Notes to the Half-yearly report

1 GENERAL INFORMATION

2 BASIS OF PREPARATION

3 ACCOUNTING POLICIES

4 SEGMENTAL INFORMATION

5 SEASONALITY

6 BUSINESS COMBINATIONS

7 INTANGIBLE ASSETS

8 SHARE CAPITAL AND SHARE PREMIUM

9 RETIREMENT BENEFIT LIABILITIES

10 FINANCE COSTS AND FINANCE INCOME

11 EARNINGS PER SHARE

12 CASH USED IN OPERATIONS

13 NET DEBT

14 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

15 CONTINGENCIES

1 GENERAL INFORMATION

AEA is one of the world’s leading energy and climate change consultancies. AEA’s core strength lies in its ability to advise governments and business on how best to reduce their consumption of energy and minimise emissions in the most cost effective manner. The acquisition of PPC during the summer of 2008 enabled AEA to access the US market and gave the Group a data systems capability. AEA can now offer its customers an integrated strategy, implementation, evaluation and data collection solution.

The Company is a public limited company, incorporated and domiciled in the United Kingdom. The address of the registered office is 329 Harwell, Didcot, Oxfordshire, OX11 0QJ.

The Company is listed on the London Stock Exchange.

These financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates. Foreign operations are included in accordance with the policies described in the annual financial statements for the year ended 31 March 2008.

On 26 November the condensed consolidated half-year financial information was authorised for issue by the Board of Directors.

These half-year results do not comprise statutory accounts within the meaning of section 240 of the Companies Act 1985. Statutory accounts for the year ended 31 March 2008 were approved by the Board of Directors on 12 June 2008 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an “emphasis of matter” paragraph and did not contain any statement under section 237 of the Companies Act 1985.

2 BASIS OF PREPARATION

This condensed consolidated financial information for the half-year ended 30 September 2008 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, ‘Interim financial reporting’ as adopted by the European Union. The half-year condensed consolidated financial report should be read in conjunction with the annual financial statements for the year ended 31 March 2008, which were prepared in accordance with IFRSs as adopted by the European Union.

3 ACCOUNTING POLICIES

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 March 2008, as described in pages 40 to 47 of those annual financial statements, with the addition of the following in respect of the new category of other intangible assets:

Estimated useful life of customer contracts and relationships – 5 years

The following new standards, amendments to existing standards or interpretations are mandatory for the first time for the financial year ending 31 March 2009:

IFRIC 12, ‘Service Concession Arrangements’, effective for annual periods beginning on or after 1 January 2008, subject to EU endorsement. This interpretation is not considered to be relevant to the Group.
IFRIC 14, ‘IAS 19, The limit on a defined benefit asset, minimum funding requirements and their interaction’, effective for annual periods beginning on or after 1 January 2008, subject to EU endorsement. This interpretation has not had a material impact on the results of the Group.
IAS 39 and IFRS 7 amendment, ‘Reclassification of financial instruments’, effective from 1 July 2008. This amendment has not had a material impact on the results of the Group.

The following new standards, amendments to existing standards or interpretations have been issued, but are not effective for the financial year ending 31 March 2009 and have not been adopted early:

IFRS 1 and IAS 27 amendment, ‘Cost of an investment in a subsidiary, jointly controlled entity or associate’, effective for periods beginning on or after 1 January 2009, subject to EU endorsement;
IFRS 2 amendment, ‘Share based payment – vesting conditions and cancellations’, effective for periods beginning on or after 1 January 2009, subject to EU endorsement;
IFRS 3 (revised), ‘Business combinations’ and related amendments to IAS 27 ‘Consolidated and separate financial statements’, effective for annual periods beginning on or after 1 July 2009, subject to EU endorsement;
IFRS 8, ‘Operating Segments’, effective for annual periods beginning on or after 1 January 2009;
IAS 1 (revised), ‘Presentation of financial statements: a revised presentation’, effective for annual periods beginning on or after 1 January 2009, subject to EU endorsement;
IAS 39 amendment, ‘Eligible hedged items’, effective for annual periods beginning on or after 1 July 2009, subject to EU endorsement;
IAS 23, ‘Borrowing costs’, effective for annual periods beginning on or after 1 January 2009, subject to EU endorsement;
IAS 32 and IAS 1 amendment, ‘Puttable financial instruments and obligations arising on liquidation’, effective for annual periods beginning on or after 1 January 2009, subject to EU endorsement;
IFRIC 13, ‘Customer loyalty programmes’ effective for annual periods beginning on or after 1 July 2008, subject to EU endorsement;
IFRIC 15, ‘Agreements for the construction of real estate’, effective for annual periods beginning on or after 1 January 2009, subject to EU endorsement;
IFRIC 16, ‘Hedges of a net investment in a foreign operation’, effective for annual periods beginning on or after 1 October 2008, subject to EU endorsement.

It is not expected that these statements will have a significant impact on the Group’s financial statements when they are adopted.

4 SEGMENTAL INFORMATION

Based on risks and returns and the basis on which the Group is managed the Directors consider that the primary reporting format is by geographic segment. The Directors consider that there is only one secondary business segment, being consultancy, policy support, programme management and data management.

Revenue by primary (geographic) segment is as follows:

	Six months ended 30 September 2008 £m	Six months ended 30 September 2007 £m	Year ended 31 March 2008 £m
Europe	32.0	35.3	80.9
United States	3.6	-	-
Total Revenue	35.6	35.3	80.9

Adjusted operating profit by primary (geographic) segment is as follows:

	Six months ended 30 September 2008 £m	Six months ended 30 September 2007 £m	Year ended 31 March 2008 £m
Europe	3.6	3.7	11.0
United States	0.3	-	-
Adjusted operating profit	3.9	3.7	11.0

Operating profit by primary (geographic) segment is as follows:

	Six months ended 30 September 2008 £m	Six months ended 30 September 2007 £m	Year ended 31 March 2008 £m
Europe	4.0	3.7	9.9
United States	0.2	-	-
Total operating profit	4.2	3.7	9.9

5 SEASONALITY

Revenues from the consulting services provided by the Group are subject to seasonal fluctuations, with the UK’s peak demand in the fourth quarter of the financial year. This reflects the pattern of purchasing/procurement by UK Government, the Group’s most significant customer type. The impact of seasonality will be lessened going forward due to the acquisition of PPC (note 6). PPC’s business has significantly less seasonal fluctuations and their less pronounced peak is in the July to September quarter, reflecting the US Federal Government’s September year-end.

6 BUSINESS COMBINATIONS

On 22 August 2008, the Group acquired 100% of the share capital of PPC, a US-based environmental and information management consultancy operating in the US. The acquired business contributed revenues of £3.6 million and profit before tax of £0.2 million to the Group for the period 22 August 2008 to 30 September 2008. If the acquisition had occurred on 1 April 2008 Group revenue would have been £48.8 million and profit before tax would have been £3.1 million.

Details of net assets acquired and goodwill are as follows:

	£m
Purchase consideration:
Cash paid	14.6
Direct costs relating to the acquisition	3.1
Fair value of shares issued (note 8)	2.5
Total purchase consideration	20.2
Fair value of net liabilities acquired	6.4
Goodwill acquired	26.6

The goodwill is attributable to the workforce of the acquired business, the presence in the US market, favourable government relationships and synergies expected to arise after the Group’s acquisition of PPC.

5,323,019 shares were issued as part consideration and the fair value of these shares was based on the published share price on 22 August 2008.

The assets and liabilities as of 22 August 2008 arising from the acquisition are as follows:

	Provisional fair value £m	Acquiree’s carrying amount £m
Property plant and equipment	1.5	1.6
Customer contracts and relationships (included in intangible assets - note 7)	4.9	-
Borrowings	(5.2)	(5.2)
Deferred tax (net)	0.5	2.3
Provisions for other liabilities and charges	(0.2)	(0.1)
Trade and other receivables	10.0	10.1
Trade and other payables	(17.9)	(17.9)
Net liabilities acquired	(6.4)	(9.2)

	£m
Purchase consideration and associated direct costs settled in cash	17.7
Cash, cash equivalents and bank overdrafts in subsidiary acquired	-
Net cash consideration on acquisition	17.7
Repayment of borrowings in subsidiary acquired	5.2
Payment of share option liabilities in subsidiary acquired	11.5
Payment of acquisition costs deducted from gross proceeds	1.4
Total cash outflow on acquisition	35.8

The above disclosures have been provisionally determined. The share purchase agreement between the parties to the business combination allowed for a certain period of time to reach agreement on the values of the assets and liabilities transferred and as a result of that agreement there may be a change in the cash outflow on acquisition. As at the date of this Half-Year Report that period has not yet expired.

There were no acquisitions in the six months ended 30 September 2007 or the year ended 31 March 2008.

7 INTANGIBLE ASSETS

	Goodwill £m	Customer contracts/ relationships £m	Development costs £m	Other intangibles £m	Total other intangibles £m
Net book amount as at 1 April 2007	-	-	0.1	0.1	0.2
Additions	-	-	-	0.1	0.1
Net book amount as at 30 September 2007	-	-	0.1	0.2	0.3
Amortisation	-	-	-	(0.1)	(0.1)
Net book amount as at 31 March 2008	-	-	0.1	0.1	0.2
Acquisition of subsidiary (note 6)	26.6	4.9	-	-	4.9
Foreign exchange	1.3	0.2	-	-	0.2
Amortisation	-	(0.1)	-	-	(0.1)
Net book amount as at 30 September 2008	27.9	5.0	0.1	0.1	5.2

Amortisation is charged to administrative expenses in the income statement.

8 SHARE CAPITAL AND SHARE PREMIUM

	Number of ordinary shares (millions)	Nominal value of ordinary shares £m	Value of share premium £m	Total share capital and premium £m
At 1 April 2007	118.3	14.5	34.7	49.2
Shares issued	5.8	0.7	5.7	6.4
At 30 September 2007 and 31 March 2008	124.1	15.2	40.4	55.6
Rights Issue	99.3	12.1	24.1	36.2
Consideration shares issued on acquisition of subsidiary (note 6)	5.3	0.6	1.9	2.5
At 30 September 2008	228.7	27.9	66.4	94.3

The total authorised number of ordinary shares is 315,000,000 shares (March 2008 and September 2007: 196,363,620 shares) with a par value of 12.2 pence per share. All issued shares are fully paid.

On 13 June 2008 the Company announced a Rights Issue, which was approved by shareholders at an EGM on 10 July 2008. On 5 August 2008 dealings in the new ordinary shares commenced. The Rights Issue has resulted in the issue of 99,302,000 new shares at 40 pence each raising £39.7 million before expenses (£36.2 million net of expenses). Of the funds raised, £35.8 million was used to partially fund the acquisition of PPC (see note 6) and the balance is to provide additional working capital to the enlarged Group.

On 22 August 2008 the Company, on behalf of a Group subsidiary, issued 5,323,019 shares to the shareholders of PPC as part of the purchase consideration for 100% of its ordinary share capital. The ordinary shares issued rank pari passu with the other shares in issue. The fair value of the shares amounted to £2.5 million (47.5 pence per share).

Warrants
The Rights Issue in August 2008 entitled the holders of the Company’s warrant instruments to additional shares on exercise of those warrants. The Company has in issue 4,366,799 warrants (March 2008 and September 2007: 5,987,560 warrants) giving the holders the right to subscribe in cash for shares in the Company. As a result of the Rights Issue in August 2008 the warrant holders are entitled to an additional 3,680,703 warrants, yet to be issued as at 30 September 2008.

9 RETIREMENT BENEFIT LIABILITIES

The amounts recognised in the balance sheet are determined as follows:

	At 30 September 2008 £m	At 30 September 2007 £m	At 31 March 2008 £m
Present value of funded obligations	285.4	335.2	315.0
Fair value of plan assets	(232.6)	(281.5)	(258.4)
	52.8	53.7	56.6
Present value of unfunded benefits	3.2	3.5	3.4
Net retirement benefit liability	56.0	57.2	60.0

The net balance sheet liability for retirement benefits has decreased to £56.0 million (March 2008: £60.0 million, September 2007: £57.2 million). This decrease has occurred through changes to the financial assumptions used in calculating the present value of funded obligations partially offset by decreases in the market value of plan assets.

As at 31 March 2008 a discount rate of 6.6% was used. Due to changes in market conditions this assumption, which must be based on market conditions at the balance sheet date, has been updated to 7.0% as at 30 September 2008, with the resultant effect of significantly reducing the present value of the obligations. There have been no other significant changes to the assumptions used and disclosed in the 2008 Annual Report.

The amounts recognised in respect of pension benefits in the income statement are as follows:

	Six months ended 30 September 2008 £m	Six months ended 30 September 2007 £m	Year ended 31 March 2008 £m
Continuing operations
Current service cost	0.6	0.9	1.8
Interest cost	10.1	9.4	19.0
Expected return on plan assets	(9.3)	(9.3)	(18.7)
Total expense in the income statement	1.4	1.0	2.1

10 FINANCE COSTS AND FINANCE INCOME

	Six months ended 30 September 2008 £m	Six months ended 30 September 2007 £m	Year ended 31 March 2008 £m
Finance costs
Interest on bank overdrafts and loans	(0.7)	(0.9)	(1.6)
Fair value losses on financial instruments	-	-	(0.1)
Accretion of discount on defined benefit pension scheme obligations	(10.1)	(9.4)	(19.0)
Finance costs	(10.8)	(10.3)	(20.7)
Finance income
Interest income	0.1	0.1	0.1
Fair value gains on financial instruments	0.1	-	-
Expected return on defined benefit pension scheme assets	9.3	9.3	18.7
Finance income	9.5	9.4	18.8
Net finance costs	(1.3)	(0.9)	(1.9)

11 EARNINGS PER SHARE

Details of basic, diluted and adjusted earnings per share are set out below. The weighted average number of shares has been restated for all prior periods to reflect the bonus element of the Rights Issue as required by IAS 33. The adjustment factor is 1.2 calculated using 64.0 pence per ordinary share being the closing price on 10 July 2008, the last day on which shares were traded with rights.

(a) Basic
Basic earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period.

	Six months ended 30 September 2008	Six months ended 30 September 2007 restated	Year ended 31 March 2008 restated
Profit attributable to equity holders of the Company – continuing operations (£ millions)	2.9	2.8	8.5
Weighted average number of ordinary shares in issue (millions)	173.3	144.2	146.6
Basic earnings per share – continuing operations (pence)	1.7p	1.9p	5.8p

(b) Diluted
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue to assume conversion of all potential dilutive ordinary shares. The Company has two categories of potential dilutive ordinary shares; share options and warrants. The calculation is performed for the share options and warrants to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options and warrants. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options and warrants to give the number of shares deemed to be issued at nil consideration. These dilutive shares are added to the weighted average number of ordinary shares in issue.

	Six months ended 30 September 2008	Six months ended 30 September 2007 restated	Year ended 31 March 2008 restated
Profit attributable to equity holders of the Company – continuing operations (£ millions)	2.9	2.8	8.5
Weighted average number of ordinary shares in issue (millions)	173.3	144.2	146.6
Adjustment for share options (millions)	-	2.1	1.8
Adjustment for warrants (millions)	-	0.2	0.1
Weighted average number of ordinary shares for diluted earnings per share (millions)	173.3	146.5	148.5
Diluted earnings per share – continuing operations (pence)	1.7p	1.9p	5.7p

(c) Adjusted earnings basis
The adjusted earnings per share is calculated as follows:

	Six months ended 30 September 2008	Six months ended 30 September 2007 restated	Year ended 31 March 2008 restated
Profit attributable to equity holders of the Company – continuing operations (£ millions)	2.9	2.8	8.5
Amortisation of intangibles (£ millions)	0.1	-	-
One-off exchange gain (£ millions)	(0.4)	-	-
Net pension finance cost (£ millions)	0.8	0.1	0.3
Acquisition and Rights Issue costs (£ millions)	-	-	1.1
Adjusted earnings attributable to equity holders of the Company – continuing operations (£ millions)	3.4	2.9	9.9
Weighted average number of ordinary shares in issue (millions)	173.3	144.2	146.6
Adjusted earnings per share (pence)	2.0p	2.0p	6.8p

12 CASH USED IN OPERATIONS

	Six months ended 30 September 2008 £m	Six months ended 30 September 2007 £m	Year ended 31 March 2008 £m
Profit for the period	2.9	2.8	8.5
Adjustments for:
tax	-	-	(0.5)
depreciation and amortisation	0.5	0.7	1.4
loss on disposal of property, plant & equipment	-	-	0.9
share option charge	0.1	-	0.1
interest expense	10.8	10.3	20.7
interest income	(9.5)	(9.4)	(18.8)
other	(0.1)	-	0.1
Changes in working capital:
inventories	(0.2)	(0.1)	(0.1)
trade and other receivables	0.7	2.5	(1.0)
trade and other payables	(3.9)	(7.7)	(5.4)
Changes in retirement benefit liabilities	(3.2)	(0.9)	(2.2)
Changes in provisions for liabilities and charges	(2.8)	(2.6)	(6.3)
Cash used in operations	(4.7)	(4.4)	(2.6)

13 NET DEBT

The movement in the Group’s total net debt is as follows:

	31 March 2008 £m	Debt decrease £m	Debt increase £m	30 September 2008 £m
Cash in hand and at bank	1.0	1.4	-	2.4
Current borrowings	(20.3)	19.4	(26.9)	(27.8)
Non-current borrowings	(0.1)	-	(0.1)	(0.2)
	(19.4)	20.8	(27.0)	(25.6)

	31 March 2007 £m	Debt decrease £m	Debt increase £m	30 September 2007 £m
Cash in hand and at bank	3.6	-	(2.1)	1.5
Current borrowings	(24.9)	11.1	(8.0)	(21.8)
Non-current borrowings	(0.1)	-	-	(0.1)
	(21.4)	11.1	(10.1)	(20.4)

14 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

Attributable to equity holders of the Company

	Share capital (note 8) £m	Share premium (note 8) £m	Fair value and other reserves £m	Capital redemption reserves £m	Cumulative translation adjustment £m	Retained deficit £m	Total equity £m
Balance as at 1 April 2007	14.5	34.7	4.6	0.7	-	(199.0)	(144.5)
Issue of shares	0.7	5.7	-	-	-	-	6.4
Actuarial losses on defined benefit plans	-	-	34.2	-	-	-	34.2
Profit for the period	-	-	-	-	-	2.8	2.8
Balance as at 30 September 2007	15.2	40.4	38.8	0.7	-	(196.2)	(101.1)
Fair value of share option schemes	-	-	0.1	-	-	-	0.1
Actuarial gains on defined benefit plans	-	-	(3.9)	-	-	-	(3.9)
Profit for the period	-	-	-	-	-	5.7	5.7
Balance as at 31 March 2008	15.2	40.4	35.0	0.7	-	(190.5)	(99.2)
Issue of shares	12.7	26.0	-	-	-	-	38.7
Fair value of share option schemes	-	-	0.1	-	-	-	0.1
Actuarial gains on defined benefit plans	-	-	1.6	-	-	-	1.6
Currency translation differences	-	-	-	-	0.4	-	0.4
Profit for the period	-	-	-	-	-	2.9	2.9
Balance as at 30 September 2008	27.9	66.4	36.7	0.7	0.4	(187.6)	(55.5)

15 CONTINGENCIES

The Group has contingent liabilities in respect of contracts entered into in the normal course of business and in respect of previous and current disposals of companies and businesses. Other than those items provided for it is not expected that these will have a material effect on the financial position of the Group. There have been no material changes to the present value of management’s best estimate of the expenditure required to settle the obligations provided for. The balance sheet reduction in provisions is due to utilisation of the provisions at 31 March 2008.

A world leading energy and climate change consultancy

Notes to the Half-yearly report

1 GENERAL INFORMATION

2 BASIS OF PREPARATION

3 ACCOUNTING POLICIES

4 SEGMENTAL INFORMATION

5 SEASONALITY

6 BUSINESS COMBINATIONS

7 INTANGIBLE ASSETS

8 SHARE CAPITAL AND SHARE PREMIUM

9 RETIREMENT BENEFIT LIABILITIES

10 FINANCE COSTS AND FINANCE INCOME

11 EARNINGS PER SHARE

12 CASH USED IN OPERATIONS

13 NET DEBT

14 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

15 CONTINGENCIES