2008 was certainly an unprecedented year across all markets, as the severity of the credit and banking crisis, and its dramatic impact on the global economy, really started to become apparent. Clearly, no sector or company is immune from these wider market conditions, but electricity remains a domestic, industrial, and commercial necessity. Our geographic spread across North America, Europe, the Middle East, Australia and Asia continues to be a major strength, ensuring no over-concentration of risk in any one market and allowing us to focus our growth initiatives where we see the most potential.

In these market conditions, strong free cash flow generation, good liquidity, and an absence of major near-term refinancings are all very good indicators of financial position, and I am pleased to report that we score well on all these criteria. We generated free cash flow (after maintenance capital expenditure, interest, and tax) of £513 million in 2008, retained good liquidity at the corporate centre, have minimal project refinancings in 2009, and the vast majority of our debt is non-recourse to the parent company.

The regional reviews, give you an in-depth analysis of the business, but let me give you an overview of some of the highlights and key issues.

In North America, our Profit From Operations (PFO) increased, principally through an improved performance from our gas and coal-fired plants in Texas. Hays benefited from a higher achieved spark spread and load factor, as a result of higher demand and transmission constraints while Coleto Creek operated at a significantly higher load factor of 90% compared to 75% in 2007. We also successfully concluded the acquisition of four peaking plants in the north eastern and mid western US markets (PJM and MISO regions) that we have targeted for some time. These are high quality, modern, and efficient plants which have been quickly integrated into our US portfolio. Forward power prices have reduced principally on the back of lower oil and gas prices, and on expectations of lower demand growth. Forward margins in the power market do not yet reflect the strong fundamentals across our major US merchant markets, and for this reason, we are relatively lightly forward contracted for 2009. Our contracted assets in the region continue to perform well.

Our European portfolio performed well during 2008, particularly in the UK where our gas-fired and pumped storage assets delivered excellent results, which helped to offset the extended outage at our Rugeley coal-fired plant. The fitting of Flue Gas Desulphurisation (FGD) at Rugeley will continue into 2009, and will ensure a longer life for this important asset. Overall, our UK portfolio is very well positioned to benefit from the attractive fundamentals of this market, and we have forward contracted output from selected plants for 2009 where we have seen particular value. We acquired a further 40% of the Turbogás 1,008MW Combined Cycle Gas Turbine (CCGT) plant in Portugal during the year, and this plant continued to perform well, contributing to a strong performance from our long-term contracted assets across the region. Similarly, our European wind portfolio of 1,179MW operated well, although wind levels and resulting load factors were lower than long-term averages.

At ISAB, where there was a major incident in October, one of the two units returned to service in mid December, with the second one expected to be back online in the middle of 2010. The Czech Republic power and district heating businesses had another excellent year, improving on a very strong 2007 performance. On the growth front, construction of the 830MW Elecgas CCGT plant in Portugal is making good progress and we were very pleased to announce the development and successful financing of the 420MW T-Power project in Belgium, in challenging financial market conditions, demonstrating the availability of non-recourse finance for high quality projects.

The Middle East is a good example of a market that continues to grow strongly despite the wider financial turmoil. The market is driven by strong fundamentals, even in a lower oil price environment, and we continue to see a range of near and longer-term growth opportunities that reflect the expansion and diversification of the economies in which we operate. Our existing portfolio continues to operate well with consistently high availability factors. We have established a strong presence in this important market and we are focused on growing and adding value for the long-term, with the construction of the Fujairah F2 plant (2,000MW and 130MIGD) in the UAE on schedule.

Australia had a much improved performance in 2008, driven by better overall plant availability and by improved achieved market prices. The major issue for the power sector in Australia is the planned introduction of a Carbon Pollution Reduction Scheme (CPRS), in this market where coal (a relatively high emitter of carbon dioxide) represents the dominant share (some 85%) of total power generation. A government White Paper was published in December, followed by draft legislation in March 2009, and this provided some insight into the proposed scheme, but many more details need to be clarified before the full impact on our portfolio can be properly evaluated. The scheme is still planned for implementation in mid 2010, and the draft terms include assistance for brown coal-fired generation – which is the cornerstone of our Australian generation portfolio.

Our Asian portfolio comprises long-term contracted assets, where high plant availability is the key driver of value. We continue to deliver high operational standards, and therefore profitability has been consistently good. Demand for power continues to be strong, and is reflected in the growth opportunities across the region, and in Indonesia in particular. The planned expansion of our plant at Paiton in Indonesia, where we are seeking to add a further 815MW by 2012, is an excellent example of this growth. Payments from our government owned offtaker in Pakistan (Water and Power Development Authority) were delayed in 2008, as its cash flow was negatively impacted by the high price of oil. Various measures, including International Monetary Fund (IMF) assistance, give us confidence that this issue will be satisfactorily resolved. We continue to look carefully at selected new markets in this region, with Vietnam a clear focus, given its high growth rate and its desire to attract inward investment in the power sector.

Operational excellence is core to our ability to deliver maximum value, and although we had some unplanned outages in 2008 – Rugeley and ISAB in particular – we always strive to learn the maximum possible from these events to ensure that we maintain the highest standards of plant safety and operations. We have a number of initiatives underway to constantly drive improved operational performance across the portfolio.

Our approach to environmental management has three major building blocks – improved environmental performance at our existing assets, the building of high efficiency plants where we develop greenfield growth opportunities, and the expansion of our significant renewables portfolio. Examples include the installation of FGD equipment in the UK and Portugal, the development of lower emission technology for brown coal generation in Australia, incorporation of high efficiency turbines in our new-build projects in the Middle East, Portugal, and Belgium, and the further development of our European onshore wind portfolio. All these initiatives make very sound environmental and commercial sense.

The growth and development of our business would not be possible without a committed team of employees, and I am always impressed by the enthusiasm displayed by our teams around the world. I would like to thank all our employees for their contribution during 2008.

As outlined in the Chairman’s statement, it is likely that Group profitability in 2009 will be lower than in 2008. However our assets are well placed to capture value, from both market recovery and short-term pricing volatility. Our focus is on maintaining a strong balance sheet with good free cash flow and liquidity, together with achieving the highest operational standards across our portfolio. Growth remains on our agenda, but we will continue to use our capital very selectively and carefully in light of the constrained capital markets. Our regional spread and market knowledge are key advantages, and enable us to allocate capital where we see the best returns.

Philip Cox

Chief Executive Officer