the Distribution Price Control Review and Transmission Price Control Extension. The division will benefit from increases in allowed revenue as a result. The price controls also introduce challenging new incentive targets which will require further improvements in operational performance. The division is focused on outperforming these new targets and delivering the increased investment programme.

In the UK Division the investment in generation plant has

complemented significant growth in customer numbers, up 865,000 this year to over 5.1 million. Together, these have contributed to the substantial increase of some 80% in the operating profit* of the division. We are continuing to grow our customer numbers, albeit at a slower rate than experienced in the first nine months of 2004/05, while maintaining our focus on gaining profitable customers that will create shareholder value. Generation has started at the Black Law windfarm and construction is underway at the Beinn Tharsuinn and Coldham windfarms. The UK Division has continued to demonstrate significant progress toward its renewable energy strategy.

PPM Energy continued to grow rapidly with operating profit* rising 60% to £59 million, for the year, with additional earnings delivered through Production Tax Credits on wind output. In the year we acquired Atlantic Renewable Energy Corporation in order to expand on the east coast of the US. This acquisition and the recently announced Shiloh and Maple Ridge windfarms, together with windfarms at Klondike II, Trimont and Elk River, gives PPM Energy 574 MW due on-line by 31 December 2005, all of which are expected to be immediately earnings enhancing following completion.

3    Investing for Growth

We continue to execute our investment strategy across the group and invested £1.4 billion during the year, with £0.8 billion (60%) invested for growth. Investments in our regulated businesses aim to achieve at least the allowed rate of regulatory returns, while our competitive businesses are expected to achieve returns of at least 300 basis points above each division’s weighted average cost of capital.

PacifiCorp’s net capital investment was £480 million for the year, with £231 million (48%) invested for organic growth. Of this, £136 million was invested in building new generation. The first phase of the 525 MW Currant Creek plant, representing 280 MW, will be operational this summer with full operations scheduled to begin in summer 2006. Construction at the 534 MW Lake Side plant is scheduled to begin this summer. A further £95 million was invested in new connections and network reinforcement.

Infrastructure Division’s net capital investment was £267 million for the year, with £67 million (25%) invested for organic growth, including expenditure on the connection to the Black Law windfarm and other new customer connections. Other organic investment focused on network reinforcement projects, such as the £30 million, five-year, Liverpool city centre regeneration programme and initial spend on the Renewable Energy Transmission Study upgrade programme required to accommodate the connection of renewable generation in Scotland. As a result of the Distribution Price

Control Review, capital expenditure allowances increase by 55% over the next five years, against the previous control period, with some 1,800 km of overhead lines due to be built. New initiatives in operational excellence will also help our drive towards a 30% improvement in network performance, resulting in reduced fault duration for our customers and minimising risk of financial penalty from Ofgem. We also plan to invest some £190 million in the first phase of the Transmission Investment for Renewable Generation.

The UK Division’s net capital investment was £546 million, including £454 million (83%) invested for growth. Growth investment included the acquisitions of the 800 MW Damhead Creek power plant for £320 million and the remaining 50% of the 400 MW Brighton power plant for £71 million. Other growth investment of £63 million related primarily to our windfarm developments, notably the largest consented UK onshore windfarm project at Black Law. Development of the project continues, with completion of approximately 100 MW scheduled for autumn this year. Construction is also underway at the 30 MW windfarm at Beinn Tharsuinn and the 16 MW windfarm at Coldham.

PPM Energy’s net capital investment for the year was £84 million, with £79 million (94%) of this invested for growth, primarily on new wind generation projects where build is ongoing. For 2005/06 PPM Energy has announced 574 MW of new windfarm investments, comprising 75 MW Klondike II, 100 MW Trimont, 150 MW Elk River, 150 MW Shiloh and 50% of the 198 MW joint venture Maple Ridge windfarm in upstate NewYork, which is being developed along with Zilkha Renewable Energy of Houston. Maple Ridge represents the first project in the northeastern US associated with the PPM Atlantic Renewable acquisition. PPM Energy’s share of the capital investment is approximately $160 million and the 120 turbine windfarm is due to be completed this December. Once operational, all of these projects are expected to be immediately earnings enhancing.

Looking ahead, we aim to invest further capital to 2010 of some £1.7 billion in the Infrastructure Division including renewable infrastructure investment; £1.4 billion in generation and gas storage in the UK Division; and approximately £1.4billion at PPM Energy on new wind and gas storage capacity.

recoveries of $44 million. Deferred power cost recoveries will expire fully by the end of December 2005. Underlying retail revenues improved due to regulatory rate increases and customer growth, partly offset by lower customer usage, mainly due to the milder weather. Although the contribution from hydroelectric resources was in line with last year, it remained below expectations as a result of the unusually dry conditions. The impact of lower thermal generation availability and related increase in purchase volumes, together with higher fuel and market prices and increased load volumes, all contributed to the rise in net power costs. Operating efficiencies delivered $42 million of benefits and this more than offset adverse other net revenue and cost movements of $37 million, which increased largely as a result of higher labour-related and maintenance costs. Non-recurring items were favourable by $10 million, as the $56 million environmental provision release in the year more than offset $46 million of non-recurring items in the prior year.

Initiatives directed at improving operational efficiency included steps to significantly reduce future expected coal costs over the long-term by commencing underground coal mining in Wyoming; to aid generation efficiency by improving the management of plant overhauls and targeted capital expenditure programmes; and to deliver cost savings by renegotiating operational and service level agreements. In addition, customer service was enhanced following the streamlining and automation of activities and, in April 2005, we opened another new operations centre to facilitate the centralisation of call handling and to provide rapid responses to outages for our customers. These initiatives contributed to PacifiCorp delivering and exceeding its target of $300 million of benefits set at the time of the merger.

In February 2005, the Utah Public Service Commission granted PacifiCorp additional annual revenues of $51 million, based upon a forward-looking test year, effective from 1 March 2005. Along with other awards earlier in the year of $15 million in Washington and $9.25 million in Wyoming, this represents rate case awards in the year of approximately $75 million of additional annual revenue. On 5 May 2005, PacifiCorp filed a general rate case request in Washington for approximately $39 million that also related to increased operating costs.

PacifiCorp is also seeking to account for and recover power costs in Oregon and Washington related to the unfavourable weather conditions. These requests relate to the 2005 calendar year and are expected to be resolved early in 2006. Recovery of any weather-related costs is expected to be made at a future date. PacifiCorp has also requested power cost adjustment mechanisms (“PCAMs”) in Oregon and Washington. The proposed PCAMs are designed to be longer-term, on going mechanisms that pass through to customers a portion of excess power costs, or return to customers a portion of over-collected power costs. This would enable power costs included within rates to be more closely aligned with PacifiCorp’s actual costs and assist in reducing earnings volatility. Discussions on possible PCAMs are also underway in Utah and Wyoming.

4

Improving Operational

Performance

PacifiCorp

For the year, operating profit, excluding goodwill amortisation and the exceptional item, was lower by £78 million at £542 million (down $29 million to $914 million) due mainly to a net £61 million adverse translation impact from the weaker US dollar, which has been substantially mitigated at an earnings level by the benefits from our hedging policy. Retail revenue growth of $98 million was offset by both increased net power costs of $98 million and, as expected, the reduction in deferred power cost

Regulatory returns for PacifiCorp at September 2004, the end of the last regulatory reportable period, were approximately 7% on a normalised basis compared to approximately 8% at September 2003, as the period does not include the increased revenue from the Utah general rate case settlement effective in March 2005 and the Washington general rate case outcome from November 2004.

PacifiCorp now has licenses or settlements in place regarding seven out of nine recent hydroelectric relicensing agreements. The relicensing of the Klamath River and Prospect River systems remain to be settled.

In April 2005, PacifiCorp received a magistrate judge’s opinion agreeing to PacifiCorp’s request to dismiss the $1 billion lawsuit filed against it in May 2004 by the Klamath Tribes. In May 2005, the Tribes filed objections to the magistrate judge’s opinion and the matter is now before a district court judge.

From a customer service perspective, the US Department of Energy ranked PacifiCorp second in the nation in terms of the total number of customers purchasing renewable power and third in terms of sales volumes. In July, PacifiCorp was named best for overall customer satisfaction in a nationwide survey of commercial and industrial customers by TQS Research, an improvement from third place last year.

Infrastructure Division

For the year, operating profit increased by £23 million to £416 million, with regulated revenues higher by £13 million mainly as a result of distribution sales volume growth and favourable transmission prices, in line with allowed revenues. Underlying net costs were favourable by £14 million mainly due to a reduction in third party transmission charges and lower other net costs. This upside, together with a net £4 million increase in one-off gains, including the gain on disposal of gas assets, more than offset an £8 million increase in rates and depreciation.

In March, we accepted the new licence conditions for the Distribution Price Control Review over the next five years from 1 April 2005 and the Transmission Price Control Extension for the next two years also from 1 April 2005. The effect of the two reviews is to increase revenues by around £60 million in 2005/06 mainly due to increased revenue allowances for taxation and pension costs and also reflecting higher capital investment levels. They also introduce challenging new incentive targets which will require further improvements in operational performance in order to avoid penalties. The division has geared up across its activities to achieve and, where possible, outperform these new targets and to deliver the increased investment programme. Initiatives include deploying a greater proportion of the workforce to restore customers to the network; improved scheduling and monitoring of repairs; programmes targeted at the worst performing circuits; and a re-prioritised maintenance programme.

On 1 April 2005, the British Electricity Trading and Transmission Arrangements (“BETTA”) were successfully introduced with National Grid assuming operational control of

the Great Britain (“GB”) transmission system, including balancing of generation and demand in Scotland. ScottishPower retains network ownership and all associated responsibilities including development of the network.

Two storms in January affected approximately 77,000 customers across our licence areas in Manweb and southern Scotland. Early deployment of emergency plans ensured power restoration was highly effective and we received favourable feedback from energywatch for our handling of these events.

During the year the system performance of one of our distribution businesses outperformed the regulatory targets and, subject to the annual audit of system performance data, will qualify for a one-off reward of approximately £3 million. This reward will be reflected in allowed revenue for 2005/06.

UK Division

For the year, operating profit, excluding goodwill amortisation, was higher by £79 million at £180 million. Electricity and gas margins improved by £198 million due to the growth in customer numbers combined with our investment in generation, which delivered £137 million of this increase. The effective management of our generation resource portfolio, including the benefit of our rolling commodity procurement strategy, contributed the majority of the remaining £61 million of margin growth. The substantial increase in customer numbers contributed to higher customer capture, energy efficiency and customer service costs of £45 million. Other net costs increased by £74 million, primarily due to £33 million of operating expenses relating to Damhead Creek and Brighton and higher depreciation and debt provisioning movements.

Renewable development remains a key part of our business strategy and the division is the leading developer of wind generation in the UK with approximately 3,000 MW in its renewable development pipeline, in addition to 158 MW that are operational and 142 MW under construction. We have entered into a joint venture with the Co-operative group to build a 16 MW windfarm at Coldham in Cambridgeshire. Construction is expected to be complete later this year. In March, planning determination for an 18 MW windfarm at Wether Hill in Dumfries and Galloway was given and construction will commence early in 2005/06. We have also completed trials of co-firing of biomass at our Cockenzie power station and have commenced full commercial burning. Co-firing trials have also begun at Longannet. Overall these activities demonstrate the Renewables Obligation Scheme is a successful mechanism that can deliver the Government’s targets for renewable power. We maintain our support for marine renewable power through our relationship with Ocean Power Delivery, a leading developer of marine power.

As we have grown our portfolio of customers and assets, we

continue to maintain a good balance between our retail demand and our generation output. We are maximising the returns from our generating plant by effectively utilising its flexibility, which is increasingly important under the new BETTA market arrangements. Our effective forward purchasing strategy for gas

and coal has helped to maintain a competitive cost base for plant and customers, whilst also helping to protect us from wholesale price volatility. We are substantially covered across ourcommodity requirements for the next two years and have secured access to competitively priced low-sulphur coal from the international market, which will be delivered to our plant via our highly competitive end-to-end coal logistics deal with Clydeport.

We have successfully adapted to the new arrangements under BETTA, and we are capturing the commercial opportunities that the new arrangements present. However, we continue to have concerns with the GB transmission charging arrangements introduced with BETTA and have therefore commenced Judicial Review proceedings with respect to Ofgem’s decision to approve the current GB charging methodology.

The 6 Sigma business transformation programme that was originally adopted in our supply activities was extended to our generation activities in the year and, in total, delivered revenue and cost savings of £15 million this year. In April 2005, we received a “Best in Class Award” at the European 6 Sigma IQ Awards in recognition of the successful delivery of a project to improve significantly customer accounts set-up time. The benefits of the improvements in our customer service provision have also been evidenced by the results seen in two customer satisfaction studies. ScottishPower came top of Datamonitor’s annual survey of industrial and commercial customers and was ranked highest for price and value in J.D. Power’s domestic gas market award.

PPM Energy

For the year, operating profit, excluding goodwill amortisation, increased by £22 million to £59 million (by $35 million to $98 million). PPM Energy’s contribution to the group’s profit before interest and tax, excluding goodwill amortisation and including results from joint ventures, was $99 million. In addition, the group’s tax charge was reduced by $12 million, as a result of PPM Energy’s Production Tax Credits. Gas storage margins improved by $48 million in the year, with increased contracted storagecapacity delivering $34 million of this growth and the owned facilities at Alberta and Katy, adding $14 million. Wind generation profit improved by $10 million, primarily due to investment in 2003/04 in new windfarms delivering substantial volume growth during the year. Energy management activities improved by $7 million mainly as a result of increased contributions from long-term contractual arrangements to supply electricity and gas due to higher volumes. Net operating costs required to support increased business activities and infrastructure were higher by $24 million and depreciation increased by $6 million.

PPM Energy now controls about 830 MW of operating wind energy with new developments totalling 574 MW due to beconstructed in 2005, making PPM Energy the largest US developer of renewables announced to date this year. In May 2005, PPM Energy announced plans for a 150 MW windfarm in northern California to be called the Shiloh windfarm. The Shiloh windfarm, together with the previously announced

windfarms at Maple Ridge, Klondike II, Trimont and Elk River, will take PPM Energy’s total wind portfolio to approximately 1,405 MW by the end of 2005, well on target toward its goal of at least 2,300 MW on-line by 2010. Approximately 90% of PPM Energy’s operational windfarm output is committed under long-term contract. In December 2004, PPM Energy also acquired the northeast US wind energy developer, Atlantic Renewable Energy Corporation (now called PPM Atlantic Renewable). Including PPM Atlantic Renewable projects, PPM Energy now has approximately 9,000 MW in its renewable development pipeline, stretching from California to New York. In addition, PPM Energy has over 800 MW of thermal generation.

In May 2005, PPM Energy announced plans to expand the Waha gas storage development project in west Texas from 7.2 BCF to 9.5 BCF based on strong market demand and favourable geological results. PPM Energy also announced the acquisition of the 4.5 BCF Grama Ridge gas storage facility in New Mexico, from ConocoPhillips, which continues PPM Energy’s profitable investment in gas storage assets. Including Grama Ridge, PPM Energy now has 80.5 BCF of gas storage under its ownership or control. PPM Energy intends to expand the Grama Ridge site to 6.0 BCF by the end of 2005.

Health and safety continues to be our top priority. After our review and implementation of policies and standards, we have now undertaken two years of thorough assessments for each of our businesses. These assessments show where we have improved in sharing information and practice and where we can improve further in our ambition to have world-class health and safety performance throughout the company.

Our policy and standards reflect our determination to achieve our goal of creating a positive and productive environment, one free from injury or illness that causes no harm to our employees, customers or the public.

We have stepped up employee involvement and training, launched behavioural safety auditing and are working with our contractors to ensure they share our commitment to health and safety. We have also improved the sharing of best operational practices across our businesses.

    Corporate Social

    Responsibility

During the year we have continued our commitment to building a strong business that creates benefits for customers, employees, shareholders, communities and the environment.

Our businesses and functions have been working together to identify our impacts on communities and the environment and will continue to refine further our approach to managing our

business responsibly.

We continue to report our performance in a comprehensive and transparent manner and were again shortlisted for the ACCA sustainability reporting awards and ranked among the top 20 in Business in the Community’s Corporate Responsibility Index. Our commitment to the highest standards of corporate governance was acknowledged by FTSE and Institutional Shareholder Services which placed ScottishPower third in the UK in the new Corporate Governance Index.

These achievements during a year of increased regulation and scrutiny reflect and reinforce the value of the effort of employees across the group in delivering good performance.

Two special highlights of our activity this year were helping over 10,000 young people since 1996 through ScottishPower Learning, and delivery of a national framework for youth action and engagement in the UK through the commission which I led with the Government. The Government has announced an investment of £150 million to recruit up to one million young volunteers to help build strong and cohesive communities.

7     Employees

At ScottishPower we recognise that our people are our greatest asset and employee feedback has been incorporated into the group’s performance management system through our employee survey tools.

This group-wide employee survey measures how our employees feel about their working environment. The results are monitored by the Executive Team and are used as a basis for action to remove barriers to productivity and increase employee satisfaction.

We remain committed to developing talent at all levels by providing both vocational and non-vocational development activity for all employees at the work place and at home, together with tailored management development programmes.

Throughout the group we strive to recognise and celebrate the achievements of our people as we continue to build our business for the future.

8    Conclusion

In summary, we have announced the sale of PacifiCorp to MidAmerican for $9.4 billion with approximately $4.5 billion of the net proceeds to be returned to shareholders. Our full year results show profit before tax*, earnings per share* and dividends per share all up by 10%. We have set the dividend for each of the first three quarters of 2005/06 off the higher than expected base for dividends this year, at 5.20 pence per share, representing an increase of 5% from 2004/05, up from 4.2% for the first three quarters of 2004/05, compared to 2003/04. Looking ahead, we will focus our management and capital on our Infrastructure Division, UK Division and PPM Energy and we remain committed to delivering our strategy of investing for growth and improving operational performance.

Ian Russell Chief Executive

24 May 2005

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Ø     Description of Business

Ø     PacifiCorp

Ø     Infrastructure Division

Ø     UK Division

Ø     PPM Energy

Ø     Group Employees

Ø     Group Environmental Policy

Ø     Community Impact

Ø     Description of the Company’s

        Property

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Ø     Description of Legislative and

        Regulatory Background

Ø     US Business Regulation

Ø     Regulation of PacifiCorp

Ø     Regulation of the Electricity

        and Gas Industries in the UK

Ø     Environmental Regulation

Ø     Employment Regulation

Ø     Litigation

Ø     Summary of Key Operating Statistics

1    Description of Business

Scottish Power plc (“ScottishPower”), a public limited company registered in Scotland, is an international energy company listed on both the London and New York Stock Exchanges. Through its operating subsidiaries, the company provides in excess of 6.7 million electricity or gas services to homes and businesses across the UK and in the western US. It provides electricity generation, transmission, distribution and supply services in both countries. In addition, the company’s North American activities extend to coal mining and gas storage, including gas facilities in western Canada, Texas and New Mexico. In Great Britain, ScottishPower also stores and supplies gas. In the year to 31 March 2005, the sales revenues of the group were £6.8 billion ($12.9 billion).

ScottishPower was created upon privatisation in 1991 and then developed by both organic growth and strategic acquisitions in the British electricity, gas and telephony markets-and through its November 1999 merger with PacifiCorp in the US. Following the group’s redefinition as an energy business in 2001, it exited or disposed of non-strategic activities in the US and UK and demerged its UK telecommunications and internet business, Thus, to the company’s shareholders.

Since 2002, ScottishPower has focused on investing for growth and improving operational performance in its energy businesses. Following a strategic review of the scale and timing of capital investment requirements, opportunities for growth and improving operational performance and the likely profile of returns from the group’s businesses, ScottishPower has entered into a binding agreement for the sale of PacifiCorp to MidAmerican for $9.4 billion. Regulatory approvals of the sale are expected to be forthcoming within 12 to 18 months. Prior to sale, it is envisaged that PacifiCorp will be managed and

developed with no material changes to its current operating plans, management structures or boards.

Strategic Context

ScottishPower’s strategy is to focus its management and capital on the further development of the three continuing businesses, which the group judges to have attractive opportunities for continued growth through capital investment and improved operational performance. The regulated UK wires business provides a base for steady growth through consistent investment and proven skills in operational and regulatory management. In the competitive businesses where the group’s management believes that it can deploy local market knowledge and employee skill advantages, it seeks to grow its market share and to enhance margins through the integration of generation, energy management and customer services, underpinned by strong operational performance. The aim is consistently to improve operational performance whilst investing to support the organic growth and development of the businesses. The group expects growth to arise from investment in new generation, networks and gas storage assets. ScottishPower will also seek to accelerate its organic growth through competitive market share gains and selective acquisitions of smaller operations that complement the group’s business. Shareholder value is expected to be created through an investment programme assessed on a risk-adjusted returns basis and aiming to retain an A category credit rating for the group’s principal operating subsidiaries. Individual investments in the continuing regulated business are expected to achieve at least the allowed rate of regulatory returns, whilst those in the competitive businesses are targeted to achieve returns of at least 300 basis points above each division’s weighted average cost of capital.

The group currently operates through four businesses, see chart above.

Ø PacifiCorp

Ø Infrastructure Division

Ø UK Division

Ø PPM Energy

In each of the US and the UK, there is one business operating under regulation and one in competitive market conditions. Each business is clearly focused on its strategic priorities.

In the US, PacifiCorp operates as a regulated electricity business and the competitive energy business is PPM Energy. Both are subsidiaries of PacifiCorp Holdings, Inc. (“PHI”) a non-operating, US holding company, itself an indirect wholly-owned subsidiary of ScottishPower. PHI is also the parent company of PacifiCorp Group Holdings which owns the shares of subsidiaries not regulated as domestic electricity providers, including PacifiCorp Financial Services, Inc.

In the UK, the regulated Infrastructure Division operates electricity transmission and distribution subsidiaries of the wholly-owned UK holding company Scottish Power UK plc (“SPUK”). Other subsidiaries comprise the group’s competitive energy business, the UK Division, covering its generation assets in the British Isles, its commercial and energy management activities and its energy supply business units.

2    PacifiCorp

In November 1999, PacifiCorp and ScottishPower completed a merger under which PacifiCorp became an indirect subsidiary of ScottishPower. Following the merger, PacifiCorp focused on its electricity businesses in the western US and embarked upon a programme of efficiency improvements. Pending completion of its proposed sale to MidAmerican, PacifiCorp is expected to maintain this focus, without material changes to its operating plans, management structures or boards.

Principal Business Activities

PacifiCorp is a regulated electricity company serving retail customers in portions of the states of Utah, Oregon, Wyoming, Washington, Idaho and California. As a vertically-integrated electricity business, PacifiCorp owns or has contracts for fuel sources, such as coal and natural gas, and uses these fuel sources, as well as wind, geothermal and water resources, to generate electricity at its power plants. This electricity, together with electricity purchased on the wholesale market, is transmitted over a grid of approximately 15,530 miles of transmission lines throughout PacifiCorp’s six-state region and is then transformed to lower voltages and delivered to end-use customers through the approximately 58,360 miles of PacifiCorp’s distribution system. PacifiCorp conducts its retail electricity utility business as Pacific Power and Utah Power, and engages in electricity sales and purchases on a wholesale basis under the name PacifiCorp. The subsidiaries of PacifiCorp support its electricity utility operations by providing coal mining facilities and services and environmental remediation.

The western US energy market is experiencing growth in demand due to both increased customer numbers and underlying load growth. Through the continual review and updating of its Integrated Resource Plan (“IRP”), PacifiCorp aims to maintain a balanced load and resource position and has hedged its forecast load and resource balance and price exposure for summer 2005, when demand is expected to be supported by the commissioning of the first phase of the 525 megawatt (“MW”) Currant Creek plant in Utah. PacifiCorp also continued to invest in support of network safety, reliability and high-level performance, including targeted investments in areas of high demand growth.

Retail Electricity Sales

PacifiCorp serves approximately 1.6 million retail customers in service territories aggregating about 136,000 square miles in portions of six western states. The geographical distribution of PacifiCorp’s retail electricity operating revenues for the year ended 31 March 2005 was Utah, 41%; Oregon, 29%; Wyoming, 14%; Washington, 8%; Idaho, 6%; and California, 2%.

The PacifiCorp service area’s diverse regional economy mitigates exposure to economic fluctuations. In the eastern portion of the service area, mainly Utah, Wyoming and southeastern Idaho, customer demand peaks in the summer when cooling systems and irrigation are heavily used. The principal industries are manufacturing, health services, recreation and mining or extraction of natural resources. In the western part of the service territory, mainly consisting of Oregon, southeastern Washington and northern California, customer demand peaks in the winter months due to heating requirements and the economy generally revolves around agriculture and manufacturing, with forest products, food processing, high technology and primary metals being the principal industries. During 2004/05, no single retail customer accounted for more than 2% of PacifiCorp’s retail electricity revenues and the 20 largest retail customers accounted for 13% of retail electricity revenues. Trends in energy sales by class of customer are set out in Tables 4 and 5 (page 34).

PacifiCorp serves some areas of rapidly changing population size and economic activity. Strong growth in the number of residential customers in Utah over recent years and increasing numbers of central air conditioning systems are contributing to a faster summer peak growth. Commercial sales are positioned for growth in the eastern portion of the service territory, particularly Utah, because of strong population and economic viability and through Utah’s central role in the manufacture, distribution and delivery of goods to surrounding western states. Wyoming is continuing to experience increasing industrial activity in its energy-related sectors, with rising exploration and rig counts suggesting a positive trend in PacifiCorp’s future sales to the industrial sector in the state. Oregon has returned to pre-recessionary conditions statewide and PacifiCorp serves a number of communities showing

higher than average levels of growth in that state. These factors suggest the likelihood of an increasing pace of economic development and recovery across PacifiCorp service territories.

For the five years to 31 March 2010, the underlying annual growth in retail megawatt hour (“MWh”) sales in PacifiCorp’s franchise service territories is estimated to be in the range of 2.2% to 3.3%, dependent upon factors such as economic growth, changes in customer numbers, weather, the potential effects on demand resulting from conservation efforts and changes in price. If energy prices increase in the region, demand growth over the region may slow.

Power Production and Fuel Supply

PacifiCorp owns or has interests in generating plants with an aggregate plant net capability of 7,981 MW, see Table 1 (page 33). During 2004/05, approximately 74% and 5% of PacifiCorp’s energy requirements were supplied by its thermal and hydroelectric generation plants, respectively. The remaining 21% was obtained primarily through purchased power. The share of PacifiCorp’s energy requirements generated by its own plants will vary from year-to-year and is determined by factors such as planned and unplanned outages, availability and price of coal and natural gas, precipitation and snowpack levels, environmental considerations and the market price of electricity. PacifiCorp will make use of existing long-term purchase contracts, including those covering some 65 MW of wind power, and expects to choose appropriate cost-effective resources to meet the balance of its customer demand through new long- and short-term purchase arrangements.

The IRP, under which PacifiCorp seeks to manage future generation needs and meet environmental objectives, is reviewed and updated every two years. The latest IRP update was filed in January 2005 and indicates that projected growth rates and contract expirations imply a need for approximately 2,800 MW of additional resources by 2015. These estimates are subject to ongoing review and possible revision. PacifiCorp is continuing to develop plans to meet this resource requirement through a mix of new thermal generation, load control programmes, energy conservation programmes and the renewable resources first identified in the 2003 IRP.

Large resource procurement action items from PacifiCorp’s IRP are pursued through the Requests for Proposals (“RFP”) process which seeks to identify PacifiCorp’s future resource mix though a programme coordinated with stakeholders in the six states it serves. From the first of the RFPs, in 2003, PacifiCorp determined that the construction of a new 525 MW gas-fired plant in Utah would be the lowest risk and most economical 2004/05 resource category choice to meet future generation needs. This plant, known as Currant Creek, has been fully authorised by the Utah authorities, is currently commissioning and is expected to come on-line in two phases over 2005 and 2006. In 2004, PacifiCorp chose Summit Vineyard LLC for the construction of a 534 MW Lake Side

Power Plant near Salt Lake City, Utah. The Utah Public Service Commission (“UPSC”) has granted all the permissions required to construct and operate the Lake Side Power Plant, and PacifiCorp is scheduled to begin operating the plant in May 2007. In May 2005, PacifiCorp entered into a 65 MW power purchase agreement, to take effect prior to January 2006, for the output of a windfarm located in southeastern Idaho. Further negotiations continue to bring into use some 1,100 MW of new renewable resources across the PacifiCorp service territories over the period to 2010, as a result of the February 2004 RFP.

At 31 March 2005, PacifiCorp had 259 million tons of recoverable coal reserves that are mined by PacifiCorp’s mining affiliates and are available to nearby PacifiCorp-operated generation plants, see Table 2 (page 33). During 2004/05, these mines supplied some 29% of PacifiCorp’s total coal requirements. Coal is also acquired through long- and short-term contracts. Thirteen long-term coal contracts accounted for 70% of the overall 2004/05 requirements. The contract terms range from one to 18 years. PacifiCorp has also entered into fixed-price and index-price natural gas contracts to meet the forecasted needs of its existing natural gas-fired electricity generation plants to the end of calendar year 2006 and to secure approaching 80% of its forecasted calendar year 2007 gas supply needs, inclusive of the Currant Creek and Lake Side projects.

Wholesale Sales and Purchased Electricity

In addition to its base of thermal, renewable and hydroelectric generation assets, PacifiCorp uses a mix of long-term, short-term and spot-market purchases to balance its retail load and wholesale obligations. PacifiCorp enters into wholesale purchase and sale transactions to provide hedges against periods of variable generation or variable retail load. Generation varies with the level of outages or transmission constraints and retail load varies with the weather, distribution system outages, customer trends and the level of economic activity. During the year ended 31 March 2005, some 21% of PacifiCorp’s energy requirements were supplied by electricity purchased under short- and long-term arrangements, compared with some 22% for the year ended 31 March 2004. PacifiCorp’s wholesale transactions are integral to its retail business, providing for a balanced and economically hedged position and enhancing the efficient use of its generating capacity over the long term. PacifiCorp’s transmission system is available for common use consistent with open access regulatory requirements and connects with market hubs in the Pacific Northwest to provide access to what is normally low-cost hydroelectric generation and also to the southwestern US, which provides access to normally higher-cost fossil-fuel generation.

Under the requirements of the Public Utility Regulatory Policies Act of 1978, PacifiCorp purchases the output of

qualifying facilities constructed and operated by entities that are not public utilities. During 2004/05, PacifiCorp purchased an average of 139 MW from qualifying facilities, compared to an average of 119 MW in 2003/04.

3    Infrastructure Division

Three wholly-owned subsidiaries of SPUK – SP Transmission Limited, SP Distribution Limited and SP Manweb plc – are the “asset-owner companies” holding the group’s UK regulated assets and transmission and distribution licences. A further wholly-owned subsidiary of SPUK – SP Power Systems Limited (“PowerSystems”) – provides asset management expertise and conducts the day-to-day operation of the networks.

Principal Business Activities

The asset-owner companies act as an integrated business unit to concentrate divisional expertise on regulatory issues and investment strategy. PowerSystems implements work programmes commissioned by and agreed with the asset-owner business. Strict commercial disciplines are applied at the asset owner-service provider interface, with PowerSystems operating as a contractor to the transmission and distribution business unit. An integrated senior management team within the Infrastructure Division applies the benefits of growing expertise in asset ownership, financing and operational service provision to the management of the group’s regulated networks businesses in both the UK and the US.

Transmission and Distribution

ScottishPower owns a substantial UK electricity transmission and distribution network which extends to approaching 112,000 km, with some 65,000 km of underground cables and 47,000 km of overhead lines, comprising both the distribution system to customers in its two authorised areas and, in Scotland, its high-voltage transmission system (132 kilovolt (“kV”) and above, including those parts of the England-Scotland interconnector which are in its Scottish authorised area). Table 8 (page 35) shows key information with respect to the division’s transmission and distribution services in 2004/05 which were operated under licences issued by the Gas and Electricity Markets Authority (“the Authority”) and held by the transmission and distribution businesses, which were entitled to charge for the use of the systems on terms approved by the Authority under various price control formulae. From 1 April 2005, operation but not ownership of the ScottishPower transmission system passed to a single, Great Britain-wide system operator. This development is described further on page 76.

The management focus of the transmission and distribution business is to outperform allowed regulatory returns from the

Business Review Description of Business

provision of efficient, coordinated and economical networks that are open to licensed users on a non-discriminatory basis (in order to facilitate competition in generation and supply) and operated to approved standards of safety and reliability. The distribution business price controls for the five years from 1 April 2005 and the transmission price controls for the two years from 1 April 2005 were agreed with the Office of Gas and Electricity Markets (“Ofgem”) in December 2004 and present challenges for the division but also opportunities to enhance returns through a revised package of performance-incentive measures. Ofgem has also agreed that the division can move ahead with the first phase of investments in network development to support the UK Government’s planned expansion of renewable generation.

The income derived from the distribution business is dependent on the demand for electricity by customers in the authorised areas. Demand for electricity is affected by such factors as growth and movements in population, social trends, economic and business growth or decline, changes in the mix of energy sources used by customers, weather conditions and energy efficiency measures. Tables 9 and 10 (page 35) set out the demand in gigawatt hours (“GWh”) by customer type within the broadly stable levels of electricity transported over the distribution systems in the ScottishPower and Manweb home areas during the five most recent financial years.

Asset Management

Within the PowerSystems business unit, the focus continues to be on cost-effectiveness and service quality improvement. Its principal business activities involve the construction and refurbishment of the ScottishPower transmission and distribution systems, their maintenance and related fault repair. PowerSystems acts as the major service provider to the ScottishPower distribution businesses and as the primary customer contact agent for network-related matters. PowerSystems continues to focus strongly on the efficient delivery of these services under contract. The regulatory framework provides financial incentives to improve network performance and customer satisfaction. PowerSystems is focused on maximising the financial benefit to be obtained from these incentives over the course of the recently renewed price control period.

Some 25% of the division’s investment programme is devoted to organic growth areas such as new customer connections and network reinforcement. PowerSystems has continued to maintain a joint venture with Alfred McAlpine Utility Services Limited, called Core Utility Solutions Limited, to take advantage of the opportunities presented by the requirement for competitive provision of connections to distribution networks.

4    UK Division

The UK Division operates in gas and electricity markets which became fully competitive with the ending of residual price controls on 31 March 2002; although Ofgem continues to enforce licence conditions and regulate quality of service. The division comprises five wholly-owned subsidiaries: ScottishPower Generation Limited owns and operates the group’s power stations and other generation assets in the British Isles and holds the group’s generation licence; ScottishPower Energy Management Limited is responsible for commercial running of the power stations including scheduling and fuel purchasing, for managing retail economics and pricing, and for managing commodity risk through buying and selling wholesale energy via ScottishPower Energy Management (Agency) Limited; ScottishPower Energy Retail Limited is the gas and electricity supply company and holder of the group’s supply licences, managing pricing, selling, billing and receipting for gas and electricity supply to both business and domestic customers and dealing with enquiries arising in the course of this business; and SP Dataserve Limited is the data management and metering company, managing the data processes that underpin customer registration through to billing and settlement.

The divisional management team oversees activities across the energy value chain, maximising value from a diverse generation portfolio through to a national customer base of over 5.1 million, via an integrated commercial and energy management activity that acts to balance and hedge energy needs. In 2004/05, wholesale energy prices were high by historic standards although, in light of the emphasis on a market-based framework for energy policy set out by the UK Government in February 2003, it seems likely that prices will tend to increase further towards the long run marginal cost of gas-fired generation, augmented by the developing impact of carbon trading. As an active market participant, the division engages fully in regulatory and contractual debate and in the consultation processes following the UK Government’s review of energy policy. In the meantime, the division aims to leverage the benefits of its flexible generation asset base and commercial operations to deliver sustained earnings through improved business processes and customer service and to develop its position in renewable generation and other aspects of the emerging market for environmental instruments.

Principal Business Activities

The UK Division operates ScottishPower’s generation assets in the British Isles, manages the company’s exposure to the UK wholesale electricity and gas markets and is responsible for energy supply, the sales and marketing of electricity and gas to customers throughout Great Britain, together with the associated customer registration, billing and receipting processes and handling enquiries in respect of these services.

Power Plant Portfolio, Fuel Strategy and Generation Sales

The UK Division operates some 6,200 MW of generating capacity, see Table 7 (page 35) comprising coal, gas, hydroelectric and wind power generation assets, giving the division a particularly flexible portfolio. Acquisition of an additional 1,000 MW of thermal generation capacity took place during 2004/05 at prices below the group’s view of new-build cost. The 2003 restatement of the public policy emphasis on renewable generation, and the extension to 2015 of the Renewables Obligation targets, provide the context for the continued expansion of the windfarm business. At 31 March 2005, the UK Division had operational windfarms totalling 158 MW, 142 MW under construction, planning applications for a further 650 MW and environmental assessments begun on around 550 MW of further potential sites to ensure that the company target of 10% of supply from renewables by 2010 is met.

ScottishPower’s fuel purchasing strategy is based upon the objective of achieving competitive fuel prices while balancing the need for security and flexibility of supply. The major components of the fuel portfolio are coal and gas, both fuels being sourced through a combination of long-term contracts and shorter-term trading. The division has three long-term contracts with terms of greater than five years for supply from major gas fields. The manner in which the division builds protection against fluctuating fuel prices is described further in the ‘Energy Price and Volume Risk Management’ section on page 76.

Generation plant is despatched economically and output is managed to maximise value, including optimising the position in the balancing market. In 2004/05, some 18 terawatt hours (“TWh”) were despatched, both to contribute towards the approximately 35 TWh of retail and wholesale demand provided by the division and to maintain export volumes through the interconnectors to England & Wales and to Northern Ireland.

Energy Management and Commercial Arrangements

In addition to scheduling its own generation capacity and managing the long-term bulk gas contracts, the UK Division, through its energy management operation, uses medium- and short-term contractual arrangements to complete its energy balancing of the whole portfolio of assets and customers. This involves both purchases and sales of electricity and gas, including selling in Scotland and, through the interconnectors, to England & Wales and to Northern Ireland. A Great Britain-wide wholesale electricity market was introduced on 1 April 2005 through the British Electricity Trading and Transmission Arrangements (“BETTA”). BETTA is expected to have only a modest impact on end-user prices but provides a wider opportunity for the sale of the group’s generation output and the deployment of its proven skills in providing market balancing services. End-user electricity and gas prices are

generally set over the long-term, whereas wholesale contracts have varying terms and short-term and spot prices vary markedly by time of day, week and year. Through its activities in the electricity, gas and coal markets, ScottishPower’s energy management business seeks to secure competitive advantage for the UK Division through hedging and optimising its position across the energy value chain, from fuel procurement and plant despatch through to retail pricing, continuously evaluating and managing risk exposure. This process is described further in the ‘Energy Price and Volume Risk Management’ section on page 76.

ScottishPower’s Hatfield Moors gas storage site enhances the flexibility of the division’s energy management position, both in meeting peak demands of supply customers and responding to the volatility of gas prices between midweek and weekends. In addition, the bulk gas contracts allow the gas to be sold out or used in the division’s power stations, giving yet more flexibility. Plans for a further 6 billion cubic feet (“BCF”) gas storage facility at Byley, Cheshire have been given planning approval.

Energy Supply

Since September 1998 when, under the provisions of the Electricity Act, competition was extended to residential electricity customers, a strategic focus of the ScottishPower energy supply business has been the defence of its core markets, residential and small business customers in the ScottishPower and Manweb home areas, whilst seeking profitable additional business outside these historical regional boundaries. Retention of home area residential customers stands at 61% whilst innovative product offerings, targeted sales efforts and wide-ranging sales channels (including strategic marketing alliances such as the partnership with Sainsbury’s, a number of other affinity deals across a wide range of market sectors and the use of e-commerce channels) have helped develop a Britain-wide customer base which now stands at over 5.1 million energy accounts. The business improvement programme introduced in 2001 continues to drive improvements across the retail supply business and has helped to deliver increased direct debit penetration and reduced customer churn rates in addition to cost benefits in areas such as billing, debt and customer registration business processes.

Metering and Data Management

In the competitive energy market SP Dataserve Limited (“Dataserve”) operates end-to-end process and data management in order to maximise efficiencies in the provision and control of registration and metering data for ScottishPower and other agency arrangements. Data management covers the establishment of new customers, maintenance of existing customers and accuracy of energy settlement. To effectively manage gas and electricity customers, ScottishPower Energy

Business Review Description of Business

Retail Ltd has continued to contribute to improvements in billing performance through the management of its metering agents, who are responsible for the provision of much of the data.

5    PPM Energy

PPM Energy, the group’s competitive US energy business, is a fast-growing energy provider, with operating assets in ten US states and in Canada. Its diverse portfolio, focus on wind power and moderate risk approach all position PPM Energy for expected earnings growth. PPM Energy commenced substantive operations in 2001 and is growing through a strategic focus on clean energy: concentrating on renewable power, natural gas storage and hub services and gas-fired generation.

Principal Business Activities

PPM Energy’s principal assets are thermal and renewable generation resources and natural gas storage facilities. PPM Energy seeks to create value by securing quality assets at strategic locations and by locking in value through long-term contracts with creditworthy customers. Integration of plant operations, contract dispatch and energy management add additional value. The optimisation benefits come from displacing plant operations with low-priced electricity purchases, and selling the displaced gas or placing it in storage, as well as using transmission and contract delivery flexibility to manage locational price differences in both gas and electricity. PPM Energy aims to leverage the benefits of its flexible asset base and contracts to extract value across the gas and electricity sectors.

Power Production and Wholesale Sales

PPM Energy has more than 1,600 MW of operating assets currently under its ownership or control and, of that total, PPM Energy has full economic interest in 1,368 MW, see Table 6 (page 34). PPM Energy balances its supply and sales, selling a substantial amount of its supply forward under long-term contracts. In its electricity business, PPM Energy serves a wide variety of wholesale energy customers including municipal agencies, public utility districts and investor-owned utilities. These customers are primarily located in wholesale energy markets served by the 1.8 million square mile Western Electricity Coordinating Council service territories in the western US and the Mid-Continent Area Power Pool service territories in the upper midwest US, although PPM Energy’s operations are now being extended into the northeastern US.

Wind Power

PPM Energy is a leading provider of wind energy in the US. In December 2004, PPM Energy acquired the wind energy developer, Atlantic Renewable Energy Corporation (now known as PPM Atlantic Renewable). This brings into the group

a project pipeline of more than 500 MW in the northeast US, planned to be operational between 2005 and 2010. In April 2005, PPM Energy announced that, with its joint venture partner, Zilkha Renewable Energy of Houston, it is to build and own the 198 MW Maple Ridge Windfarm in New York. On 23 May 2005, PPM Energy also announced plans for a 150 MW windfarm in northern California, to be called the Shiloh windfarm. When projects previously announced come on-line in 2005 (the 75 MW Klondike II windfarm in Oregon, the 100 MW Trimont windfarm in Minnesota, the 150 MW Elk River windfarm in Kansas, the 150 MW Shiloh windfarm in California and 50% of the 198 MW joint venture Maple Ridge windfarm in upstate New York), PPM Energy will have approximately 1,405 MW of wind power under its ownership or control. PPM Energy remains on target to deliver its goal of 2,300 MW of renewables by 2010.

Gas Storage and Hub Services

PPM Energy’s two major gas storage facilities are in Alberta, Canada and in Katy, Texas. Each is connected into substantial pipeline networks serving well-diversified customer bases under firm, long- and short-term contract arrangements. In addition to the 46 BCF of gas storage capacity under the group’s ownership, PPM Energy increased its available gas storage capacity by 30 BCF through contracting for capacity in third-party storage facilities in western Canada, Texas and California. PPM Energy also has begun development of a 9.5 BCF high-deliverability salt cavern gas storage project in west Texas and acquired the 4.5 BCF Grama Ridge gas storage facility in New Mexico.

6    Group Employees

US Businesses  PHI and its subsidiaries had 6,934 employees at 31 March 2005, of which PacifiCorp and its subsidiaries had 6,656 and PPM Energy and its subsidiaries 278. Approximately 57% of the employees of PacifiCorp and its mining subsidiaries are covered by union contracts, principally with the International Brotherhood of Electrical Workers, the Utility Workers Union of America, the International Brotherhood of Boilermakers and the United Mine Workers of America. In the company’s judgement, employee relations in the US businesses are satisfactory.

UK Businesses  ScottishPower and its UK subsidiaries had 9,208 employees, at 31 March 2005. Of these, 3,541 were employed in the Infrastructure Division and 5,667 in the UK Division. Approximately 56% of employees in the UK are union members, and 83% are covered by collective bargaining arrangements. In the company’s judgement, employee relations in the UK businesses are satisfactory.

Human Resources Strategy

The group’s human resources (“HR”) strategy was approved by the Board in July 2002 and aims to ensure that the group’s businesses achieve superior results through the high performance of their employees. In 2004/05, in support of this group HR strategy, a combined UK and US HR strategy has been developed to take account of the implications of the group HR strategy.

The management of health and safety in ScottishPower is based on a Group Health & Safety Framework introduced in January 2004 and overseen by the Group Health & Safety Executive Committee, composed of US and UK members who meet on a quarterly basis. There are 12 key Health & Safety Standards that are used to provide regular assurance to the Board, to the Executive Team and to employees that health and safety is managed effectively and in line with stated policy. Challenging targets are set each year for both lost time accident rates and leading indicator metrics, covering progress against the Group Health & Safety Standards and building on the baseline assessments carried out in 2003/04.

Employee Consultation

An annual survey is conducted across all businesses to provide a measure of employees’ perception of the company’s direction and their sense of empowerment, value, training and development and of manager communication. Survey results are shared with all employees, reviewed by the Executive Team and used in each business to set targets and action plans for the following year. In addition, individual businesses use surveys and other tools to understand the issues that fall within their specific areas of responsibility and regular consultation takes place using a variety of means, including monthly team meetings, team managers’ conferences, business unit road shows, safety committees, presentations and employee magazines. The group believes that an important element of a positive working experience is stable employee and industrial relations, it recognises the legitimacy of trade union involvement and has formal agreements in place to foster open, two-way communication and consultation. Positive relationships and ongoing liaison with employees and their representatives are seen as contributing significantly to achieving the performance objectives of the businesses.

Further details of group workplace policy and performance can be found in the ScottishPower Environmental and Social Impact Report and the Workplace Performance Report. Both are available on the ScottishPower website. The company also operates a number of all-employee share plans (see page 98).

7    Group Environmental Policy

ScottishPower recognises the need to embrace a wider role in society and to engage fully with shareholders, employees, communities, customers, regulators, legislators and other opinion formers. It aims to do this transparently, through an international framework, to ensure that key principles are translated into action. This framework comprises overall international visionary goals; and specific goals for the US and UK. Performance towards meeting these goals is tracked through carefully chosen Key Performance Indicators, closely related to business unit objectives. Hence, it must strive to achieve a balance between various needs including securing energy supply now and into the future, keeping energy affordable and minimising its impact on the environment.

Public policy frameworks in the US and UK have common elements, particularly in using market instruments for air quality regulation and supporting renewables and energy efficiency measures. The group continues to develop specific policies to respond to these regulatory challenges, aiming to grow its business sustainably in new energy markets, to invest in renewables and clean-coal technology and to ensure that customers benefit from innovations in energy efficiency. It also aims to manage existing coal-fired assets responsibly, applying appropriate abatement technologies to reduce its environmental footprint whilst supporting security of supply and affordability of power for its customers. The lines of accountability for environmental policy are focused through the policy making Energy and Environment Committee, chaired by the Chief Executive and with direct reporting lines to ScottishPower’s Executive Team.

Further details of group environmental policy and performance can be found in the ScottishPower Environmental and Social Impact Report and the Environmental Performance Report. Both are available on the ScottishPower website.

8    Community Impact

In order to encourage comparability, the group uses the London Benchmarking Group (“LBG”) model to evaluate its community support activity across the group. The LBG model is a standard for community reporting currently adopted by 99 leading UK companies. It endeavours to provide consistency and comparability across companies and to account for the total impact on communities, rather than charitable contributions alone. ScottishPower’s use of the model is reviewed each year by the LBG to help ensure the evaluation principles are correctly and consistently applied.

In 2003, the LBG Model was expanded to include a

category for “mandatory contributions” (which incorporates “Community contributions or activities undertaken as a result of the requirements of law, regulation or contract”) to account for the overall impact a company and its operations has on communities. These are reported separately from voluntary contributions. ScottishPower is reviewing changes to the model, has ensured all mandatory or regulated spend is excluded from its currently reported community support contributions, and has begun tracking to enable it to report the full community impact of its business activities in future years.

During 2004/05, ScottishPower companies contributed £4.1 million in community support activity, of which £1.5 million was contributed to registered charitable organisations. The total incorporated £557,000 categorised by the LBG model as charitable gifts, £2.6 million of community support activity categorised as community investment and £1.0 million categorised as commercial initiatives in the community given in cash, through staff time and in-kind donations by the company’s US and UK operations. An additional £1.2 million of charitable support was made through the PacifiCorp Foundation for Learning, which is fully endowed by ScottishPower companies.

Further details of group community engagement policy and performance are summarised in the ScottishPower Environmental and Social Impact Report and the Community Performance Report. Both are available on the ScottishPower website.

public lands, roads and streets and, by easement or licence, upon the lands of other third parties. Table 3 (page 34) sets out further information regarding the PacifiCorp networks.

PacifiCorp’s coal reserves are described in Table 2 (page 33). Most are held pursuant to leases from the federal government through the Bureau of Land Management and from certain states and private parties. The leases generally have multi-year terms that may be renewed or extended and require payment of rentals and royalties. In addition, federal and state regulations require that comprehensive environmental protection and reclamation standards be met during the course of mining operations and upon completion of mining activities.

PPM Energy has more than 1,600 MW of operating assets currently under its ownership or control and, of that, PPM Energy has full economic interest in 1,368 MW, see Table 6 (page 34). The majority of PPM Energy’s capacity (606 MW of wind power contracted for a period of 25 years and 237 MW of thermal power contracted for a period of 30 years) comes from long-term agreements while 525 MW comes from outright ownership of six wind plants and two thermal plants. PPM Energy’s windfarms are on land owned or leased for 25 years or more. PPM Energy also manages ScottishPower-owned gas storage facilities in Alberta, Canada and owns facilities in Texas and New Mexico, representing an overall total of 50.5 BCF of gas storage capacity.

UK Businesses The UK properties consist of generating stations, transmission and distribution facilities and certain non-operational properties in which the company holds freehold or leasehold interests.

ScottishPower owns seven power stations in Scotland (five of which are operational) and four in England. It also owns three windfarms in Northern Ireland, five in Scotland, and one in the Republic of Ireland. In addition, the company has joint venture interests in three windfarms, two of which are in England and one in Wales. All generation plant is owned by the group, with the exception of the non-operational Methil power station, which is held on a ground lease that expires in 2012, and the windfarms which are generally held on ground leases of at least 25 years’ duration. See Table 7 (page 35) for further details of operational generation assets.

At 31 March 2005, the UK transmission facilities included approximately 4,000 circuit km of overhead lines and underground cable operated at 400 kV, 275 kV and 132 kV. In addition, the distribution facilities included approximately 108,000 circuit km of overhead lines and underground cable at voltages operating from 33 kV to 0.23 kV. The group holds either permanent rights or wayleaves which entitle it to run these lines and cables through private land. See Table 8 (page 35) for further details.

Description of the

Company’s Property

US Businesses The US properties consist primarily of generating facilities, electricity transmission and distribution facilities, coal mines, gas storage facilities and a number of office facilities. Substantially all of PacifiCorp’s electricity property is subject to the lien of PacifiCorp’s Mortgage and Deed of Trust.

PacifiCorp owns or has an interest in 51 hydroelectric generating plants. These have an aggregate plant net capability of 1,155 MW. It owns or has interests in 16 thermal electric generating plants with an aggregate plant net capability of 6,793 MW. PacifiCorp jointly owns one wind power generating plant with plant net capability of 33 MW. Table 1 (page 33) sets out key aspects of PacifiCorp’s existing generating facilities. These generating facilities are interconnected through PacifiCorp’s own transmission lines or by contract through the lines of others. Substantially all of PacifiCorp’s generating facilities and reservoirs are managed on a coordinated basis to obtain maximum load carrying capability and efficiency and to manage river systems and preserve fish stocks. Portions of PacifiCorp’s almost 74,000 miles of transmission and distribution networks are located, by franchise or permit, upon

Description of Legislative

and Regulatory Background

Texas are subject to regulation by the FERC and the Texas Railroad Commission and those in Canada are subject to regulation by the Alberta Energy and Utilities Board.

FERC Issues

California Refund Case

PacifiCorp is one of a number of parties to a FERC investigation of potential refunds for energy transactions in California during past periods of high-energy prices. In 2001/02, it established a provision of $17.7 million for these potential refunds and has subsequently fully provided in the amount of $5 million for defaults in receivables from certain counterparties. PacifiCorp’s ultimate exposure to refunds is dependent upon any final order issued by the FERC in this proceeding.

FERC Show-Cause Orders

In August 2003, PacifiCorp and the FERC staff reached a resolution on the FERC order to show why various parties’ behaviour during the California energy crisis did not constitute manipulation of the wholesale electricity market. Under the terms of the settlement agreement, PacifiCorp denied liability and agreed to pay a nominal amount of $67,745 in exchange for complete and total resolution of the issues raised relating to it in the FERC’s show-cause order. The FERC issued its final order approving the settlement in March 2004. Several market participants have requested a rehearing of the FERC’s approval and a decision on the rehearing request is pending.

Northwest Refund Case

In June 2003, the FERC terminated its proceeding in this case, concluding that ordering refunds would not be an appropriate resolution of the issues relating to wholesale spot-market bilateral sales in the Pacific Northwest between 25 December 2000 and 20 June 2001. In November 2003, the FERC issued its final order denying a requested rehearing. Several market participants have filed petitions in the court of appeals for review of the FERC’s final order but any decision from the court of appeals is not expected to have a material impact on the group’s consolidated results or financial position.

Federal Power Act Section 206 Case

In November 2003, the FERC also issued its final order denying a rehearing of PacifiCorp’s request for recovery of excessive prices charged under certain wholesale electricity purchases scheduled for delivery during summer 2002. PacifiCorp’s appeal for review of the FERC’s final order is before the US Court of Appeals for the Ninth Circuit. Court briefs from interested parties were filed in March 2005.

FERC Market Power Analysis

PacifiCorp and PPM Energy are authorised by the FERC to charge market-based rates for sales of wholesale energy and

As a public limited company (“plc”), Scottish Power plc is subject to the UK Companies Acts and is also registered as a holding company under the US Public Utility Holding Company Act of 1935, as amended, (“1935 Act”) which is administered by the United States Securities and Exchange Commission (“SEC”). Hence, Scottish Power plc, PacifiCorp and other subsidiaries are subject to regulation unless specific subsidiaries or transactions are otherwise exempt by SEC rules or orders. SPUK and its subsidiaries are generally exempt from regulation under the 1935 Act because SPUK is a foreign utility company as defined in the 1935 Act.

ScottishPower’s UK operations are subject to such European Union (“EU”) Directives as the UK Government brings into effect, specifically, the EU energy liberalisation directives and EU prohibitions on anti-competitive agreements and the abuse of a dominant position (implemented through the Competition Act 1998, which came into effect from 1 March 2000) and also to the provisions of the Electricity Act 1989 (“Electricity Act”) as amended by the Utilities Act 2000 (“Utilities Act”) and other legislation including the Energy Act 2004 (“Energy Act”). The Utilities Act introduced a legal framework for energy company licences based on standard, UK-wide conditions and, taken together with requirements of the Department of Trade and Industry (“DTI”) and licence changes introduced by the Regulators, defines the regulatory framework within which SPUK and its subsidiaries must operate.

A summary of the more specific legislative and regulatory background to the operations of the group’s businesses is set out below.

PacifiCorp is subject to the jurisdiction of the public utility regulatory authorities in each of the states in which it conducts retail electricity operations. These authorities regulate various matters including prices, services, accounting, the allocation of costs by state, issuance of securities and other matters. PacifiCorp is a “licensee” and a “public utility” as those terms are used in the Federal Power Act (“FPA”) and is, therefore, subject to regulation by the Federal Energy Regulatory Commission (“FERC”) as to accounting policies and practices, certain prices and other matters.

Because PPM Energy does not conduct retail electricity operations, it is not subject to the same state public utility commission regulation as PacifiCorp. However, certain of its wholesale activities are regulated by the FERC and the state commissions impose certain limitations on affiliate transactions. In addition, PPM Energy’s gas storage activities in

capacity. Under the FERC’s current policy, market participants must demonstrate that they do not possess market power and are required to submit a market power analysis every three years. The analysis must be applied to all affiliated entities on a combined, or aggregate, basis thus PacifiCorp and PPM Energy must submit a market analysis jointly. In February 2005, PacifiCorp and PPM Energy submitted their joint triennial market power analysis to the FERC. In May 2005, the FERC instituted a proceeding to determine whether PacifiCorp and PPM Energy may continue to charge market-based rates for sales of wholesale energy and capacity. PacifiCorp and PPM Energy are in the process of responding to the FERC’s request that additional information and analysis be submitted within 60 days in an attempt to rebut the presumption that PacifiCorp and PPM Energy have generation market power.

12 Regulation of PacifiCorp

Multi-State Process (“MSP”)

PacifiCorp initiated a collaborative process with stakeholders in five of the six states it serves, aiming to develop and implement a cost allocation methodology that would achieve a more permanent consensus on each state’s responsibility for the costs of, and entitlement to the benefits of, PacifiCorp’s existing assets. This was intended to enable PacifiCorp to recover the full cost of future investments and provide states with the ability independently to implement state energy policy objectives. Between April 2002 and December 2003, extensive discussions between PacifiCorp and key parties within its service areas led to the development of a “Protocol” cost allocation methodology, which was filed in Utah, Oregon, Wyoming, Idaho and Washington. Following discussions with all parties, this proposal was refined and re-submitted to each of the state commissions as the “Revised Protocol”. Final ratification of the Revised Protocol occurred in March 2005 with each of the state commissions in Utah, Oregon, Wyoming and Idaho issuing orders approving and accepting the use of the Revised Protocol cost allocation methodology for future rate setting in each of those states. In accordance with this agreement, ongoing rate case filings in Oregon and Idaho have been based on the Revised Protocol and the recent Utah settlement was based on Revised Protocol. In Washington, the Washington Utilities and Transportation Commission (“WUTC”) issued its formal order approving and adopting the Washington general rate case settlement, accepting the Revised Protocol for reporting purposes and establishing a process for ongoing discussions for a permanent allocation methodology during 2005/06. The Revised Protocol will be filed in the state of California with the next general rate case.

Regional Transmission Arrangements

PacifiCorp, in conjunction with nine other utilities, has established a non-profit corporation, known as Grid West. If and when fully implemented, it would serve as an independent transmission provider for the Grid West region and have the operational authority needed to direct bulk wholesale electricity transfers over a majority of the 60,000 miles of transmission lines owned by its members. Grid West would have operational control but PacifiCorp would continue to own its transmission assets. Creation of Grid West is in response to the FERC’s Order 2000 and is subject to regulatory approvals from the FERC and state regulatory commissions. In December 2004, the filing utilities, in collaboration with regional stakeholders, adopted new bylaws for Grid West’s interim board, on which PacifiCorp has a representative. The parties are now engaged in the continuing development of the regional proposal together with work on inter-regional issues in conjunction with other regional transmission operators.

Relicensing of Hydroelectric Projects

PacifiCorp’s hydroelectric portfolio consists of 51 plants with a plant net capability of 1,155 MW, about 15% of PacifiCorp’s total generating capacity. The majority of the hydroelectric generating portfolio is operated under licences from the FERC, granted for periods of 30 to 50 years. There is a complex regulatory process to apply for licence renewal which begins five and a half years before the expiration of an existing licence and involves a number of federal and state agencies, Native American tribes and other stakeholders. Some state and federal agencies have mandatory authority to require certain terms and conditions to be included in the FERC licence. Often existing licences expire prior to the FERC’s issuing of a new licence. In these cases, the FERC has historically issued annual operating licences so that the project can continue to operate while alternatives are evaluated; the FERC is continuing this practice.

In order to facilitate the licensing process, PacifiCorp may agree to early implementation of expected licence conditions, or settlement terms, if a settlement has been reached with licensing stakeholders. The cost of these measures, together with the costs for hydroelectric relicensing, are expected to be included in rates and, as such, not to have a material adverse impact on the group’s consolidated results of operations. Relicensing and decommissioning of individual hydroelectric installations are an ongoing part of the PacifiCorp business and, in 2004/05, new licences were issued for the Bear River and Big Fork projects (some 89 MW) whilst settlements were agreed for the removal of the American Fork, Condit and Powerdale projects (some 17 MW).

Regulatory Established Returns

The regulatory commissions in the various states where PacifiCorp operates approve levels of cost recovery for debt,

preferred equity and common equity which result in an allowed return on rate base costs, including an allowed return on equity (“ROE”) which represents the return on shareholder investment. Determination of these returns, and the composition of the investment costs included in the rate base, is made by the commissions through general rate cases. Rates are then set to allow PacifiCorp the opportunity, with no guarantees, to meet its expenses, recover its investments and earn the allowed ROE for its shareholders. PacifiCorp pursues a regulatory programme in all states, with the objective of keeping rates closely aligned to ongoing costs. In recently completed general rate cases, base rates in Utah increased by $65.0 million annually starting in April 2004, resulting in an average price increase of 7.0% and, in February 2005, the UPSC approved a stipulation settling PacifiCorp’s general rate case filed in August 2004 under which base rates in Utah increased by $51.0 million annually starting in March 2005, resulting in an average price increase of 4.7% and an allowed return on equity of 10.5%. In September 2004, the Wyoming Public Service Commission (“WPSC”) approved a stipulation for a stand-alone pass-on of increased net wholesale purchased electricity costs. This stipulation was effective from 15 September 2004 and resulted in an overall price increase of $9.25 million annually, or 2.7%. In October 2004, the WUTC issued an order adopting a multi-party settlement agreement with limited conditions. A subsequent supplemental order was issued in November 2004, resulting in a total rate increase of $15.5 million annually, or 7.8%, effective from 16 November 2004.

PacifiCorp continues to refine its internal procedures and to work with the commissions to ensure that all prudently incurred costs are reflected in its rates. General rate adjustments reflecting changes in the regulated cost base granted during 2004/05 have an annualised value of approximately $ 75 million. Further rounds of rate cases are in progress, under consideration or in development in most of the states served by PacifiCorp. In this context, PacifiCorp has proposed or initiated discussion of power cost adjustment mechanisms designed to be longer-term, ongoing mechanisms that pass through to customers a portion of excess power costs, or return to customers a portion of over-collected power costs. These would enable power costs included within rates to be more closely aligned with PacifiCorp’s actual costs and assist in reducing earnings volatility. As with any general rate case, the outcome of these discussions and requests is uncertain.

Future Generation, Renewable Energy and Conservation

As required by state regulators, PacifiCorp uses its IRP to provide a framework for prudent future actions required to help ensure that it continues to provide reliable and cost-effective electricity services to its customers. The IRP process identifies PacifiCorp’s anticipated future resource mix in a coordinated dialogue with the stakeholders in each of the six states in which PacifiCorp operates. It allows PacifiCorp to

continue to select optimal solutions from a mix of renewable, thermal, market purchase and demand side management choices, guiding specific “build or buy” decisions made dependent on permitting, siting, emissions, cost recovery and economic conditions. Dockets have been established in Utah, Oregon, Idaho and Washington to determine acknowledgment of the plan under which costs incurred by PacifiCorp to provide service to its customers are expected to be included as allowable costs for ratemaking purposes. However, under the US “regulatory compact”, PacifiCorp must demonstrate to regulators that its incurred costs are both reasonable and necessary to the provision of safe, adequate, reliable and efficient electricity utility services to its retail customers and that its decisions were made in a prudent manner.

As part of the 2004 IRP process, PacifiCorp has identified a potential future difference between retail load obligations and available resources which it plans to meet through a combination of investment in new generation and load control programmes. Major IRP action items are formed into a series of separate RFPs, each of which focuses on a specific category of requirement, including energy conservation programmes (450 average MW) and the 1,400 MW of economic renewable resources that were first identified in the 2003 IRP. Since the US Congress renewed the federal Production Tax Credit (“PTC”) for renewable energy in late 2004, PacifiCorp has concentrated its efforts on renewable energy generation that could come on-line by the end of 2005, when the PTC expires pending further extensions. Projects that can incorporate the PTC’s value benefit by 1.8 cents per kWh over the first 10 years of a plant’s operation. At 31 March 2005, PacifiCorp was negotiating with top bidders for 2005 projects, with plans subsequently to move on to 2006 projects.

To date, PacifiCorp has entered into a 64.5 MW power purchase agreement, to take effect prior to calendar 2006, for the output of a windfarm located in southeastern Idaho. PacifiCorp is continuing to negotiate with other counterparties to increase its use, storage and delivery of renewable energy beyond the approximately 1,000,000 MWh of 2004/05. Based on data compiled by the US Department of Energy, PacifiCorp ranks second nationwide in customer participation and third in MWh sales in voluntary renewable energy programmes. The benefits of renewable energy include low to no emissions and no fossil fuel requirements but wind and solar generation are intermittent, so complementary thermal or hydroelectric resources are important to integrate renewable resources into the electricity system.

In addition to the supply-side RFPs, in June 2003 PacifiCorp issued a separate RFP requesting an additional 100 MW or more of conservation to be obtained over the next 10 years and load control proposals specifically addressing peak load. Two conservation programmes and one load control programme were selected. Tariffs for each programme have been filed with the UPSC.

Business Review Description of Legislative and Regulatory Background

Competition and Deregulation

During 2004/05, PacifiCorp continued to operate its electricity distribution and retail business under state regulation, which generally prohibits retail competition. However, as a result of Direct Access mandated by Oregon’s Senate Bill 1149, a group of customers having a total average load of approximately 18 MW has chosen service from suppliers other than PacifiCorp. A group of customers having a total average load of approximately 2 MW has taken service from PacifiCorp at the Daily Market Pricing Option, which links the energy charge on a customer’s bill to a representative market price index. These changes will not have a material effect on PacifiCorp’s earnings. In addition to Oregon’s Direct Access programme, others in PacifiCorp’s service territories are seeking choice of suppliers, options to build their own generation or co-generation plants, or the use of substitute energy sources such as natural gas. If these other customers gain the right to receive electricity from alternative suppliers, they will make their energy purchasing decision based upon many factors, including price, service and system reliability. Availability and price of alternative energy sources and the general demand for electricity also influence competition. PacifiCorp does not expect significant retail competition in the near future.

A summary of the outcomes and the most significant further regulatory and legislative developments in the states concerned is set out below. The summary below does not include the possible effect of the proposed sale of ScottishPower’s indirect interest in PacifiCorp to MidAmerican. In each state, the sale of PacifiCorp will require regulatory notification and/or approval. Although PacifiCorp intends to pursue general rate increase requests as currently planned, management is unable to predict the impact, if any, of the proposed sale and the process of obtaining such approvals, on the pending matters described below.

Utah

In August 2004, PacifiCorp filed a general rate case request with the UPSC related to operating cost increases and recovery of investments that support Utah’s growing demand and need for enhanced network reliability. In October 2004, the UPSC approved the use of a forward-looking test year in this general rate case, the year 2005/06, and in February 2005 approved a stipulation settling the general rate case. Under the stipulation, base rates in Utah increased by $51.0 million annually starting in March 2005, resulting in an average price increase of 4.7% and an allowed return on equity of 10.5%.

Senate Bill 26 was signed into law in February 2005 and establishes rules and a mandatory process for the solicitation and evaluation of bids to procure significant energy resources. It also provides PacifiCorp with the opportunity to obtain advance approval from the UPSC of a resource decision and an assurance of the recovery of costs associated with the resource.

Oregon

In May 2004, the Oregon Court of Appeals heard oral arguments concerning appeals made against the Marion County, Oregon circuit court affirmation of a 2002 Oregon Public Utility Commission (“OPUC”) order which authorised PacifiCorp’s recovery of $131.0 million of excess net power costs, plus carrying charges, at a rate of $45.6 million annually. In October 2004, the Oregon Court of Appeals affirmed the circuit court decision. The deadline for further appeals has now passed. At 31 March 2005, approximately $13.7 million remained to be collected by the authorised surcharge.

In November 2004, PacifiCorp filed a general rate case with the OPUC related to increases in operating costs, including fuel, purchased power, and pension and healthcare costs. PacifiCorp is seeking an increase of $102.0 million annually, or 12.5%. Any increase would take effect in September 2005. Settlement conferences were held in April 2005 and hearings are scheduled for July 2005. PacifiCorp has also made filings designed to provide for discussion regarding the development of a power cost adjustment mechanism.

Wyoming

In April 2004, PacifiCorp filed a complaint with the federal district court in Wyoming challenging the March 2003 decision of the WPSC to deny recovery of Hunter No. 1 replacement power costs and deferred excess net power costs on the grounds that the decision violates federal law by denying PacifiCorp recovery in retail rates of its wholesale electricity and transmission costs incurred to serve Wyoming customers. The lawsuit seeks an injunction requiring the WPSC to pass through PacifiCorp’s wholesale electricity and transmission costs in retail rates. In May 2004, the WPSC filed a motion to dismiss the complaint; the motion to dismiss was denied in November 2004. In January 2005, the WPSC appealed the court’s ruling on the motions to dismiss and requested a stay of the underlying litigation. In February 2005, the Tenth Circuit Court of Appeals denied the WPSC interlocutory appeal of the court’s ruling; this decision is subject to a currently active appeal.

In October 2004, the WPSC approved a stipulation filed by PacifiCorp, Powder River Energy Corporation and Kennecott Energy Company to resolve an attempt by Powder River Energy Corporation and Kennecott Energy Company to allow Kennecott Energy Company to choose its electricity service provider for the Antelope Coal Mine, which is in PacifiCorp’s service territory and has been served by PacifiCorp for 20 years. The terms of the stipulation include a continued recognition of PacifiCorp’s authorised territory through a regulatory recovery fee payment that Kennecott Energy Company will make to PacifiCorp. The regulatory recovery fee protects other Wyoming customers from any impacts due to the loss of the mine load. Powder River Energy Corporation will be the sole energy provider to the mine.

In July 2004, PacifiCorp applied to the WPSC for a standalone pass-on of increased net wholesale purchased electricity costs. Following discussions with various parties, PacifiCorp filed a joint stipulation valuing this request at $9.25 million annually, or 2.7%. This stipulation was heard by the WPSC and approved effective 15 September 2004. The expedited treatment of this application was recognised in the stipulation with an agreement that PacifiCorp will not file a general rate application until at least September 2005. Further, the parties agreed to hold discussions on the development of a commodity cost recovery mechanism and alternative forms of regulation.

Washington

In December 2003, PacifiCorp filed with the WUTC for a general rate increase and requested that the WUTC adopt the findings of a prudence review of generating resources acquired since the last Washington general rate case. In October 2004, the WUTC issued an order adopting the multi-party settlement agreement with limited conditions and, in November 2004, the WUTC issued a supplemental order with revised calculations. As a result, the WUTC authorised an annual increase of $15.5 million, or 7.8%, effective 16 November 2004. On 5 May 2005, PacifiCorp filed a general rate case request for approximately $39 million related to increased operating costs and investment in new generation. The rate case also seeks the use of a forward-looking test year, implementation of a power cost adjustment mechanism and ratification of the MSP Revised Protocol.

Idaho

In December 2003, PacifiCorp filed with the Idaho Public Utilities Commission (the “IPUC”) to recover Idaho’s portion of income tax payments resulting from Internal Revenue Service audits of prior years. In April 2004, the IPUC staff held public input meetings concerning PacifiCorp’s application. A stipulated agreement signed by the parties was filed with the IPUC in May 2004 and was approved by the IPUC in June 2004. This allowed recovery of $4.2 million over 16 months beginning in June 2004 when a power cost recovery surcharge, which began in June 2002, expired.

In January 2005, PacifiCorp filed a general rate case with the IPUC related to continuing investment to serve Idaho load, increases in employee-related costs and general inflation impacts. PacifiCorp seeks an increase of $15.1 million annually, or 12.5%. If approved by the IPUC, new rates would take effect 16 September 2005. On that date, unrelated surcharges currently in effect will expire, so the net effect to customers of this increase would be $11.4 million annually, or 9.2%, overall.

13

Regulation of the Electricity

and Gas Industries in the UK

The UK electricity and gas industries are regulated under the provisions of the Electricity Act, the Gas Acts, the Utilities Act and the Energy Act 2004. The Electricity and Gas Acts provided for the privatisation and restructuring of the industries in the late 1980s and the 1990s, including the introduction of price regulation for electricity transmission and distribution and gas transportation; and of competition in electricity generation, gas storage and the supply of both gas and electricity. The Electricity and Gas Acts established the licensing of industry participants and created regulatory bodies for each of the electricity and gas industries. In 2000, the Utilities Act enabled the electricity and gas regulators to be merged as the Authority, established new independent consumer councils and provided powers for Government Ministers to give statutory guidance on social and environmental issues and to set energy efficiency targets and renewables obligations. In 2004, the Energy Act provided the Secretary of State for Trade and Industry (“Secretary of State”) with powers to implement Great Britain-wide electricity trading and transmission arrangements.

The Utilities Act transferred the functions of the previous electricity and gas industry regulators to the Authority and provided for the appointment of a Chairman and other members of the Authority by the Secretary of State. The Chairman of the Authority holds office for renewable periods of five years, and its Chief Executive is also the Chief Executive of Ofgem which provides administrative support to the Authority. Under the Utilities Act, the principal objective of the Secretary of State and the Authority is to protect the interest of customers, wherever appropriate by promoting effective competition. In carrying out those functions, they are required to have regard to the need to secure that all reasonable demands for electricity and gas are met; the need to ensure that licence holders are able to finance their functions; and the interests of individuals who are disabled or chronically sick, of pensionable age, with low incomes or residing in rural areas. The Authority exercises, concurrently with the Director General of Fair Trading, certain functions relating to monopoly situations under the Fair Trading Act 1973 and the Enterprise Act 2002 and to anti-competitive conduct under the Competition Act 1980 and the Competition Act 1998. The Authority also manages UK compliance with the European Community Liberalisation Directive, which is concerned to introduce competition in generation and supply and non-discriminatory access to gas transportation and electricity transmission and distribution across the EU.

The Licensing Regime

The Authority is responsible for granting new licences or licence extensions for each of the following separate activities:

Business Review Description of Legislative and Regulatory Background

Electricity Generation – the production of electricity at power stations, hydroelectric plants, windfarms and some industrial plants. Through its wholly-owned subsidiary, ScottishPower Generation Limited, the group is licensed to operate some 6,200 MW of generating capacity and, by contracting in the wholesale market, has access to capacity operated by other licensed generators.

Electricity Transmission – the bulk transfer of electricity across a high-voltage network of overhead lines, underground cables and associated equipment typically operating at or above 132 kV. Through its wholly-owned subsidiary, SP Transmission Limited, the group owns the transmission system in central and southern Scotland. ScottishPower’s transmission system is connected to that of Scottish and Southern Energy in the north of Scotland and is linked to the National Grid in England & Wales. It is also linked to the Northern Ireland transmission system by interconnectors that enable the export and import of electricity between the two systems. From 1 April 2005, under BETTA, operation, but not ownership, of the group’s transmission system was passed to the Great Britain-wide transmission system operator, National Grid Transco plc.

Electricity Distribution – the transfer of electricity from the high voltage transmission system and its delivery to customers, across a network of overhead lines and underground cables operating at voltages ranging from 33 kV (132 kV in England & Wales) to 0.23 kV. The Utilities Act required separate licensing of the 14 regional distribution businesses introduced under electricity privatisation. Each Public Electricity Distributor licensee is required, among other duties, to develop and maintain an efficient, coordinated and economical system of electricity distribution and to offer terms for connection to, and use of, its distribution system on a non-discriminatory basis, in order to ensure competition in the supply and generation of electricity. Through its wholly-owned subsidiaries, SP Distribution Limited and SP Manweb plc, the group is licensed to distribute electricity within its two distribution services areas for all suppliers whose customers are within the areas. Charges for distribution are made to the various suppliers as appropriate.

Gas Transportation and Storage – the onshore transportation system, most of which is owned and operated by Transco, the transportation arm of National Grid Transco plc, and the rest by other gas transporters, conveys gas from the beach terminals to consumers and is interconnected with the gas transportation systems of continental Europe, Northern Ireland and the Republic of Ireland. Storage capacities are largely used to balance supply and demand over time. Major facilities are used to balance seasonal variations in demand while diurnal storage capacities provide flexibility in meeting changing gas demand on a daily basis. Competition in storage has been introduced

progressively since 1998 through the auction of major storage capacity owned by Transco and the provision of new capacity by independent operators, including ScottishPower.

Gas Shipping – gas shippers contract with gas transporters to have gas transported between the beach terminal and the point of supply. Gas shippers can also access storage facilities. The group is licensed as a gas shipper.

Supply of Gas and Electricity – the bulk purchase of gas and electricity by suppliers and its sale to customers, with the associated customer service activities, including customer registration, meter reading, sales and marketing, billing and revenue collection. Large industrial and commercial customers have been able to choose their energy suppliers for a number of years and the residential market was opened to competition progressively, commencing in April 1996, with residual controls on residential electricity prices ending in March 2002. Any electricity supplier wishing to supply electricity to domestic customers must obtain authorisation from the Authority and be subject to additional domestic supply obligations in its licence, including having its codes of practice (statements of intent about how the supplier will interact with customers) approved by the Authority. Broadly comparable arrangements allow British Gas Trading to supply mains gas to any connected customer in competition with licensed gas suppliers. Customers may continue to take supplies from the pre-privatisation monopoly supplier for the area or may choose an alternative licensed supplier. Once customers have changed a gas or electricity supplier, they are able to change supplier again subject to the contractual terms offered by licensed suppliers and approved by the Authority. Through its wholly owned subsidiary, ScottishPower Energy Retail Limited, the group is licensed as a gas supplier and an electricity supplier.

Modification of Licences

The Authority is responsible for monitoring compliance with the conditions of licences and, where necessary, enforcing them through procedures laid down in the Electricity and Gas Acts. Under these Acts, as amended by the Utilities Act, licences consist of standard licence conditions, which apply to all classes of licences, and special conditions particular to that licence. The Authority may modify standard licence conditions collectively through making proposals to all relevant licence holders. If some licence holders object, the modification may be carried out only if the number of objectors is below a specified minority. The Authority may modify a special licence condition with the agreement of the licence holder after due notice, public consultation and consideration of any representations or objections. In the absence of agreement for a special licence condition or if objections are above the specified minority threshold for a standard licence condition, the only means by which the Authority can secure a

modification is following a modification reference to the Competition Commission and in the circumstances set out below. A modification reference requires the Competition Commission to investigate (having regard to the matters in relation to which duties are imposed on the Secretary of State and the Authority) and report on whether matters specified in the reference in pursuance of a licence operate, or may be expected to operate, against the public interest; and, if so, whether the adverse public interest effect of these factors could be remedied or prevented by modification of the conditions of the licence. If the Competition Commission so concludes, the Authority must then make such modifications to the licence as appear to it requisite for the purpose of remedying or preventing the adverse effects specified in the report, after giving due notice and consideration to any representations and objections. The Secretary of State has the power to veto any modification.

Modifications to licence conditions may also be made in consequence of a reference under the Fair Trading Act 1973, the Enterprise Act 2002 or the Competition Act. ScottishPower’s acquisition of Manweb in 1995 and its merger with PacifiCorp in 1999 both involved ScottishPower’s giving of undertakings to the Secretary of State to agree to modifications to the licences under which the group operates in the UK. Broadly, these modifications were designed to ring-fence various UK regulated businesses, to require that the group had sufficient management and financial resources to fulfil its UK obligations and to ensure that UK regulators would continue to have access to the information needed to carry out their duties.

Term and Revocation of Licences

Licences under the Electricity Act, as modified by the Utilities Act, may be terminated by not less than 25 years’ notice given by the Secretary of State and may be revoked in certain circumstances specified in the licence. These include the insolvency of the licensee, the licensee’s failure to comply with an enforcement order made by the Authority and the licensee’s failure to carry on the activities authorised by the licence.

Price Controls

It is recognised that the development of competitive markets is not appropriate in some areas: particularly in the core activities of transmission and distribution of electricity and the operation of the gas transportation system. In these areas, regulatory controls are deemed necessary to protect customers in monopoly markets (by determining inflation-limited price caps) and to encourage efficiency. The group’s UK transmission and distribution businesses are subject to price controls (or revenue controls in the case of the transmission business) which restrict the average amount, or total amount, charged for a bundle of services. The price caps are expressed in terms of an “RPI – X” constraint on charges, where “RPI” represents the annual

percentage change in the UK’s retail price index, and X is a percentage determined by the Authority. The X factor is used to reflect expected efficiency gains and investment requirements. For example, where RPI is running at 3% and X is 2%, a company would be able to increase the average charge for a bundle of services by 1% per annum. The Authority from time to time reviews the price cap formulae. Through participation in, and the submission of evidence to, these price control reviews and, where necessary, through the Competition Commission modification process described above, companies have the opportunity to comment on and seek to influence the final outcome of any price control review.

Transmission Price Control

The revised transmission price control for ScottishPower took effect for the five years from 1 April 2000 and, under the terms of BETTA, which establishes a Great Britain-wide wholesale market for electricity, the price control for SP Transmission has been extended for two years from 1 April 2005.

Distribution Price Control

The maximum distribution revenue is calculated from a formula that is based on customer numbers as well as units distributed. Distribution price controls for the SP Distribution and SP Manweb operating areas, which took effect for the five years from 1 April 2005, provide incentives for distribution companies to enhance returns through performance improvements and to connect distributed generation and renewables.

14    Environmental Regulation

Throughout its operations, ScottishPower strives to meet, or exceed, relevant legislative and regulatory environmental requirements and codes of practice. ScottishPower will publish its 2004/05 Environmental and Social Impact Report and Environmental Performance Report in October 2005. Copies will be available on request from the Company Secretary and the reports will be available on the ScottishPower website.

US Environmental Regulation

US federal, state and local authorities regulate many PacifiCorp and PPM Energy activities pursuant to laws and regulations designed to prevent and control pollution and restore, protect and enhance the quality of the environment. These laws and regulations govern the construction, permitting, operation and closure of PacifiCorp and PPM Energy facilities. In general, these laws and regulations have increased the cost of providing electricity service and give rise to permit and pollution control requirements and other liabilities, principally in respect of Clean Air Act matters, which are often the subject of

Business Review Description of Legislative and Regulatory Background

discussions and negotiations with the US Environmental Protection Agency (“EPA”) and state regulatory authorities. In addition, US environmental laws and regulations have become more stringent over time, and future changes in US environmental laws or regulations could increase PacifiCorp’s operating costs, including those relating to site clean-up and closure, and give rise to challenges in obtaining and maintaining required operational permits. PacifiCorp expects that future costs relating to these matters may be significant and will consist primarily of capital expenditures required to upgrade or modify facilities to control or reduce regulated emissions. PacifiCorp expects to manage its decision making and implementation of these matters effectively so that these and future costs will be found to be prudent and recoverable in rates and, as such, will not have a material adverse impact on the group’s consolidated results of operations.

Air Quality

PacifiCorp and PPM Energy’s fossil fuel-fired electricity generation plants, as well as other facilities with significant air emissions, are subject to regulation under federal, state and local air pollution permitting and pollution control and reduction requirements, primarily those under the federal Clean Air Act and associated regulations. PacifiCorp and PPM Energy believe they have all required permits and other approvals to operate their plants and that the plants are in material compliance with applicable requirements. PacifiCorp uses emission controls, low-sulphur coal, plant operating practices sensitive to possible environmental impacts and continuous emissions monitoring to ensure that its plants comply with visible emissions, opacity and criteria pollutant limits and other air quality requirements. Federal and state air quality laws and regulations have and will become more stringent over time. In particular, the EPA has initiated a regional haze programme intended to improve visibility at specific federally protected areas, some of which are located near PacifiCorp plants. This programme could require affected PacifiCorp facilities to further reduce visible emissions through capital expenditures for pollution controls or operational changes. PacifiCorp is working with the Western Regional Air Partnership to help develop the technical and policy tools needed to comply with those regulations.

Carbon dioxide (“CO₂”) emissions are the subject of growing discussion and action in the context of global climate change, but such emissions are not currently subject to regulation. PacifiCorp is anticipating climate change challenges with additions of renewable generation, conservation and thermal resources as outlined in the IRP. CO₂ emissions risk has been recognised in PacifiCorp’s IRP through the use of a projected additional cost applied to CO₂ emissions when evaluating the cost of proposed resources. PacifiCorp also supports development of US or global trading and other market mechanisms, as well as offset strategies, where feasible,

to reduce future compliance costs to customers.

The US Congress is currently considering several proposed bills that would modify the overall enforceable limits on electricity plant emission of sulphur dioxide (“SO₂”), oxides of nitrogen (“NOx”), mercury and in some cases CO₂. These proposed laws and regulations advocate a cap and trade approach to overall reduction of air emissions from power facilities, which would allow generation facilities to meet more stringent emissions limits through the purchase of emission credits and/or additional pollution controls. The EPA also has finalised new regulations that could impact emissions and is pursuing enforcement actions against selected coal-fired power plants in the eastern and mid-western US with the aim of causing nationwide emission reductions. All of these efforts may lead to additional control equipment being installed over the next 10-15 years. PacifiCorp expects that future costs relating to these matters may be significant and would consist primarily of capital expenditure but will be spread over a number of years. PacifiCorp also expects that these costs will be recovered through regulatory ratemaking.

Endangered Species

Protection of threatened and endangered species and their habitat makes it difficult and more costly to perform some of the core activities of the US businesses, including the siting, construction, maintenance and operation of new and existing transmission and distribution facilities, as well as hydroelectric, thermal and wind generation plants. In addition, endangered species issues impact the relicensing of existing hydroelectric generating projects, generally raising the price PacifiCorp pays to purchase wholesale electricity from hydroelectric facilities owned by others as well as reducing the generating output and operational flexibility and increasing the costs of operation of PacifiCorp’s own hydroelectric resources. PacifiCorp creates and implements management systems to ensure that environmental considerations are successfully incorporated into major business decisions relating to its generation, transmission and distribution assets.

Environmental Clean-ups

Under the federal Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act and similar state statutes, entities that accidentally or intentionally dispose of, or arrange for the disposal of, hazardous substances may be liable without regard to fault for the clean-up of the contaminated property. In addition, the current or former owners or operators of contaminated sites also may be strictly liable for corrective action costs. PacifiCorp has been identified as a potentially responsible party for the costs for site clean-up in connection with a number of current or formerly owned sites or third party sites where PacifiCorp is alleged to have arranged for the disposal of hazardous substances from its operations.

PacifiCorp has completed several clean-up actions and is actively participating in investigations and remedial actions at other sites.

Mining

The federal Surface Mining Control and Reclamation Act of 1977 and similar state statutes establish permitting, siting, operational, reclamation and closure standards that must be met during the operation and upon completion of mining activities. These obligations mandate that mine property be restored consistent with specific standards and the approved reclamation plan. Significant expenditures are expected to be required as individual PacifiCorp mining operations are closed and reclamation occurs.

Water Quality

The federal Clean Water Act and individual state clean water regulations require permits for the discharge of wastewater, including storm water runoff from the electricity plants and coal storage areas, into surface waters and groundwater. PacifiCorp and PPM Energy believe they have management systems in place to monitor performance, identify problems and take action to assure compliance with wastewater permit and other Clean Water Act requirements. Additionally, PacifiCorp believes it currently has, or has initiated the process to receive, all required water quality permits.

UK Environmental Regulation

The group’s UK businesses are subject to numerous regulatory requirements with respect to the protection of the environment, including environmental laws which regulate the construction, operation and decommissioning of power stations, pursuant to legislation implementing environmental directives adopted by the EU and protocols agreed under the auspices of international bodies such as the United Nations Economic Commission for Europe (“UNECE”). The group believes that it has taken and continues to take measures to comply with applicable laws and regulations for the protection of the environment. Applicable regulations and requirements pertaining to the environment change frequently, however, with the result that continued compliance may require material investments, or that the group’s costs and results of operation are less favourable than anticipated.

Electricity Generation, Transmission, Distribution and Supply

The Electricity Act obligates the Secretary of State to take into account the effect of electricity generation, transmission, distribution and supply activities upon the physical environment in approving applications for the construction of generating facilities and the location of overhead power lines. The Electricity Act requires the group to take into account the conservation of natural features of beauty and other items of particular interest and, in terms of the Environmental Impact

Assessment Regulations, to carry out an environmental assessment when it intends to construct significant overhead transmission systems or power stations of greater capacity than 50 MW. The group also prepares formal statements on the “Preservation of Amenity and Fisheries” in line with the requirements of the Electricity Act.

The Utilities Act provided for environmental guidance to be given by the Secretary of State to the energy regulator, Ofgem, and for regulations to be drawn up which require licensed electricity suppliers to secure a certain percentage of their supplies from renewable energy sources, compliance being demonstrated by tradable “Renewables Obligation Certificates” (“ROCs”) or payment of a “Buyout Fine”. The current legislative requirement is that 15.4% of UK energy should come from renewable sources by 2015. ScottishPower continues to develop its windfarm and renewables business in support of these requirements. In April 2005, the UK Government also introduced amending legislation to recognise ROCs generated in Northern Ireland, creating a single UK-wide market for trading ROCs from April 2005.

The Utilities Act also provided for residential energy efficiency targets to be set for licensed suppliers and to be implemented by an “Energy Efficiency Commitment” (“EEC”). The savings target, set by Ofgem, is to achieve fuel-weighted energy benefits, which will make a contribution to carbon savings in the UK Government’s Climate Change Programme. ScottishPower has met its targets for EEC1 (operating between April 2002 and March 2005) with the delivery of over 4.5 Terawatt hours of energy saving benefits. The revised scheme, called EEC2, will run from April 2005 to March 2011 with a formal review to take place in 2008.

The Environmental Protection Act of 1990 (“EPA 1990”) requires that potentially polluting activities such as the operation of combustion processes (which includes power plant) requires prior authorisation. The Act also provides for the licensing of waste management and imposes certain obligations and duties on companies which produce, handle, and dispose of waste. Waste generated as a result of the group’s electricity activities is managed to ensure compliance with legislation and waste minimisation is undertaken where possible.

Generation Activities

The principal emissions from fossil-fuelled electricity generation are SO₂, NO_x, CO₂ and particulate matter, such as dust, with the main waste being ash, namely pulverised fuel ash and furnace bottom ash. The primary focus of previous environmental legislation has been to reduce emissions of SO₂, NOx and particulates, the first two of which contribute to acid rain. A number of other power station emissions and discharges are subject to environmental regulation.

The EU Emissions Trading Scheme is one of the policies being introduced across Europe to help implement the Kyoto

Protocol to tackle emissions of carbon dioxide and other greenhouse gases and to combat the threat of climate change. The scheme commenced on 1 January 2005 and works on a “cap and trade” basis where installations are allocated a number of allowances which they can then trade to achieve reduced CO₂ emissions at least cost. The number of allowances allocated to each installation is set down in a document called the National Allocation Plan (“NAP”) which Member States were required to submit to the European Commission (“EC”) in 2004. The UK’s final NAP was published on 24 May 2005 and outlined the number of free allocations to be issued to each installation in the UK during 2005 to 2007. ScottishPower has 13 installations covered by the scheme and under the final NAP received just under 14 million tonnes of free CO₂ per annum. ScottishPower has fully integrated CO₂ management into its energy portfolio and manages CO₂ as a commodity alongside power, gas and coal.

EPA 1990 is the primary UK statute governing the environmental regulation of power stations. In April 1991, it introduced a system of Integrated Pollution Control (“IPC”) for large scale industrial processes, including power stations, now enforced with respect to emissions to atmosphere in England & Wales by the Environment Agency (“EA”) and in Scotland by the Scottish Environment Protection Agency (“SEPA”). Each of ScottishPower’s power stations is required to have its own IPC authorisation, issued by the EA or SEPA, regulating emissions of certain pollutants, seeking to minimise pollution of the environment and containing an improvement programme. Each IPC authorisation requires that a power station uses the Best Available Techniques Not Entailing Excessive Cost (“BATNEEC”) to prevent the emissions described above or, to the extent this is not practicable, to minimise and render harmless any such emissions. ScottishPower’s IPC authorisations do not have an expiry date, but the EA or SEPA is required to review the conditions contained within them at least once every four years and may impose new conditions to prevent or reduce emissions of pollutants, subject to the application of BATNEEC.

The EU has agreed a Directive on Integrated Pollution Prevention and Control, which introduces a system of licensing for industrial processes such as power stations. This Directive is being implemented via the Pollution Prevention and Control (“PPC”) Regulations which will bring modifications to the IPC regime into effect, on a staged basis. The EU Directive will eventually require that all emission and pollution control measures are placed onto a “Best Available Techniques” (“BAT”) basis to control the impact on the environment. Existing large combustion plants, including power stations, are due to transfer over to the PPC regime during 2006 and must apply for PPC Permits during the period January to March 2006. ScottishPower has six such

plants. New plant must immediately comply with the PPC requirements and BAT.

The EU has adopted a framework directive on ambient air quality assessment and management and, under the auspices of UNECE, protocols regarding reductions in the emissions of SO₂ and NOx have been agreed. These protocols are currently implemented in the EU by means of the Large Combustion Plants Directive (“LCPD”) and the revision of this Directive will implement tighter controls on emissions to air from 2008. The EU has finalised a “Ceilings Directive” which will implement the SO₂ and NOx targets agreed in the UNECE Gothenburg Protocol. In the UK, the Government has submitted details to the EC of how it proposes to implement the LCPD. Continued uncertainty remains on final arrangements surrounding implementation of bulk emissions and emission limit values. Compliance with local air quality issues will continue to be implemented in the UK by means of the National Air Quality Strategy (“NAQS”) published in 1997, and reviewed in 2000. The provisions of the revised LCPD and of NAQS are to be introduced through the PPC permitting process on a plant-by-plant basis.

The group has identified options that, given the appropriate commercial conditions, would enable it to continue the environmental improvements required by potential future limits arising from this review, without materially constraining operational and commercial flexibility.

Contaminated Sites

While the nature of developments in environmental regulation and control cannot be predicted, the group anticipates that the direction of future changes will be towards tightening controls. In view of the age and history of many sites owned by the group, the group may incur liability in respect of sites which are found to be contaminated, together with increased costs of managing or cleaning up such sites. Site values could be affected and potential liability and clean-up costs may make disposal of potentially contaminated sites more difficult. The Contaminated Land Regulations, which implement provisions of the Environment Act 1995 (“EA 1995”), require local authorities to identify sites where significant harm is being caused and to take appropriate steps. In order for harm to be demonstrated it must be shown that a source of pollution, a receptor and a pathway are present. Harm may be eliminated by clean-up or by breaking the source to receptor pathway. Clean-up is only required to “fit for subsequent use” standards, so that environmental compliance is consistent with the intended use of the site.

Other proposals which may, under certain conditions impose strict liability for environmental damage, such as the Environmental Liability Directive, are presently being adopted by the EC. ScottishPower is not currently aware of any liability which it may have under EA 1995 or proposed

EU directives which will have a materially adverse impact on its operations.

15    Employment Regulation

Each of the UK and the US has extensive legislation covering both health and safety and equal opportunities at work. ScottishPower has well-defined policies in place throughout its businesses to ensure compliance with applicable laws and related codes of practice. These policies cover a wide range of employment issues such as disciplinary action, grievance, harassment, discrimination, stress and ‘whistle-blowing’.

A more extensive description of how the businesses discharge their wider responsibilities to protect the welfare, health and safety of the public and their employees, can be found in the ScottishPower Environmental and Social Impact Report and the Workplace Performance Report, available on the ScottishPower website. A brief overview of the more extensively regulated aspects of employment follows.

Equal Opportunities

ScottishPower is committed to promoting equal opportunities for all, irrespective of age, colour, disability, ethnic or national origin, marital status, nationality, race, religion or similar belief, creed, sex, sexual orientation or any other considerations that do not affect a person’s ability to perform their job. The company aims to promote equality of opportunity through the implementation of non-discriminatory policies, practices and initiatives in all aspects of employment in ScottishPower, including recruitment and selection, terms and conditions of employment, career development and retention.

The company aims to take particular action in respect of disability in order to encourage job applications from disabled candidates and to establish working conditions which encourage the full participation of people with disabilities. The company is committed to making all reasonable adjustments and accommodations necessary to attract, develop and retain people with disabilities. This includes the rehabilitation, training and reassignment of employees who develop a disability

ScottishPower works proactively with a range of organisations that promote equality of opportunity including in the UK, the Equal Opportunities Commission, Employers’ Forum on Age, Employers’ Forum on Disability, Job Centre Plus and The Council of British Pakistanis (Scotland). The Company also maintains positive relations with the federal and state compliance and enforcement agencies in the US, including the Department of Labor, the Office of Federal Contract Compliance Programs and the Equal Employment Opportunity Commission. ScottishPower HR in the UK and

the US work with these organisations to find ways to incorporate their expertise into company policies.

Recent Developments

The UK Employment Act 2002 (Dispute Resolution) Regulations 2004, effective from October 2004, place a legal obligation on employers to follow certain minimum procedures when resolving workplace disputes. In order to comply with the Regulations, the company undertook a review of its existing employment procedures and concluded that the ScottishPower UK procedures far exceeded the minimum standards required.

The company has also undertaken a review of its existing UK consultation arrangements in order to comply with the Information and Consultation of Employees Regulations which come into force in April 2005. These Regulations give employees in larger firms rights to be informed and consulted on a regular basis about issues in the business they work for. Plans are in place to ensure that, by September 2005, each ScottishPower business in the UK has conducted a review of how it engages with its employees and produced an action plan which takes account of the Regulations. A further review of the company-level machinery will then be undertaken to support and maximise the aims of each business and of the ScottishPower employee relations philosophy.

In September 2004, California passed legislation requiring employers with 50 or more employees in California to provide sexual harassment training to all supervisory employees. The group’s US businesses are developing and will implement sexual harassment training tailored to meet this requirement and will adapt relevant procedures to ensure tracking of all California supervisory employees in accordance with the law.

From 10 March 2005, US employers were required to post a notice informing employees of their rights under the Uniform Services Employment and Reemployment Act. Compliance with this federal law was ensured by sending e-mail notification of the law and the required posting of materials to the appropriate individuals.

Health and Safety

During January and February 2005, the performance of eight group businesses was assessed against the Group Health & Safety Standards. The results showed that 29% of the assessed business units achieved the level four or five expected of a world-class performer in comparison with 19% in 2003/04. A further 63% of the assessed business units met the level three threshold of demonstrable attention to the key issues compared with 54% in 2003/04.

US Businesses  The lost time accident (“LTA”) rate for the US businesses increased from 0.66 to 0.92, an increase in LTAs from 42 to 59 during 2004/05 primarily due to an increase in the number of accidents in the power delivery business compared to the previous year. The highlight was PPM Energy

maintaining its 0.0 LTA rate from prior years, whilst Pacific Klamath Energy was re-certified in the Oregon Sharp Program from the Oregon Occupational Safety and Health Administration.

The group’s US Health & Safety Committee continues to meet on a regular basis, providing senior executive oversight and leadership in PacifiCorp and PPM Energy in these areas. Major initiatives are underway in PacifiCorp’s power delivery, generation and mining business units and in PPM Energy to reduce and prevent accidents.

The US businesses participate with other industry stakeholders in the regulatory process on significant safety and health regulatory proposals affecting the utility and mining industries. PacifiCorp is also well represented amongst these stakeholders, with safety professionals occupying leadership positions in both mining and electricity trade associations’ safety groups.

UK Businesses  The LTA rate for the UK businesses reduced from 0.62 to 0.42, a reduction in LTAs from 48 to 36. The highlight of the year was in the generation business which had a period of seven months without any LTAs and only two LTAs during the 12 months to April 2005.

In the UK, the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations set out the requirements for reporting of all work-related accidents. As UK regulators and enforcement authorities increasingly seek to raise the priority and importance that companies give to health and safety issues, they are likely to take action for any non- compliance. The company continues to support industry organisations, such as the Association of Electricity Producers

and Energy Networks Association, and engages in representation to the UK Health and Safety Executive, the DTI and other relevant organisations through these industry groups.

16    Litigation

In May 2004, PacifiCorp was served with a complaint filed in the US District Court for the District of Oregon by the Klamath Tribes of Oregon and certain of the Klamath Tribes’ members. The claim generally alleges that PacifiCorp and its predecessors affected the Klamath Tribes’ federal treaty rights to fish for salmon in the headwaters of the Klamath River in southern Oregon by building dams that blocked the passage of salmon upstream to the headwaters beginning in 1911. The complaint seeks in excess of $1.0 billion in damages. PacifiCorp’s motion for summary judgement and dismissal of the case was supported by the magistrate judge’s recommendation in April 2005 but the Klamath Tribes’ objections to that recommendation, and PacifiCorp’s response, are now before the court. Any final order will be subject to appeal.

The group’s businesses are parties to various other legal claims, actions and complaints, certain of which may involve material amounts. Although the group is unable to predict with certainty whether or not it will ultimately be successful in these legal proceedings or, if not, what the impact might be, the directors currently believe that disposition of these matters will not have a materially adverse effect on the group’s consolidated Accounts.

Installation

Dates

Hydroelectric plants

Swift

Merwin

Yale

Five North Umpqua Plants

John C. Boyle

Copco 1 and 2

Clearwater 1 and 2

Grace

Prospect 2

Cutler

Oneida

Iron Gate

Soda

Fish Creek

31 minor hydroelectric plants

Subtotal (51hydroelectric plants)

Thermal electric plants

Jim Bridger

Huntington

Dave Johnston

Naughton

Hunter 1 and 2

Hunter 3

Cholla Unit 4

Wyodak

Carbon

Craig 1 and 2

Colstrip 3 and 4

Hayden 1 and 2

Blundell

Gadsby

Little Mountain

Hermiston

Camas Co-Gen

Subtotal (16 thermal electric plants)

Other plants

Foote Creek

Subtotal (1 other plant)

Total generating facilities

Location

Recoverable Tons

(in millions)

Craig, Colorado

Emery County, Utah

Rock Springs, Wyoming

Franchise area

System maximum demand

Transmission network (miles)

Overhead

Distribution network (miles)

Underground

Overhead

Year

2000/01

2001/02

2002/03

2003/04

2004/05

Year

2000/01

2001/02

2002/03

2003/04

2004/05

Thermal electric plants

Klamath Cogeneration Plant

West Valley Generating Plant

Klamath Generating Plant

Subtotal (3 thermal electric plants)

Renewable electric plants

Phoenix Wind Power Plant

Stateline Wind Energy Center

Klondike Wind Power Plant

High Winds Energy Center

Southwest Wyoming Wind Energy Center

Moraine Wind Power Plant

Flying Cloud Wind Power Plant

Mountain View III Wind Power Plant

Colorado Green Wind Power Plant

Subtotal (9 renewable electric plants)

Total all plants (Owned or controlled plants)

Thermal electric plants

Subtotal (6 thermal electric plants)

Subtotal (3 hydroelectric plants)

Renewable electric plants

Subtotal (12 renewable electric plants)

CHP

Total all plants (Owned or controlled plants)

Franchise area

System maximum demand

Transmission network (km)

Underground

Overhead

Distribution network (km)

Underground

Overhead

2000/01

2001/02

2002/03

2003/04

2004/05

2000/01

2001/02

2002/03

2003/04

2004/05

Ø   Introduction

Ø   Critical Accounting Policies – UK GAAP

Ø   Dividend Policy

Ø   Critical Accounting Policies – US GAAP

Ø   Sale of PacifiCorp

Ø   Accounting Developments

Ø   Overview of the Year to March 2005

Ø   Implementation of International

 Financial Reporting Standards

5

Ø   Overview of the Year to March 2004

Ø   Research and Development

Ø   Off Balance Sheet Arrangements

Ø   Liquidity and Capital Resources

Ø   UK GAAP to US GAAP Reconciliation

Ø   Fair Value of Derivative Contracts

Ø   Summary

Ø   Pension Arrangements

Ø   Cautionary Statement Regarding

 Non-GAAP Financial Information

10

Ø   Creditor Payment Policy and Practice

Non-GAAP Financial Measures

Items marked * are excluding goodwill amortisation and/or the exceptional item. ScottishPower management assesses the underlying performance of its businesses by adjusting UK Generally Accepted Accounting Principles (“GAAP”) statutory results to exclude items it considers to be non-operational or non-recurring in nature. In the years presented, goodwill amortisation and the exceptional item have been excluded. Therefore, to provide more meaningful information, ScottishPower has focused its discussion of business performance on the results excluding these items. Items marked ^† are non-GAAP liquidity measures, which management and external bodies utilise to assess the performance of our business. In accordance with guidance from the UK Auditing Practices Board, the UK Listing Authority, and the US Securities and Exchange Commission, where non-GAAP figures are discussed, comparable UK GAAP figures have also been discussed and reconciled to the non-GAAP figures. A detailed “Cautionary Statement Regarding Non-GAAP Financial Information” is provided in Section 18 on page 72. The full statutory results are presented in the “Group Profit and Loss Account” and in Note 1 “Segmental profit and loss information” on page 112 and on page 116, respectively.

1    Introduction

ScottishPower is an international energy business, listed on both the London and New York Stock Exchanges, with 2004/05 annual turnover of £6.8 billion and operating profit and profit

before tax, both excluding goodwill amortisation and the exceptional item, exceeding £1 billion*. The group comprises four businesses operating in both a regulated and competitive environment in the UK and US, which serve over 6.7 million (2003/04: 5.8 million) electricity and gas customers. The group considers its core strengths to lie in a number of key areas, including strong asset management skills; its integrated approach to energy and risk management; a dedicated customer service focus; and careful management of regulatory partnerships.

The regulated businesses accounted for 39% of group external turnover in the current year (2003/04: 46%), and 80%* of operating profit, excluding goodwill amortisation and the exceptional item (2003/04: 88%*). The group’s geographical distribution of operating profit, excluding goodwill amortisation and the exceptional item, is broadly balanced between its UK and US operations. The regulated businesses comprise PacifiCorp in the US and Infrastructure Division in the UK. Together they accounted for almost £2.7 billion of group turnover in the year, and almost £960 million* of operating profit, excluding goodwill amortisation and the exceptional item. PacifiCorp is a regional vertically integrated utility servicing 1.6 million customers in six US states and is subject to the jurisdiction of the public utility regulatory authorities in each of these states. At operating profit level, excluding goodwill amortisation and the exceptional item, it is the largest of our divisions. Infrastructure Division, our UK wires business, owns and manages a substantial UK electricity transmission and distribution network covering approximately 112,000 km within the ScottishPower and Manweb franchise service areas. The division comprises three “asset-owner companies”, which hold the group’s UK regulated assets and transmission and

distribution licences, and an “asset-management” company, which provides the expertise necessary to conduct the day-to-day operation of the network. At an operating profit level, excluding goodwill amortisation and the exceptional item, the Infrastructure Division is our second largest division.

The competitive businesses are the UK Division and PPM Energy in the US. Together they contributed almost £4.2 billion of group turnover in the year, and just under £240 million* of operating profit, excluding goodwill amortisation. The UK Division is an integrated commercial energy generation and supply business, which balances and hedges energy demand

Key drivers

PacifiCorp

Infrastructure Division

Ø      Achieving allowed regulatory rate of return on equity

Ø      Managing the regulatory rate case process

Ø      Managing a balanced power position

Ø      Managing the impact of growing demand

Ø      Improving operating and capital cost-efficiency

Ø      Maximising returns from investment in the regulatory

asset base

Ø      Securing a positive outcome from the 2007 Transmission

Price Review and delivering outperformance against

the 2005 Distribution Price Control

Ø      Improving operating and capital cost-efficiency

PPM Energy

UK Division

Ø      Availability of attractive business opportunities and

favourable public policies

Ø      Optimising returns from its gas and power portfolio

by actively seeking to lock in value inherent in the

portfolio’s assets and contracts

Ø      Continuing to grow the customer base at optimal tariff levels

Ø      Managing a balanced power position

Ø      Further significant expansion of renewable generation

at appropriate rates of return

Ø      Improving operating and capital cost-efficiency

ownership or control, with a further 574 MW of wind power due on-line by December 2005.

The group’s results are affected to a small extent by seasonality, with group external turnover and operating profit weighted towards the second half of the year, primarily as a result of higher winter demand requirements in the UK, with complementary summer and winter seasonal load patterns in the US. Seasonality has had the greatest impact on the UK Division’s results, where, historically, customer demand has peaked during the winter months reflecting increased heating and lighting requirements.

The businesses’ key drivers impacting the financial performance of the group are shown in Table 11. Other factors affecting our financial performance include increases and reductions in customer demand for electricity, economic growth and downturns, and abnormal weather, all of which impact revenues, cash flows and investment. The group proactively manages its supply and demand balance, but any unanticipated changes in future customer demand, weather conditions, generation resource availability or commodity prices may affect revenues from, and the cost of, supplying power to customers.

ScottishPower is committed to its strategy of investing for growth and improving operational performance. During the year, the ScottishPower Board undertook a strategic review of PacifiCorp and concluded in May 2005 that shareholders’ interests were best served by a sale of PacifiCorp and the return of capital to shareholders.

In the year, group operating profit reduced by £870 million to £153 million principally due to an exceptional impairment charge of £927 million, which reduced the book value of PacifiCorp down to its expected net realisable value.

Further details of the sale and impairment charge are provided in Section 3 on page 40.

In the year, ScottishPower continued with its significant investment programme and group operating profit, excluding goodwill amortisation and the exceptional item, increased by 4%*. The Infrastructure Division has delivered growth in the year with operating profit up by 6% on last year, but PacifiCorp’s operating profit*, excluding goodwill amortisation and the exceptional item, reduced due to a combination of unfavourable weather, lower generation availability and the effect of the weaker dollar on sterling results. The competitive businesses reported substantial improvements, with operating profit, excluding goodwill amortisation, up by 74%* in the year. In the UK Division, this has been achieved through customer growth combined with investment in, and successful integration of, new generation and an effective hedging strategy; and in PPM Energy through 2003/04 investment in new wind resources, gas storage activities and optimisation of long-term contractual arrangements.

ScottishPower is committed to maintaining an A category credit rating for its principal operating subsidiaries, thereby allowing access to flexible borrowing sources at favourable cost. To achieve this rating, on completion of the sale of PacifiCorp, the group will target credit ratios of adjusted Funds From Operations (“FFO”)/net debt of greater than 25% and FFO/interest cover of more than five times. ScottishPower will work closely with the rating agencies in order to ensure its rating objectives are achieved. In addition to the cash generated from operations and existing cash resources, the group relies on the capital markets as a source of liquidity to fund investment as required. Consistent with this strategy, the group successfully issued $1.5 billion of US bonds in March 2005, and unwound a corresponding amount of derivative hedges.

The group seeks to minimise and manage earnings volatility whilst protecting the value of the group’s overseas assets

Financial Review

through appropriate interest rate and foreign exchange risk management programmes. Against these objectives, the effective use of dollar denominated debt, derivatives and commodity price hedging have substantially protected the group’s earnings and net assets from foreign exchange volatility over the past 12 months, while allowing the group to benefit from interest rates in dollars that have been lower than those in sterling. Substantially all of the group’s US investments continue to be protected from exchange rate movements, with expected US earnings similarly protected in the next financial year.

During the year, earnings per share were lower by 46.23 pence resulting in a loss per share of 16.83 pence due to the exceptional goodwill impairment charge. Excluding goodwill amortisation and the exceptional item, earnings per share increased by 10% to 40.22 pence*, as a result of the continuing three businesses’ improved performance and lower group interest charges. Key financial highlights are shown in the chart on page 39.

ScottishPower will adopt International Financial Reporting Standards (“IFRS”) for the financial year ending 31 March 2006. Included within the “IFRS Financial Information” section on page 173 are reconciliations of the group’s 2004/05 UK GAAP financial statements to the amounts that would have been reported under IFRS (based on the IFRS standards and interpretations currently in existence). ScottishPower has elected to defer the application of the financial instruments standards (International Accounting Standard (“IAS”) 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’) until the financial year ending 31 March 2006, and therefore, there is no impact from these standards on the 2004/05 IFRS financial information. The implementation of IFRS is discussed in more detail in Section 14 on page 64.

2    Dividend Policy

Our intention is to target dividend cover based on full year earnings within a range of 1.5 to 2.0 times and ideally towards the middle of that range. This excludes goodwill amortisation and exceptional items. We have achieved that with our full year dividend of 22.50 pence per share, which is covered 1.79 times by earnings per share, excluding goodwill amortisation and the exceptional item, of 40.22 pence*. We aim to grow dividends broadly in line with earnings and we expect to continue this policy following the sale of PacifiCorp and the return of capital to shareholders. In the absence of unforeseen circumstances, ScottishPower intends to pay an identical dividend for each of the first three-quarters of 2005/06, of 5.20 pence per share per quarter, representing an increase of 5% from 2004/05. The balance of the total dividend for 2005/06 will be set in the fourth quarter.

3    Sale of PacifiCorp

During the year, the ScottishPower Board undertook a strategic review of PacifiCorp, as a result of its performance and the significant investment it required in the immediate future. In May 2005, the Board concluded that, in the light of the scale and timing of the capital investment required in PacifiCorp and the likely profile of returns from that investment, shareholders’ interests were best served by a sale of PacifiCorp and return of capital to shareholders. The Board therefore announced on 24 May 2005 that ScottishPower had entered into a binding agreement for the sale of PacifiCorp to MidAmerican for $9.4 billion. The Board intends to return approximately $4.5 billion of the net proceeds of $5.0 billion from the sale of PacifiCorp, to shareholders. The sale is subject to regulatory and shareholder approval.

An exceptional impairment charge of £927 million has been made in the year, to reduce the book value of PacifiCorp, under UK GAAP, down to its expected net realisable value. Pending completion of the sale, PacifiCorp will be treated as a discontinued operation in the financial statements of ScottishPower. The impairment amount excludes foreign exchange gains of £485 million, achieved to date, which will be reflected in ScottishPower’s Income Statement under IFRS on completion of the sale of PacifiCorp to MidAmerican.

The sale is subject to, among other things, Securities and Exchange Commission (“SEC”), Department of Justice or Federal Energy Regulatory Commission (“FERC”), Federal Trade Commission and Nuclear Regulatory Commission approvals at the federal level, without conditions that would have a material adverse effect on the PacifiCorp business. In addition it is subject to approval at state level in Utah, Oregon, Wyoming, Washington, Idaho and California provided such state approvals are not subject to conditions whose effect would be meaningfully adverse to the business of PacifiCorp. ScottishPower anticipates that such approvals should be forthcoming within 12 to 18 months.

Between now and closing of the sale, ScottishPower has agreed to invest additional equity in PacifiCorp to fund ongoing capital expenditure in line with PacifiCorp’s current plan. Pursuant to these arrangements, ScottishPower will invest $500 million during the financial year 2005/06. In addition ScottishPower has agreed to make further investments during the financial year 2006/07 of up to $525 million, contributed quarterly, although ScottishPower will be fully compensated for any such payments made in respect of the financial year 2006/07. Between now and the closing of the sale, ScottishPower is entitled to dividends from PacifiCorp in line with PacifiCorp’s current plan. Pursuant to these arrangements, it is expected that, ScottishPower will receive $215 million of dividends during the financial year 2005/06, and $242 million of dividends during the financial year 2006/07, these amounts to accrue monthly.

The sale of PacifiCorp enables ScottishPower to focus its

management and capital on the continued development of the Infrastructure Division, UK Division and PPM Energy. These businesses have driven our profit growth over the last two years and delivered overall returns ahead of our cost of capital. We consider these businesses to have substantial opportunities for continued growth through capital investment and improved operational performance.

revenues increased to a lesser extent, mainly as a result of regulatory rate increases and customer growth. Infrastructure Division’s external turnover grew by £22 million to £380 million (6%) due to higher regulated and new connections business revenues, both driven by higher volumes. The UK Division experienced turnover growth of 33%, with revenues rising by £908 million to £3,685 million mainly as a result of higher retail sales, increased energy balancing activities in England & Wales, which was offset in cost of sales, and the acquisition of new generation plant. PPM Energy’s turnover increased by £159 million to £502 million, after a £20 million adverse US dollar translation impact. PPM Energy’s dollar turnover was higher by 56%, as a result of increased sales under long-term contracts, activities around owned and contracted gas storage and the addition of new wind generation.

    Overview of the Year

    to March 2005

Group Profit and Loss

This has been a year of profitable growth for the Infrastructure Division, UK Division and PPM Energy, which all delivered strong performances. PacifiCorp’s results were affected by the impact of weather conditions, which reduced demand and owned hydroelectric generation availability. Thermal plant outages, particularly in the first half, also contributed to higher net power costs. During the year, an exceptional goodwill impairment charge of £927 million has been made in ScottishPower’s results to reduce the book value of PacifiCorp down to its expected net realisable value. As a result of this charge, the group recorded a pre-tax loss of £29 million, compared to a pre-tax profit of £792 million in 2003/04. Excluding goodwill amortisation and the exceptional item, pre-tax profit increased by 10% to over £1 billion*, as improved performances from our continuing three businesses and substantially lower interest charges, more than offset the impact of PacifiCorp’s lower operational results. Our policy to hedge both dollar earnings and net assets to reduce the impact of currency volatility, continued to successfully mitigate the impact of the weaker US dollar. At operating profit level, an earnings hedge benefit of approximately £53 million (2003/04: £60 million) was delivered and our balance sheet hedging delivered an £88 million (2003/04: £39 million) benefit to interest from the UK/US interest rate differential.

Cost of sales of £4,567 million increased by £937 million on last year, reflecting growth in balancing our UK and PacifiCorp energy positions; increased power production and purchase costs in both the UK Division and PacifiCorp; the acquisition of generation plant in the UK; and increased gas activities and wind generation at PPM Energy. These increases were partly offset by the favourable US dollar translation impact. Transmission and distribution costs increased by £62 million to £606 million as a result of higher UK Division costs associated with customer growth and higher PacifiCorp labour-related costs and increased depreciation, partly offset by the favourable US dollar translation impact. Administrative expenses (including goodwill amortisation and the exceptional item) as shown in Table 12 were £930 million higher than last year at £1,556 million. Excluding goodwill amortisation and the exceptional item, administrative expenses increased by £13 million* due to higher labour-related costs in the US, including costs to support business growth in PPM Energy; and operating costs associated with customer growth and new generation plants in the UK Division. Partly offsetting this was the release of an environmental provision within PacifiCorp and the favourable US dollar impact. Depreciation, which is included within each of the three preceding cost categories, was £19 million higher than last year at £458 million. Increased levels of capital investment throughout the group resulted in higher depreciation charges during the year, partly offset by the impact of the weaker dollar on translation

Ø      Table 12

Administrative expenses (£m)

Group turnover for the year to 31 March 2005 was £6,849 million, an increase of £1,052 million on the previous year, with the majority of the increase in the UK Division. The weaker US dollar reduced sterling revenues by £225 million, net of the movement in hedging benefits from the forward sale of dollars. The effect of the weaker dollar on PacifiCorp and PPM Energy’s sterling revenues was mitigated at an earnings level by the favourable effect of the weaker dollar on costs and by our hedging strategy.