energy made better
Scottish and Southern Energy plc
Annual Report 2007
Our purpose is to provide people
with the energy they need –
in a reliable and sustainable way.
This Annual Report describes how
we’ve worked to make energy better.
And we’re continuing to work
to make it better still.
Scottish and Southern Energy
Annual Report 2007
Contents
Chairman’s Statement
Profile
Providing Energy
Key Performance Indicators
2
3
4
6
Directors’ Report
Corporate Governance Report
Organisation and Structure
Board Effectiveness
Board Committees
Chief Executive’s Statement
10
Audit Committee
Financial Overview
Energy Systems
Generation and Supply
Contracting, Connections and Metering
Gas Storage
Telecoms
Exceptional Item
Investment and Capital Expenditure
Financial Management
Tax
Balance Sheet
Purchase of Own Shares
Corporate Responsibility
Strategy and Outlook
CR Key Performance Indicators
10
11
16
25
27
28
28
28
30
31
31
31
31
32
33
36
38
38
39
39
39
40
40
40
40
40
40
41
41
1
68
69
70
72
73
76
77
79
79
80
80
80
80
81
83
84
85
85
86
89
93
97
98
100
100
101
104
Dividends
Earnings Per Share
Intangible Assets
Property, Plant and Equipment
Investment in Associates and
Joint Ventures
Subsidiary Undertakings
Acquisitions and Disposals
Inventories
Trade and Other Receivables
Cash and Cash Equivalents
Trade and Other Payables
Current Tax Liabilities
Construction Contracts
Loans and Other Borrowings
Deferred Taxation
Provisions
Share Capital
Reserves
Retirement Benefit Obligations
Employee Share-Based Payments
Financial Instruments
Related Party Transactions
Commitments and Contingencies
Analysis of Net Debt
Post Balance Sheet Events
Notice of Meeting
Shareholder Information
Glossary of Terms
Back cover
Remuneration Committee
Nomination Committee
Risk Committee
Executive Committee
Health, Safety and Environmental
Advisory Committee
Internal Control and Risk Management
Going Concern
Communication with Shareholders
and Major Business Stakeholders
Directors’ Biographies and Responsibilities 42
Remuneration Report
Independent Auditors’ Report
Consolidated Income Statement
Balance Sheets
Statements of Recognised
Income and Expense
Cash Flow Statements
Notes on the Financial Statements
Significant Accounting Policies
Segmental Information
Other Operating Income and Expense
Exceptional Items and Certain
Re-measurements
Directors and Employees
Finance Income and Costs
Taxation
44
50
51
52
53
54
55
55
61
64
64
65
66
67
Directors
Financial Calendar
*This results statement describes adjusted profit
before tax before exceptional items, the impact
of IAS 32 and IAS 39 and after the removal of
taxation on profits from jointly-controlled entities
and associates. It also describes adjusted
earnings and earnings per share before
exceptional items, the impact of IAS 32 and
IAS 39 and deferred tax. In addition, it describes
adjusted operating profit before exceptional
items, the impact of IAS 32 and IAS 39, and after
the removal of taxation and interest on profits
from jointly controlled entities and associates.
Sir Robert Smith
Chairman
Ian Marchant
Chief Executive
Gregor Alexander
Finance Director
Colin Hood
Chief Operating Officer
Nick Baldwin
Non-Executive Director
Richard Gillingwater
Non-Executive Director
René Médori
Non-Executive Director
David Payne
Deputy Chairman
Alistair Phillips-Davies
Energy Supply Director
Susan Rice CBE
Non-Executive Director
Sir Kevin Smith CBE
Non-Executive Director
Annual General Meeting
26 July 2007
Ex dividend date
22 August 2007
Record date
24 August 2007
Final dividend payable
21 September 2007
Interim announcement
14 November 2007*
* Provisional date
Operational data for 2005 and 2006 has been
restated in some places to conform with the
definitions for data published for 2007.
Scottish and Southern Energy
Annual Report 2007
Chairman’s Statement
2
Making dividends bigger
Sir Robert Smith Chairman
Scottish and Southern Energy’s strategy
is to deliver sustained real growth in the
dividend payable to shareholders through
the efficient operation of, and investment
in, a balanced range of regulated and non-
regulated energy-related businesses. The
successful implementation of this strategy
in 2006/07 delivered another year of excellent
financial performance, with profit before
tax exceeding £1 billion for the first time,
and strong operational performance,
with our policy of responsible pricing
helping us to gain more than one million
additional customers.
Assets
There has been very good progress in our
major investment programme, with the result
that our asset base in energy networks,
electricity generation, energy supply and
gas storage, which has grown substantially in
recent years, will again increase significantly
in the coming years. Later this year, for
example, the first of the gas storage caverns
at our development at Aldbrough in East
Yorkshire are set to be commissioned, and our
first new large-scale hydro electric scheme
for 50 years is taking shape at Glendoe near
Loch Ness. This growth in assets will confirm
our position as the broadest-based UK energy
company, and we have the opportunities and
financial strength to invest further.
Customers
SSE has two kinds of customers: those
to whom we supply electricity and gas
and other energy and utility services in
competitive markets; and those to whom
we distribute energy via regulated networks.
I am very pleased to report that we responded
effectively to the power cuts experienced
by our electricity network customers
and achieved another reduction in the
number of complaints sent by customers
of Scotia Gas Networks to energywatch for
resolution. We have also set the standard
in customer service in energy supply, with
the implementation of our sector-leading
Customer Charter. This, combined with
our policy of responsible pricing, has
helped us to reach 7.75 million customers,
an increase of over 70% in five years.
Dividend
SSE’s first responsibility to shareholders is to
deliver sustained real growth in the dividend.
With its operational and investment focus
leading to value enhancement and creation,
SSE is in an excellent position to deliver
very good results in the years ahead, as a
customer-serving, dividend-paying company.
Our enhanced dividend policy reflects this.
The Board is recommending a final dividend
of 39.9p, making a full-year dividend of 55p –
an increase of 18.3%. From this new, higher
base, our new target is to deliver at least
4% real growth in the dividend in respect
of 2007/08, 2008/09 and 2009/10 and to
deliver sustained real growth in the dividend
thereafter.
Environment
SSE’s core activities present significant
environmental challenges and our policy is
to minimise where possible the emissions of
carbon, sulphur and nitrogen from all of our
activities through a combination of continuous
improvement in the management of our
operations and investment in alternative
sources of energy. In this context, I am
particularly pleased that we have set
ourselves the target of reducing the carbon
intensity of electricity generated at power
stations in which we have an ownership or
contractual interest by 20% by 2016. This is
just one example of our determination to
make energy better.
Values
Sustainability – aiming to operate ethically,
taking the long-term view to achieve growth
while safeguarding the environment – is one
of six core values for SSE which we defined
during the year. The others are safety,
service, efficiency, excellence and teamwork.
These values are demonstrated day-in,
day-out by people throughout SSE and it is
this which helps to set the company apart
from so many others, and to which I pay a
fulsome tribute. Adhering to them helped us
to achieve another reduction in the number
of lost time and reportable injuries to a new
record low for the company. Nevertheless,
we remain focused on our ultimate goal of
injury-free working.
Long-term
Next year will see the completion of SSE’s
first decade as one of the UK’s leading
energy companies, and the company is
full of ideas, plans and opportunities for
its second decade. That decade will be
challenging, and there is absolutely no room
whatsoever for complacency, but I am fully
confident that the company is exceptionally
well-placed to add greatly to its track record
of sustained real growth in the dividend.
Scottish and Southern Energy
Annual Report 2007
Profile
3
SSE’s core purpose is to provide
the energy people need in a
reliable and sustainable way.
Our values: safety, service, efficiency,
sustainability, excellence and teamwork.
Our strategy: to deliver sustained real growth
in the dividend payable to shareholders through
the efficient operation of, and investment in, a
balanced range of regulated and non-regulated
energy-related businesses.
Our team: more than 13,400 people, working
from more than 150 power stations, depots,
customer service centres, offices and shops.
We have a clear purpose, clear
values and a clear strategy.
We believe in teamwork.
And the net result?
Energy made better.
Scottish and Southern Energy
Annual Report 2007
Providing Energy
4
6
4
2
1
3
5
1. Generation portfolio
SSE owns and operates over 10,000MW of electricity
generation capacity, including its share of joint ventures.
This capacity includes coal-fired (with biomass co-firing
capability) and gas-fired power stations, as well as wind
farms and hydro electric schemes.
2. Wind
SSE owns and operates and has consent to build six
onshore wind farms in the UK, including the first to
generate over 100MW of electricity, and is seeking
consent to develop others.
3. Hydro
SSE owns and operates over 50 hydro electric power
stations in Scotland and is now building what will be
its second largest, at Glendoe near Loch Ness.
4. Electricity networks infrastructure
SSE is responsible for 128,000km of overhead lines and
underground cables, distributing electricity to 3.5 million
homes, offices and businesses in the north of Scotland
and central, southern England.
5. Electricity networks management
SSE’s investment in its electricity networks, and its
response to incidents such as storms, means its
electricity network is more than 99.99% reliable.
6. Contracting
SSE’s Southern Electric Contracting is one of the UK’s
largest mechanical and electrical contractors. Its street
lighting division is responsible for maintaining around
one million street lights in the UK and has contracts
to replace and maintain street lights for four local
authorities under the Private Finance Initiative.
7. Telecoms
SSE Telecom provides radio sites for local authorities,
mobile operators and emergency services and its
subsidiary, Neos Networks, operates a 7,500km UK-wide
telecoms network, providing services for other telecoms
providers, companies and public sector organisations.
8. Gas networks
SSE has a 50% stake in Scotia Gas Networks, which owns
the medium and low pressure gas distribution networks
in Scotland and the South of England, delivering gas to
5.7 million homes, offices and businesses via 74,000 kms
of gas mains and services.
Scottish and Southern Energy
Annual Report 2007
7
5
PROVIDING ENERGY
8
10
9
11
14
12
13
9. Gas storage
SSE owns and operates 325 million cubic metres (mcm)
of gas storage capacity at Hornsea, currently the UK’s
largest onshore gas storage facility and, with Statoil UK,
is developing significant new capacity at neighbouring
Aldbrough.
10. Offshore wind
SSE and Talisman UK have placed one of the world’s
largest wind turbines installed anywhere in the world,
in 45 metres of water 25 kilometres off the coast of the
Moray Firth to test the technical and economic feasibility
of deep water wind farms.
11. Solar energy
SSE is an investor in Solarcentury, the UK’s leading
independent solar photovoltaics company, and its
subsidiary, Southern Electric Contracting, is now the
preferred installer for Solarcentury.
12. Energy supply
SSE supplies electricity and gas to over
7.75 million domestic and business customers
through its Southern Electric, Scottish Hydro Electric,
SWALEC and Atlantic brands.
13. Services for the home
SSE supplies a wide range of electrical and gas appliances
through its network of high street shops in the north
of Scotland and through its websites including
www.thehydroshop.co.uk. It also provides home
telecoms, security and boiler maintenance services.
14. Alternative technologies
SSE promotes technologies such as ground source heat
pumps which replace a ‘boiler’ in a conventional heating
system by using the refrigeration cycle to extract heat at
a low temperature and convert it to a higher temperature.
Scottish and Southern Energy
Annual Report 2007
Key Performance Indicators
FINANCIAL OVERVIEW
Dividend cover – times
7
Electricity distributed – TWh
6
13
Adjusted profit before tax – £m*
1
2007
2006
2005
1,079.3
873.9
732.1
+23.5%
2007
2006
2005
1.68
1.61
1.51
+4.3%
2007
2006
2005
-3.2%
42.4
43.8
42.9
ENERGY SYSTEMS
Southern Electric Power Distribution customer
minutes lost
14
2007
2006
2005
+1.4%
72
71
84
Southern Electric Power Distribution customer
interruptions
15
2007
2006
2005
-2.6%
76
78
98
Southern Electric Power Distribution mains in
commission – kilometres
16
2007
2006
2005
+1.1%
77,502
76,690
75,708
Scottish Hydro Electric Power Distribution
customer minutes lost
17
2007
2006
2005
77
+18.5%
65
82
Adjusted earnings per share – pence
2
Power Systems capital expenditure – £m
8
2007
2006
2005
92.5
+23.8%
2007
2006
2005
74.7
64.2
+18.8%
204.5
172.1
171.5
Dividend per share – pence
3
Energy Systems operating profit – £m*
9
2007
2006
2005
55.0
+18.3%
46.5
42.5
2007
2006
2005
+0.1%
471.1
470.6
336.8
Investment and capital expenditure – £m
4
Regulatory Asset Value – £bn
10
2007
2006
2005
502.1
383.5
663.4
+32.1%
2007
2006
2005
2.5
2.4
2.6
+4.0%
Net debt – £bn
5
Southern Electric Power Distribution
operating profit – £m*
11
2007
2006
2005
2.233
2.166
+3.1%
1.430
2007
2006
2005
-0.9%
224.0
226.1
201.6
Underlying interest cover – times
6
Scottish Hydro Electric Power Distribution and
Transmission operating profit – £m*
12
2007
2006
2005
11.0
+19.6%
9.2
9.0
2007
2006
2005
+1.6%
144.0
141.8
135.2
Scottish and Southern Energy
Annual Report 2007
7
Scottish Hydro Electric Power Distribution
customer interruptions
18
SGN mains in commission – kilometres
24
Renewable energy generation capacity – MW
30
2007
2006
2005
79
78
86
+1.3%
2007
2006
2005
73,661
73,617
n/a
+0.1%
2007
2006
2005
1,518
1,516
+0.1%
1,363
Scottish Hydro Electric Power Distribution mains
in commission – kilometres
19
SGN gas distributed – GWh
25
Hydro and wind generation capacity qualifying
for ROCs – MW
31
2007
2006
2005
45,886
45,586
44,468
+0.7%
2007
2006
2005
162,336
185,269
n/a
-12.4%
2007
2006
2005
395
568
566
+0.3%
Scottish Hydro Electric Transmission mains in
commission – kilometres
20
SGN Regulatory Asset Value – £bn
26
Hydro storage – % of maximum water for
generation
32
2007
2006
2005
4,913
4,913
4,913
0%
2007
2006
2005
+10.3%
3.2
2.9
n/a
2007
2006
2005
75
+22.9%
61
74
SGN capital expenditure – £m
21
GENERATION AND SUPPLY
Hydro output – GWh
33
2007
2006
3,767
3,054
+23.3%
10 year average 2005 3,177
Wind generation in operation, under construction
or consented – MW
34
2007
2006
2005
168
162
236
+40.8%
2007
120.4
2006 (10 months)
109.2
+10.3%
2005
n/a
Generation and Supply operating profit – £m*
27
SGN repair expenditure – £m
2007
2006
2005
22
444.8
388.6
642.6
+44.5%
2007
174.8
2006 (10 months)
123.6
+41.4%
2005
n/a
Electricity generation capacity – MW
28
SGN operating profit share – £m
2007
2006
2005
23
10,017
10,015
9,974
0%
2007
103.1
2006 (10 months)
102.7
+0.4%
2005
n/a
Electricity generated – TWh
29
2007
2006
2005
+15.0%
46.60
40.52
38.64
Scottish and Southern Energy
Annual Report 2007
Key Performance Indicators continued
8
Gas-fired power station availability – %
35
Power station CO2 emissions –
kilograms per kWh
41
Energy customer numbers – millions
47
2007
2006
2005
95
87
94
+9.2%
2007
2006
2005
0.555
0.622
-10.8%
0.489
2007
2006
2005
+15.7%
7.75
6.70
6.08
Gas-fired power station thermal efficiency – %
36
Power station SO2 emissions – metric tonnes
42
Electricity customers – millions
48
2007
2006
2005
49.5
50.4
54.3
-1.8%
2007
2006
2005
50,776
64,967
-21.8%
42,604
2007
2006
2005
+11.0%
4.95
4.47
4.21
Coal and biomass-fired power station
availability – %
37
Power station SO2 emissions – grams per kWh
43
Gas customers – millions
49
2007
2006
2005
92
92
88
0%
2007
2006
2005
1.090
1.103
-32.0%
1.603
2007
2006
2005
1.87
2.80
+25.6%
2.23
Coal and biomass-fired power station thermal
efficiency – %
38
Power station NOx emissions – metric tonnes
44
Complaints received by energywatch
50
2007
2006
2005
36.1
36.2
35.6
-0.3%
2007
2006
2005
44,120
49,180
-10.3%
840
2007
2006
2005
1,573
1,981
-46.6%
31,620
Power station water consumption – million cubic
metres
39
Power station NOx emissions – grams per kWh
45
Domestic electricity disconnections for non-
payment
51
2007
2006
2005
3.18
3.49
-8.9%
2007
2006
2005
4.66
0.947
-22.0%
1.214
0.818
2007
2006
2005
74
113
133
+79.7%
Power station CO2 emissions –
million metric tonnes
40
Electricity supplied – TWh
46
Domestic electricity disconnections for non-
payment – per 1,000 customers
52
2007
2006
2005
25.88
25.21
+2.7%
2007
2006
2005
18.90
50.9
49.9
47.7
+2.0%
2007
2006
2005
0.03
+50.0%
0.02
0.03
Scottish and Southern Energy
Annual Report 2007
Gas disconnections – number
53
TELECOMS
New gas connections – thousands
9
63
2007
2006
2005
437
502
671
+53.5%
Operating profit – £m*
58
2007
2006
2005
9.2
+16.5%
7.9
7.0
Gas disconnections – number per
1,000 customers
2007
2006
2005
54
13.9
13.2
+5.3%
10.8
Managed networks
64
2007
2006
2005
0.24
0.20
+20.0%
0.27
GAS STORAGE
Operational faults fixed within agreed service
levels – %
59
2007
2006
2005
+4.4%
94
90
90
2007
2006
2005
24
+26.3%
19
16
Southern Electric Contracting order book – £m
65
Gas Storage operating profit – £m*
55
Delivery on standard projects – %
60
2007
2006
2005 19.0
27.3
55.9
+104.8%
2007
2006
2005
98
+10.1%
89
77
2007
2006
2005
95.4
87.2
+9.4%
75.5
Apprentices recruited
66
Customer nominations met – %
56
CONTRACTING, CONNECTIONS, METERING
2007
2006
2005
Gas Storage capacity including
under construction – mcm
2007
2006
2005
100
100
100
505
505
505
Operating profit – £m*
0%
2007
2006
2005
61
-7.1%
92
99
90
Meters read once a year – %
67
2007
2006
2005
57
+2.4%
51.6
50.4
47.9
New electrical connections – thousands
62
0%
2007
2006
2005
+4.0%
44.6
42.9
42.0
2007
2006
2005
n/a%
95.07
n/a
n/a
Meters read twice a year – %
68
2007
2006
2005
n/a%
78.69
n/a
n/a
Scottish and Southern Energy
Annual Report 2007
Chief Executive’s Statement
10
Performance made stronger
Ian Marchant Chief Executive
FINANCIAL OVERVIEW
Introduction
The management of SSE is governed by six
key financial principles: delivery of sustained
real dividend growth; effective management
of core businesses; rigorous analysis to
ensure investments are well-founded and,
where appropriate, innovative; maintenance
of a strong balance sheet; deployment of
a selective and disciplined approach to
acquisitions; and use of purchase in the
market of the company’s own shares as
the benchmark against which financial
decisions are taken.
Financial Results for 2006/07
These results for the year to 31 March 2007
are reported under International Financial
Reporting Standards. In previous results
statements, SSE’s focus was on profit before
tax before exceptional items, net finance
income from pension assets (IAS 19), the
impact of IAS 32 and IAS 39, and after the
removal of taxation on profits from jointly
controlled entities and associates. In these
results, however, in line with emerging
practice and as stated in the interim results
in November 2006, SSE no longer makes any
adjustment in respect of net finance income
from pension assets (IAS 19). Results for
2005/06 has been restated on this basis.
March 07 March 06
£m
£m
Reported profit before tax
Movement in derivatives
Exceptional items
Tax on JVs and Associates
Interest on convertible debt
Adjusted profit before tax*
Adjusted current tax charge
Adjusted profit after tax*
1,132.0
(56.2)
(33.9)
33.8
3.6
1,079.3
(282.6)
896.9
70.9
(127.4)
29.9
3.6
873.9
(231.5)
796.7
642.4
Reported profit after tax
830.5
642.3
Number of shares for basic
and adjusted EPS (million)
Adjusted EPS*
Basic EPS
860.9
92.5
96.5
859.5
74.7
74.7
Adjusted Profit before Tax*
Adjusted profit before tax grew by 23.5%,
from £873.9m to £1,079.3m. The most
substantial growth continues to be achieved
in Generation and Supply. This reflects
the benefits from the development and
diversification of SSE’s electricity generation
portfolio, which is over 10,000MW, and
the sustained increase in the number
of energy supply-related customers,
which now total 7.85 million (including
100,000 ‘talk’ telecoms customers).
Adjusted Earnings per Share*
To monitor financial performance over
the medium-term, SSE continues to focus
on adjusted earnings per share, which
increased by 23.8%, from 74.7p to 92.5p.
Dividend
The Board is recommending a final
dividend of 39.9p, compared with 32.7p in the
previous year, an increase of 22.0%. This will
make a full year dividend of 55p, compared
with 46.5p last year, an increase of 18.3%.
This increase is also designed to provide a
significantly higher base for future dividend
growth. From this new, higher base, SSE’s
target will be to deliver at least 4% annual
real growth in the dividend paid to
shareholders in respect of 2007/08, 2008/09
and 2009/10. Thereafter, SSE expects to
continue to deliver at least sustained real
growth in the dividend. This new policy
replaces SSE’s existing targets, which were
to deliver at least 4% annual real growth
in the dividend payable to shareholders in
respect of 2006/07 and 2007/08, with
sustained real growth thereafter.
The expected full-year dividend in respect
of 2006/07, of 55p, compares with 32.4p for
2001/02, an increase of 69.8% in five years.
This represents a compound annual growth
rate of 11.2%, at 55p,it will also be double
the dividend paid by SSE to shareholders
for the financial year ending 31 March 2000.
The total full-year dividend payment
to shareholders for 2006/07 is covered
1.68 times by SSE’s adjusted profit after
tax, compared with 1.61 times in the
previous year.
Scottish and Southern Energy
Annual Report 2007
ENERGY SYSTEMS
k Operating profit* up to £471.1m
compared with £470.6m in previous year
Electricity networks
k Power Systems operating profit*
of £368.0m compared with £367.9m
in previous year
k Investment in electricity networks
up 18.8% to £204.5m
k Additional revenue of £13m earned
under Ofgem’s Quality of Service
and other incentive schemes
k Agreement on Transmission Price
Control Review 2007-12
k Beauly-Denny Public Inquiry
commenced in February 2007
Gas Networks (10 months in 2005/06)
k Share of SGN’s adjusted operating
profit* up from £102.7m to £103.1m
k SGN capital expenditure up 10.3%
to £120.4m and replacement
expenditure up 41.4% to £174.8m
Energy Systems Introduction
SSE owns Southern Electric Power
Distribution, Scottish Hydro Electric Power
Distribution and Scottish Hydro Electric
Transmission. These companies are the
subject of incentive-based regulation by
the Office of Gas and Electricity Markets
(Ofgem), which sets for periods of five years
the prices they can charge for the use of
their electricity networks, their capital
expenditure and their allowed operating
expenditure, within a framework known as
the Price Control. In broad terms, Ofgem
seeks to strike the right balance between
attracting investment in electricity and
gas networks, encouraging companies to
operate them as efficiently as possible and
ensuring that prices ultimately borne by
customers are no higher than they need to
be. The current Distribution Price Control
runs until April 2010. A new five-year
Transmission Price Control was agreed
during 2006/07 and came into effect on
1 April 2007.
11
As at 31 March 2007, SSE estimates that
Ofgem’s valuation of the assets of its
electricity distribution and transmission
businesses (the Regulated Asset Value or
‘RAV’) was over £2.6bn, based on Ofgem’s
methodology.
All of this means that Southern Electric
Power Distribution, Scottish Hydro Electric
Power Distribution, Scottish Hydro Electric
Transmission and SGN all distributed fewer
units of energy during the year, and this
impacted on the revenue that they earned.
SSE also has an equity interest of 50% in,
and provides corporate and management
services to, Scotia Gas Networks (SGN),
which owns Southern Gas Networks and
Scotland Gas Networks, companies which
own and operate the medium and low
pressure gas distribution networks in their
areas of the UK. They are the subject of
incentive-based regulation similar to that
which applies in electricity. The Price Control
that had applied to gas distribution networks
from 1 April 2002 expired on 31 March 2007,
at which point a one-year Price Control
was put in place to run until 31 March 2008.
A Price Control for a full five-year period
from 1 April 2008 is now being determined.
SGN estimates that the RAV of the networks
it owns was around £3.2bn, based on Ofgem’s
methodology, as at 31 March 2007.
Energy Systems Overview
Operating profit* in Energy Systems,
including gas distribution, increased slightly,
from £470.6m to £471.1m, contributing
38.3% of SSE’s total operating profit.
The amount of electricity transmitted and
distributed through SSE’s networks and the
amount of gas distributed through SGN’s
networks is determined by the weather,
by customers’ demand for energy and by
the availability of the networks themselves.
Variations in the volume of energy distributed
have an impact on the income earned by
SSE’s energy systems businesses.
2006/07 was marked by higher than
normal temperatures throughout the year
in all parts of the country. There was also
a reduction in customers’ use of both
electricity and gas, even after allowing
for weather-related variations in demand.
This may reflect the impact of the higher
energy supply prices which prevailed during
the year, and a growing awareness of the
importance of energy efficiency.
If, in any year, regulated energy networks
companies’ revenue is greater (over
recovery) or lower (under recovery) than
is allowed under the relevant Price Control,
the difference is carried forward and
the subsequent prices the companies
may charge are adjusted. Under this
arrangement, the under recovery of
revenue from SSE’s electricity distribution
networks in 2006/07 means they will
receive a favourable revenue adjustment
of £3.9m in 2007/08; similarly, SGN will
receive a favourable revenue adjustment
of £21m in the 12 months following the
tariff re-setting in October 2007.
Southern Electric Power Distribution
Southern Electric Power Distribution’s
operating profit* fell by 0.9%, from £226.1m
to £224.0m. During the year, it distributed
33.9TWh of electricity, compared with
34.9TWh in the previous year, despite
a growth in the number of customers
to whom electricity is distributed. This
reduction in the number of units distributed
was, however, partially offset by changes
in their price.
Ensuring the reliability of the electricity
networks it owns and operates is one of
SSE’s main priorities and the key measures
of reliability are customer minutes lost and
customer interruptions. The average number
of minutes that customers in the Southern
Electric Power Distribution area were
without supply was 72, one more than in
the previous year; and the number of supply
interruptions per 100 customers was 76,
compared with 78 in the previous year.
Performance in respect of both minutes
lost and interruptions was ahead of the
targets set by Ofgem under its Quality of
Service Incentive Scheme (QSIS), which
gives financial benefits to distribution
network operators that deliver good
performance for customers.
Did you know?
We deliver electricity to
3.5
million homes, offices and
businesses
SSE owns one electricity
transmission network and two
electricity distribution networks,
comprising 106,000 substations
and 128,000km of overhead
lines and underground cables
across one third of the UK
landmass. It delivers electricity
to 3.5 million customers in the
north of Scotland and in central
southern England.
Did you know?
We distributed
42.4
TWh of electricity
SSE distributed 42.4TWh
of electricity to customers
connected to its electricity
networks in 2006/07. The
average number of minutes that
these customers were without
electricity during the year was
77 in the north of Scotland and
72 in central southern England.
This means that the networks
were more than 99.99% reliable.
Scottish and Southern Energy
Annual Report 2007
Chief Executive’s Statement continued
12
Safety
We believe all accidents are preventable,
so we aim to do everything safely and responsibly,
or not at all. This helped us to achieve yet another
reduction in the number of lost-time and reportable
injuries during 2006/07, to 11 – an all-time low
for SSE. But that’s still not low enough. We hate
anyone getting hurt. So our ultimate goal is
injury-free working.
Scottish and Southern Energy
Annual Report 2007
13
This, together with income earned in
2006/07 under other incentive arrangements
is expected to lead to SSE receiving
additional revenue totalling £9m during
the next two financial years.
In January 2007, the Southern Electric
Power Distribution area was affected by a
storm which the Meteorological Office said
was the most severe in its scale and impact
for 17 years. This led to additional costs of
around £2m being incurred. It resulted in
almost 200,000 customers having their
electricity supply interrupted. Power was
restored to around 180,000 customers
within a day and to almost all of the affected
customers within 36 hours. Over 1,000
people in SSE, from across the country, were
involved in dealing with the consequences of
the storm, from engineers out in the field
to customer service advisers who spoke to
over 50,000 affected customers who called
in. It was an exercise in which first class
teamwork was key. Following the event,
SSE undertook a comprehensive review
to ensure that it is as well prepared as
possible for storms in the future.
Scottish Hydro Electric Power Distribution
and Scottish Hydro Electric Transmission
Operating profit* for Scottish Hydro Electric
Power Distribution and Scottish Hydro
Electric Transmission increased by 1.6%,
from £141.8m to £144.0m. In the Scottish
Hydro Electric area, 8.5TWh of electricity
were distributed during the year, compared
with 8.9TWh distributed in the previous
year. This reduction in the number of
units distributed was, however, offset
by changes in their price.
The average number of minutes that
customers were without supply was 77,
compared with 65 in the previous year
(which was the best performance in the
area since records began) and 82 in 2004/05.
This followed an increase of almost 25%
in the number of weather-related faults
experienced on the 33kV network during
January and February of 2007. The number
of supply interruptions per 100 customers
was 79, one more than in the previous year.
Performance in respect of both minutes
lost and interruptions was, however,
ahead of Ofgem’s QSIS targets. This,
together with income earned in 2006/07
under other incentive arrangements, is
expected to lead to SSE receiving additional
revenue of just under £4m during the next
two financial years.
Electricity Network Investment
The key responsibility of SSE’s electricity
networks businesses is to maintain safe
and reliable supplies of electricity and to
restore supplies as quickly as possible in
the event of interruptions. The Distribution
Price Control Review for 2005-10 resulted
in substantially increased allowances for
capital expenditure to maintain and improve
the networks’ performance. This will enable
SSE to increase its revenue from its
networks, and delivery of this enhanced
investment programme was one of SSE’s
priorities for 2006/07. It is now well under
way, with capital expenditure of £204.5m
during the year, which was 18.8% higher
than in 2005/06. In the course of the year,
SSE added just over 1,000km to the length
of its networks, taking the total, including
transmission, to over 128,000km.
An example of the type of project in which
investment is being made is the installation
of a 15km overhead ‘BLX’ line and 2.5km
underground cable, which will improve
the security of supply to customers at
Marchington on the Dorset/Wiltshire border.
The cable is being laid using directional drill
techniques which avoid the need for large
open trenches under sensitive woodland to
comply with requests from English Nature
and the National Trust.
Rising demand for electricity in north
Hampshire and south Berkshire has created
the need for a reinforcement of the local
electricity network. In line with this, SSE has
begun preliminary work on the installation
of two 10km underground 132kV cables
that will carry power from National Grid’s
substation at Bramley to the SSE substation
in Basingstoke.
In the north of Scotland, 2007/08 will be
marked by the replacement of no fewer
than four subsea cables, reinforcing the
electricity supply to islands off the north
and west coasts.
With two years of the five-year Distribution
Price Control period completed, SSE
forecasts that the Regulated Asset Value
(RAV) of its distribution and transmission
businesses is over £2.6bn. It is expected
to grow by around £500m over the 2005-10
Distribution Price Control period, based
on Ofgem’s methodology, to around £3bn.
This excludes any major transmission
investment. In line with this, SSE expects
to invest around £250m in its electricity
networks in 2007/08.
Future Transmission Developments
One of SSE’s priorities for 2006/07 was
to secure a satisfactory outcome from
the Transmission Price Control Review for
2007-12, and in December 2006 it decided,
on balance, to accept Ofgem’s final proposals.
While the allowed cost of capital was, and
remains, disappointing, SSE concluded,
ultimately, that there was within Ofgem’s
detailed proposals for areas such as capital
and operational expenditure sufficient scope
and incentive to secure an acceptable level
of revenue from its transmission business.
As the licensed transmission company for
the north of Scotland, SSE is required to
ensure there is sufficient network capacity
for those seeking to generate electricity
from renewable sources. The project to
replace the electricity transmission line
connecting Beauly in the Highlands with
Denny in the Central Belt of Scotland is
in line with that responsibility. It is likely
that the construction of its part of the
replacement line will require SSE to invest
over £250m, and making progress with
this project was another of SSE’s priorities
during 2006/07. A Public Inquiry into the
project began in February 2007, and was
still on schedule at the end of May. It is
expected that the report of the Inquiry
will be submitted to Scottish Ministers
for a decision during 2008.
Did you know?
We invested over
204
million pounds in our electricity
networks
SSE invested £204.5m in its
electricity networks during
2006/07 to maintain and improve
their performance, an increase
of 18.8% on 2005/06. During
2007/08 it expects to invest
around £250m in the networks.
Did you know?
We expect to add
500
million pounds to our
electricity networks’
Regulated Asset Value
SSE forecasts that the
Regulated Asset Value (RAV) of
its distribution and transmission
businesses will grow by around
£500m over the 2005-10
Distribution Price Control
period, based on Ofgem’s
methodology. This excludes any
major transmission investment.
Scottish and Southern Energy
Annual Report 2007
Chief Executive’s Statement continued
14
In December 2006, SSE published a
consultation document on the possible
development of a new high voltage
transmission line capable of accommodating
power from possible renewable energy
developments on the Western Isles and
connecting this to the existing mainland
transmission network at Beauly. The
consultation document set out a preferred
option for the new connection which would
involve the construction of a subsea High
Voltage Direct Current (HVDC) cable circuit
and an underground HVDC cable. The
development on this basis would require
investment by SSE broadly estimated at
around £375m.
SSE’s share of SGN’s adjusted operating
profit was £103.1m during 2006/07,
compared with £102.7m for the 10 months
from 1 June 2005. This result reflects the
major reduction in gas transportation
volumes experienced during the year. SGN
would have earned additional revenue if
temperatures had been normal, rather than
above average, and transportation volumes
had also been normal, rather than lower
than average. This would have added £21.0m
to SSE’s share of SGN’s adjusted operating
profit. Nevertheless, performance was
supported by an ongoing focus on underlying
operating costs and by improving results
from SGN in its non-regulated activities.
Electricity Distribution and Transmission
Priorities in 2007/08
During 2007/08, SSE’s first objective in
electricity distribution and transmission
will be to maintain safe and reliable supplies
of power and to restore supplies as quickly
as possible in the event of interruptions, so
performance in terms of customer minutes
lost and customer interruptions will continue
to be critical. This will be supported by
delivery of continuous improvement
initiatives, following a fundamental review
of internal processes and customer-facing
operations that is now under way. Other
key priorities will be the efficient delivery
of the next phase of the major programme
of investment in the networks, targeted at
upgrading them so as to benefit the greatest
number of customers and the successful
completion of the Public Inquiry into the
Beauly-Denny transmission line proposal.
Scotia Gas Networks – Operational
During 2006/07, the gas transportation
volume for SGN’s network in Scotland was
57,096GWh and for its Southern network
the volume was 105,240GWh. This compares
with 61,637GWh and 123,632GWh respectively
in the previous year.
SGN’s objective is to reach and remain at
the frontier for safety, customer service
and efficiency in gas distribution. During the
year, it made significant progress towards
the achievement of this goal. In September
2006, following negotiations, the trade
unions’ ballot produced a substantial vote
in favour of SGN’s pay and productivity offer
for the three years until 2009, which will
allow the introduction of much more flexible
working patterns. These will be introduced
while continuing to attach the highest
priority to safety.
Scotia Gas Networks – Financial
In June 2005, Scotia Gas Networks plc
(SGN), in which SSE holds 50% of the equity,
acquired the Scotland and the Southern gas
distribution networks from National Grid.
The networks comprise around 74,000km
of gas mains, delivering gas to around
5.7m industrial, commercial and domestic
customers. SSE’s investment was £505m,
including shareholder subordinated debt,
in return for which it receives 50% of the
distributable earnings from the networks.
SSE is also providing corporate and
management services for SGN.
Implementation of the new structure for
the business is virtually complete. The
previous functionally-based arrangement
has been replaced with a geographically-
based organisation operating out of 24
depots, thereby enabling SGN to secure
significant efficiencies. This reorganisation
is intended to improve SGN’s effectiveness
in its customer-facing activities such as
emergency response, repairs, metering
work and streetworks.
As part of SGN’s drive to deliver excellent
customer service through this depot
structure, customer satisfaction indices
have been introduced across the range of
activities. Almost 6,000 customers were
asked to rate their experience of SGN
undertaking work at their home across a
range of metrics, and this culminated in
an overall score of 4.11 out of 5 (5 being
very satisfied). During 2006/07, this focus
on customer service helped SGN deliver a
reduction of 56%, to 75, in the number of
complaints about it sent to energywatch
for resolution.
Future performance will be supported by the
introduction of new front office management
systems, the total number of which has been
reduced from over 50 to 11. The final stage
of the implementation was completed in
April and the systems are bedding in well.
During 2006/07 the number of lost
time injuries in SGN fell to 0.21 per
100,000 hours worked.
Scotia Gas Networks – Investment
During the year, SGN invested £120.4m in
capital expenditure projects, compared with
£109.2m in the 10 months from June 2005. It
also invested £174.8m in mains and services
replacement expenditure works, compared
with £123.6m in the 10 months from June
2005, under the 30:30 mains replacement
programme. This is the Great Britain-wide
replacement of all iron gas mains within
30 metres of domestic properties in a 30-year
timeframe to improve the future reliability
and safety of the network. Following this
investment, SGN estimates that the RAV
of the networks it owns was around £3.2bn
as at 31 March 2007 – the same as the
total enterprise value paid when they were
acquired in June 2005.
In 2007/08, SGN expects to invest around
£200m in capital expenditure projects and
around £190m in replacement expenditure
works. With such high levels of investment
expected in future years, the RAV of SGN
is on course to increase significantly.
Did you know?
We distribute gas to
5.7
million customers via SGN
SSE owns 50% of Scotia Gas
Networks (SGN), the company
which owns Scotland Gas
Networks and Southern Gas
Networks. It also provides
corporate and management
services to SGN. The two
networks comprise around
74,000km of gas mains,
delivering gas to 5.7 million
customers.
Did you know?
We invested
295
million pounds in our gas
networks, via SGN
SGN invested £295.2m in its
gas networks during 2006/07.
This comprised: £120.4m in
capital expenditure projects; and
£174.8m in mains and services
replacement expenditure works
under the 30:30 programme,
which is the Great Britain-wide
replacement of all iron gas
mains within 30 metres of
domestic properties.
Scottish and Southern Energy
Annual Report 2007
15
A SMART IDEA
Service
We give our customers service we are proud of
and make commitments that we deliver. That’s why
we support ways of helping them to save energy –
and money. During 2006/07, we won support from
the government to run trials of ‘smart’ meters.
These give people a lot more information about
the energy they are using and how to use it better.
A smart move for all concerned.
Scottish and Southern Energy
Annual Report 2007
Chief Executive’s Statement continued
16
Future Scotia Gas Network developments
SGN decided to accept Ofgem’s final
proposals for the gas distribution one-year
price control for 2007-08. As in electricity
transmission, the allowed cost of capital
in gas distribution was disappointing and
should not be seen as a precedent for the
forthcoming five-year review for 2008-13.
Nevertheless, SGN’s networks secured the
highest increases in revenue amongst the
eight gas distribution networks. The policy
frameworks for ‘shrinkage’ gas, pensions
deficit and capital and replacement
expenditure were all satisfactorily dealt
with in the context of what was a one-year
review period.
On 29 May 2007, Ofgem published its initial
proposals for the 2008-13 price control.
These proposals are comprehensive and
detailed and require extensive scrutiny
and ongoing dialogue with Ofgem. SGN’s
objective is to ensure that Ofgem’s final
proposals, which are expected to be
published in November 2007, feature an
acceptable cost of capital, opportunities
to earn additional revenue and the correct
incentives for dealing with operational,
capital and replacement expenditure.
In addition to its core gas distribution
activities, SGN has established Connections,
Contracting and Commercial Services
businesses. Amongst other things, these
new businesses carry out work previously
done by contractors and they will provide
the scope for SGN to enhance revenue from
non-regulated activities in future years.
As a result of this, SGN now employs
over 3,500 people – although, because
of efficiencies achieved, the total number
of people working on SGN activities,
including contractors, has fallen.
Scotia Gas Networks Priorities in 2007/08
SSE’s priority in gas distribution will
continue to be to provide SGN with the
corporate and management services to
support its ongoing reform of procedures,
processes and practices which are designed
to secure cost savings and efficiencies,
and to support also the continued in-
sourcing of services currently provided
by National Grid, which will yield further
cost savings. It will also assist SGN in
the delivery of its substantial capital and
replacement expenditure programmes.
More specifically, SSE will help SGN in its
work with Ofgem on the Gas Distribution
Price Control review for 2008-13 and in
its drive to achieve a further improvement
in its safety performance.
GENERATION AND SUPPLY
k Operating profit* up 44.5% to £642.6m
Generation
k Gas-fired power station availability
up from 87% to 95%; coal station
availability unchanged at 92%
k Acquisition of 50% stake in Marchwood
Power Ltd, a new 840MW gas-fired
power station under construction
k Start of work on ash separation plant
at Fiddler’s Ferry
k Fourth highest hydro output on record
k Hadyard Hill became first UK wind farm
to generate over 100MW of electricity
k Planning permission secured for a
further 68MW of new wind farm capacity
k Partnership Agreement signed with
Viking Energy for 600MW wind farm
on Shetland
k Target adopted to reduce carbon intensity
of power generated by 20% by 2016
Supply
k Net gain of over one million energy
supply customers, to 7.75m, following
policy of responsible pricing
k Implementation of lower energy
prices from 1 March 2007; lowest
domestic prices for dual fuel
k Further reduction, of 47%, in
complaints reported by energywatch
k Ranked first in uSwitch.com customer
satisfaction survey and top performer
in JD Power study
k 100,000 ‘talk’ telecoms customers
achieved for first time
k First 20,000 customers won by new
domestic gas boiler installation,
maintenance and repair business
k New energy programme rewarding
customers for energy efficiency set
for launch
Generation and Supply Introduction
SSE owns just over 10,000 megawatts (MW)
of electricity generation capacity, including
its share of joint ventures. This comprises
almost 4,400MW of gas-fired capacity,
4,000MW of coal-fired capacity (with biomass
‘co-firing’ capability), over 1,500MW of hydro
and wind capacity and 150MW of oil-fired
capacity, giving SSE diversity in fuels and,
as a result, greater optionality in the overall
management of its power stations. As at
31 March 2007, SSE supplied energy to over
7.75 million homes, offices and businesses
within the UK’s competitive electricity and
gas supply market.
A series of market reforms, culminating
in the introduction of British Electricity
Trading and Transmission Arrangements
(BETTA) in 2005, means that wholesale gas
and wholesale electricity are transacted
like any other commodities. SSE purchases
gas and, where appropriate, some electricity
via bilateral contracts and through the
wholesale market – the latter complementing
the electricity produced from its own
generation portfolio. Within its integrated
business model, SSE’s power stations and
fuel supply contracts are used to support
performance in electricity supply, mainly
through exploiting flexibility and optionality.
Generation and Supply is, therefore,
assessed as a single value chain and this
approach means, amongst other things,
that more sustained value can be created
from SSE’s balanced portfolio of assets,
contracts and customers than would be
the case on a stand-alone basis.
Did you know?
We produce electricity from
10
GW (10,000MW) of generation
capacity
SSE owns just over 10GW of
gas-fired, coal- and biomass-
fired, oil-fired, hydro, pumped
storage and wind generation
capacity in England and
Scotland. Its main power
stations are at Ferrybridge,
Fiddler’s Ferry, Keadby,
Medway and Peterhead.
SSE is also the UK’s leading
generator of electricity from
renewable sources.
Did you know?
We generated
46.6
TWh of electricity
During 2006/07, the amount of
electricity generated at SSE’s
power stations (wholly-owned
and owned by joint ventures)
was 46.6TWh. This was enough
to power around 13 million
homes for one year.
Scottish and Southern Energy
Annual Report 2007
17
Generation and Supply Overview
Operating profit* in Generation and Supply
rose by 44.5%, from £444.8m to £642.6m,
contributing 52.2% of SSE’s total operating
profit during the year. Total revenue for
Generation and Supply was £10.98bn which
accounted for 88% of SSE’s total revenue
in 2006/07, of which £5.06bn was in relation
to sales of electricity and gas to industrial,
commercial and domestic customers.
The underlying financial performance of
Generation and Supply has been reported
excluding the impact of IAS 39 revaluations
because SSE does not believe this represents
underlying business performance.
During 2006/07, SSE generated 46.6TWh
of electricity, including power stations it
wholly owns and in which it has a share.
It also purchased 10.5TWh of electricity via
long-term contracts with other generators,
including British Energy. In the year,
it supplied 26.3TWh of electricity to its
domestic and small business customers,
and 24.6TWh was supplied under contract
to industrial and commercial customers.
The net balance was sold in the wholesale
electricity market.
The continuing growth achieved by SSE’s
integrated Generation and Supply business
is the outcome of the company’s investment
in and acquisition of a diverse range of
electricity generating assets and a growth of
74% in the number of energy supply-related
customers over the past five years. More
specifically, it also reflects the fact that
SSE’s gas-fired power stations delivered
a greater level of availability to generate
electricity during 2006/07, compared with
the previous year, which was a key priority.
There was also much more output of wind
energy during the year which contributed
around £20m to operating profit. Hydro
output was the fourth highest on record
and the additional output contributed
around £25m to operating profit,
compared with an average year.
Since the BETTA arrangements were
introduced in April 2005, SSE has benefited
from its ability to deploy its flexible power
stations in Scotland to meet demand from
the electricity market in England and Wales.
This positive impact from Scottish-based
generation contributed around £25m to
operating profit during 2006/07.
Operating profit reflects a charge of £18.9m
in respect of the write down of Combined
Heat and Power facilities and the expensing
of costs associated with the deep water
offshore wind research, development and
demonstration project in the Moray Firth.
Gas-fired Generation – Operations
Good performance in BETTA is dependent
on plant reliability. During 2006/07, SSE’s
principal wholly-owned gas-fired power
stations (Fife, Keadby, Medway and
Peterhead) achieved an average of 95%
of their maximum availability to generate
electricity, excluding planned outages,
a significant improvement on the 87%
availability in the previous year. This followed
an intensive programme of engagement
with the equipment suppliers to resolve
technology and performance issues.
Gas-fired Generation – Investment
During 2007/08, SSE expects to invest over
£20m at its Medway, Keadby and Peterhead
Power Stations to improve their availability
and reliability and to increase the overall
performance capability of the plant. Within
this, the most significant investment will
be in gas turbine efficiency and flexibility
improvements at Peterhead, which are
scheduled to begin in the autumn of this year.
In December 2006, SSE and ESBI (Ireland’s
Electricity Supply Board International)
completed all of the financial and legal
agreements in respect of their 50:50 joint
venture, Marchwood Power Ltd. This allowed
work on the construction of the venture’s
new 840MW combined cycle gas turbine
(CCGT) power plant in Southampton to
begin early in 2007. The plant is expected to
be constructed and in commercial operation
in time for the winter of 2009/10. On
completion, it will take SSE’s ownership
interest in gas-fired power stations to
almost 4,800MW and in electricity generation
capacity as a whole to almost 10,500MW.
The plant will be operated by Marchwood
Power Ltd, which will be responsible for
ensuring it is available to generate electricity
as required by its customer, SSE. SSE will
supply both the gas for conversion into
electricity, and the net carbon emissions
allowances, and will sell the resulting
output into the UK electricity market. In
this respect, the arrangements are similar
to those which apply to Seabank Power
Limited, in which SSE also has a 50% stake,
and which operates a 1,140MW CCGT power
station near Bristol.
The plant is being built under a fixed price
turnkey contract by Siemens plc, using
gas turbines similar to those used at
Seabank and at Peterhead. With a net
thermal efficiency in excess of 58%, it will
be one of the most efficient in the UK and
in a typical year will meet the electricity
requirements of around one million homes.
The favourable location of the plant, on the
coast of central southern England, means
it will actually receive payments under
the current arrangements for charging
electricity generators for use of the
electricity networks.
The expected capital cost for Marchwood
Power Ltd is around £400m. It is being
financed on a debt/equity ratio of 80:20.
In line with the 50:50 joint venture, SSE’s
equity investment will be, therefore, around
£40m and it is also providing 50% of the
project debt requirements (other than
the VAT and Working Capital facilities)
as a lender. On this basis, SSE has so
far incurred £32.5m in respect of the
Marchwood development.
During August 2006, Barking Power Ltd,
in which SSE has a 30.4% stake, submitted a
Section 36 application for consent to develop
a new 400MW CCGT. If consented, this would
effectively add around 120MW to the portfolio
of generation assets owned by SSE.
During 2006/07 SSE and its partner BP
delayed a decision on whether to invest in
the development of a 475MW carbon capture
plant at SSE’s power station at Peterhead.
The companies had been working for almost
two years on what would have been the
world’s first industrial-scale project to
generate ‘de-carbonised’ electricity from
Did you know?
We achieved
95
per cent availability at our
gas-fired power stations
SSE’s main wholly-owned
gas-fired power stations
(Fife, Keadby, Medway and
Peterhead) achieved 95% of
their maximum availability to
generate electricity, excluding
planned outages, a significant
improvement on the 87%
availability in the previous year.
Did you know?
We are developing a new
840
MW gas-fired power station
SSE and ESB International
have entered into a 50:50 joint
venture to build a new combined
cycle gas turbine power station
in Southampton. At over 58%,
it will have one of the highest
net thermal efficiencies in the
UK and in a typical year will
meet the electricity needs of
around one million homes.
Scottish and Southern Energy
Annual Report 2007
Chief Executive’s Statement continued
18
hydrogen, and they had completed the
front-end engineering and design study.
The project was, however, always dependent
on the government putting in place a policy
framework which encourages the capture
of carbon from fossil fuel-based electricity
generation, and its long-term storage.
In May 2007, the Energy White Paper
set out a timetable for a competition to
determine which carbon capture and
storage project in the UK would be
supported by the government. This timetable
was not compatible with the requirements of
the participants in the project at Peterhead
and BP announced it would take the project
no further. Nevertheless, SSE retains an
interest in developments in carbon capture
and storage technologies and has potential
opportunities at its gas-fired and coal-fired
power stations.
Coal and Biomass Generation – Operations
The Ferrybridge and Fiddler’s Ferry power
stations, each with a capacity of almost
2,000MW, achieved 92% of their maximum
availability to generate electricity, excluding
planned outages, during 2006/07, the same
as in the previous year.
The stations also ‘co-fire’ fuels from
renewable sources (biomass) in order to
displace fossil fuels, thus reducing the
impact of carbon emissions resulting from
their operation. The resulting electricity
output qualifies for Renewable Obligation
Certificates (ROCs). During the year, their
output qualifying for ROCs was 741GWh,
compared with 795GWh in the previous year.
The total for 2006/07 was less than might
have been expected following the recent
development of the new ‘co-firing’ facilities
at the sites. It reflects the introduction
of the regulatory change which limits to
10% the amount that companies can use
co-fired fuels to meet their Renewables
Obligation. Output was also affected by
the fact that the new facilities to ‘co-fire’
fuels from renewable sources underwent
commissioning during the period,
which included the need to ensure
the quality of fuel for the station was
of the required standard.
Nevertheless, the new facilities mean that
SSE is now the UK’s leading user of biomass
co-firing. It is now considering the impact
of the proposed new ROC arrangements
for biomass, set out in the government’s
consultation document Reform of the
Renewables Obligation, but these are not
expected to come into effect until April 2009.
Coal and Biomass Generation – Investment
SSE has opted in to the Large Combustion
Plant Directive all of the capacity at
Fiddler’s Ferry and half of the capacity
at Ferrybridge and as a result is installing
Flue Gas Desulphurisation (FGD) equipment
in an investment expected to total around
£225m. This will extend the stations’
contribution to the security of the UK’s
energy supplies and means that SSE
will continue to have the country’s most
diverse electricity generation portfolio.
Making good progress with the investment
was one of SSE’s priorities during 2006/07,
and the civil works at both sites are now
well under way, with the first outage
connected to the project commencing at
Fiddler’s Ferry in March 2007. This was
to allow the removal of asbestos from the
exhaust ducting before the ducting itself
was removed and replaced to accommodate
the FGD plant. The installation of FGD
is expected to be complete in time for
the power stations to begin generating
electricity through a ‘de-sulphurised’
process during 2008.
To complement the investment in FGD, SSE
is investing £17m in installing re-designed
high-pressure turbines and static blades at
all four units at Fiddler’s Ferry and at two
units at Ferrybridge. This will increase their
thermal efficiency by around 1.4%, thereby
reducing the amount of coal consumed and
the amount of CO2 emitted per MWh of
electricity generated. The turbines and the
static blades have been installed at the first
of the units at Fiddler’s Ferry, and further
installations will take place at both stations
during 2007.
SSE’s partnership with Doosan Babcock
Energy, Siemens and UK Coal is intended
to lead to the installation of ‘cleaner coal’
technology at Ferrybridge, comprising a
500MW Super-critical Boiler and Steam
Turbine, with a thermal efficiency of around
45%, and the subsequent deployment of
post-combustion carbon capture equipment.
The front-end engineering and design study
is almost completed and SSE expects to
make a decision before the end of 2007 on
whether to proceed with the investment.
It was originally expected that installation
of the Super-critical Boiler and related
plant to meet all established environmental
standards would require investment by SSE
of around £250m. Over the past year, costs
across the power equipment sector have
risen and the required level of investment
may be significantly higher, which will
clearly influence SSE’s final decision.
In February 2007, SSE and RockTron Limited
concluded an agreement leading to the
construction at Fiddler’s Ferry of the first
plant in the UK to separate ash arising
from electricity generation into constituent
mineral parts for sale as cement substitute
products and industrial minerals.
Under the agreement, SSE has acquired one
preference share in RockTron and is providing
it with a loan of up to £22m to facilitate the
construction of the plant. All of the necessary
consents are in place, and work on the
development is now under way, with the
plant on course to become fully operational
in the summer of 2008.
Over a period of up to 25 years the plant will
remove and process all fresh ash produced
and all which is currently stored in lagoons
at the site, up to a total of around 800,000
tonnes per annum. It will take this as its raw
material and process it into its constituent
parts such as fine and coarse ash fractions,
magnetic fraction, carbon rich fraction and
cenospheres.
These constituent parts then become
marketable products and will be sold into
their respective markets, with the largest
volume being used as cement substitutes.
Without processing, ash disposal would
begin to attract landfill duty and associated
environmental liabilities.
Did you know?
We are investing around
225
million pounds in flue gas
desulphurisation equipment
SSE is installing flue gas
desulphurisation equipment at
all of the capacity at Fiddler’s
Ferry power station and half
of the capacity at Ferrybridge.
This will extend the stations’
contribution to the security of
the UK’s energy supplies and
will prevent emissions from
them which cause acid rain.
Did you know?
We are enabling
800
thousand tonnes of ash per
annum to be recycled at
Fiddler’s Ferry
SSE and RockTron Ltd have
concluded an agreement leading
to the construction at Fiddler’s
Ferry power station of the first
plant in the UK to separate
ash arising from electricity
generation into constituent
mineral parts for sale as
cement substitute products
and industrial minerals.
Scottish and Southern Energy
Annual Report 2007
19
A LEADING ROC STAR
Efficiency
We keep things simple, do the work that adds value
and avoid wasting money, materials, energy or time.
That’s why we’re building, near Loch Ness, our first
large-scale hydro electric power station for 50 years.
With 16 kilometres of tunnels collecting rainfall and
channelling it to the under ground power station,
it will be the most efficient plant of its kind in the UK,
producing plenty of green power to earn ROCs.
Scottish and Southern Energy
Annual Report 2007
Chief Executive’s Statement continued
20
The agreement between SSE and
RockTron governs all of the commercial and
operational matters in respect of the new
plant, including a lease to allow construction
and operation of the plant at the power
station and the supply to the plant on a
‘must-take’ basis of ash from the power
station. RockTron will be responsible for
the operation of the new plant and for
the marketing and sale of the constituent
mineral parts arising from the processing.
EU Emissions Trading Scheme
In March 2007, the UK government
published its Approved National Allocation
Plan for Phase II of the EU Emissions
Trading Scheme, from 2008 to 2012. Across
its electricity generation portfolio (taking
account of contractual shares), SSE will
receive an allocation of 16.3 million tonnes
per annum. This can be compared with its
Phase I allocation of 19.6 million tonnes
per annum. SSE’s Phase II allocation as
a percentage of its Phase I allocation is
around 83%, compared with around 80%
across the electricity sector as a whole.
Hydro and Wind Generation – Operations
The Energy White Paper, published in May
2007, stated that ‘renewable energy is an
integral part of the government’s strategy
for reducing carbon emissions’. It also
stated that ‘renewables can also make
a contribution to security of supply,
by diversifying the electricity mix and
reducing the need for energy imports’.
SSE owns and operates over 1,500MW
of renewable energy generating capacity,
including pumped storage. Total output
from its hydro electric stations during the
year was the fourth highest on record at
3,767GWh. This compares with the 10-year
average of 3,177GWh and with output of
3,054GWh during 2005/06. As at 31 March
2007, the amount of water held in SSE’s
reservoirs which could be used to generate
electricity was 75% of the maximum,
compared with 61% on the same date
last year, enough to generate 670GWh
of electricity.
The output of refurbished hydro electric
stations with capacity of up to 20MW
Did you know?
qualifies for ROCs. The refurbishment of all
of SSE’s sub-20MW capacity was completed
during 2005 and, in total, it has 406MW of
capacity in its sub-20MW stations (including
the new plant commissioned in the last few
years at Culleig, Kingairloch and Fasnakyle).
Of the total hydro output in 2006/07,
1,791GWh qualified for ROCs.
The Tangy, Spurness, Artfield Fell and
Hadyard Hill wind farms also contributed
384GWh of ROC-qualifying output in 2006/07,
compared with the 108GWh of output
produced by SSE’s wind farms in the
previous year. This increase reflects the
fact that Hadyard Hill was commissioned
at the start of the financial year and became
the first wind farm in the UK to generate
over 100MW of electricity.
Assuming average ‘run off’ of water into
SSE’s reservoirs during the rest of this
financial year, and typical wind conditions,
the ROC-qualifying output from hydro and
wind generation is expected to be almost
2,000GWh in 2007/08.
Hydro Generation – Investment
The construction of what will be SSE’s
second largest conventional hydro-electric
station at Glendoe, near Loch Ness is
now well under way. At the end of March,
over 500 people were working on the
development. By that time, cavern excavation
had been completed to power station floor
level, the headrace tunnel had advanced
to 1,250 metres and the aqueduct tunnel
to 520 metres.
With an installed capacity of around 100MW,
Glendoe will produce around 180GWh of
electricity qualifying for ROCs in an average
year. When synchronised, it will be able
to start generating 100MW of electricity in
30 seconds. The development of Glendoe
is requiring investment of around £140m.
The project is a key priority and remains
on course for electricity to be generated
from the winter of 2008/09.
In March 2007, SSE applied for consent to
build a new 2.5MW hydro electric station
near Crianlarich; the proposal is for a
‘run-of-river’ scheme. This was followed
by an application, in April 2007, for consent
to build another new run-of-river hydro
electric scheme of 3.5MW in Wester Ross.
SSE believes there may be potential
to develop up to three larger hydro electric
schemes in the Highlands, which could
be capable of producing a total of up
to 200GWh of electricity a year, plus a
number of pumped storage schemes.
Their development would, however, require
a planning and policy framework more
attuned to the critical need to maximise
production of energy from renewable
sources and reform of the current regime
for charging generators for the use of the
electricity networks.
Wind Generation – Investment
SSE’s four operational wind farms have
a total installed capacity of 162MW. This
will increase to 236MW with completion of
construction of the wind farms at Tangy 2
(6MW), Drumderg (32MW) and Toddleburn
(36MW). Drumderg finally received consent
in September 2006 and Toddleburn received
consent in January 2007.
At the start of 2006/07, SSE said it hoped
that its applications in respect of seven wind
farms in Scotland would be determined and
approved during the financial year. Of these
seven, two have been approved and one was
the subject of a Public Inquiry which has
now been completed and of which the result
is awaited. Two have been referred to Public
Inquiries which will start later this year
and two have yet to be determined by the
relevant planning authority. Another wind
farm, Strathy North, was submitted for
planning consent during the year. Its
proposed installed capacity is 70MW.
Despite these issues, SSE is still aiming
to have around 1,000MW of ROC-qualifying
wind and hydro generating capacity by
the end of the decade. It already has in
place, or has secured consent to develop,
742MW of capacity (568MW in operation
and 174MW in development or construction).
In January 2007, SSE signed a partnership
agreement with Viking Energy Ltd,
the company established to represent
We are investing around
140
million pounds in a new large-
scale hydro electric scheme
SSE is developing what will be
its second largest conventional
hydro electric scheme at
Glendoe, near Loch Ness.
When synchronised, it will
be able to start generating
100MW of electricity in
30 seconds and will help
to meet peaks in demand
for power.
Did you know?
We are developing a
600
MW community-backed
wind farm
SSE has signed a partnership
with Viking Energy Ltd, the
company established to
represent Shetland Islands
Council’s interests in wind farm
development, intended to lead to
the development on Shetland’s
Central Mainland of a 600MW
wind farm. Viking Energy’s
involvement would make it the
world’s largest community-
backed wind farm.
Scottish and Southern Energy
Annual Report 2007
21
Shetland Islands Council’s interests in wind
farm development, which is intended to lead
to the development on Shetland’s central
mainland of a wind farm with around 600MW
of capacity. SSE and Viking Energy each have
a 50% stake in the partnership. Under the
agreement, the new partnership will, later
this year, submit to the Scottish Executive
a planning application for the wind farm
which, if consented, could reduce the UK’s
annual carbon emissions by an estimated
two million tonnes, or more. Its development
is subject to, amongst other things,
planning consent being secured and to the
construction of a sub-sea cable between
Shetland and the mainland of Scotland.
Innovation
The placing of a 5MW wind turbine, one of
the largest installed anywhere in the world,
in 45 metres of water 25 kilometres off
the coast in the Moray Firth, was a key
milestone in a research, development and
demonstrator project to test the technical
and economic feasibility of deep water
wind farms. The project has been funded
by Talisman Energy (UK) Ltd and SSE, as
well as the European Union, the Scottish
Executive and the Department of Trade and
Industry. Electricity was first generated by
the turbine in May 2007 and is being used
to power the Beatrice oil platform, which,
in turn, will provide a base from which to
carry out turbine maintenance and
performance monitoring.
A second turbine was due to be installed,
but this did not take place before the onset
of the autumn and winter weather, and
was postponed until the summer of 2007.
In addition, the project has been subject to
significant cost over-runs, and total costs
have now exceeded £30m, of which SSE’s
share was £16m. All of this demonstrates
the challenges associated with the
development of leading-edge technology
and this project has had difficulties.
Accordingly, SSE has recognised a
charge of £5m in 2006/07 in respect
of this expenditure.
The development of secure, reliable
and cost-effective low carbon energy
technologies towards commercial
deployment is a key priority for the UK
government and is part of SSE’s strategy
to remain the UK’s leading generator of
electricity from renewable sources. Against
this background, SSE agreed in October
2006 to become a partner in the new Energy
Technologies Institute, providing it with up
to £2.5m a year for five years. The detailed
arrangements for the ETI are still being
finalised and if, in practice, SSE’s
participation in the ETI is not the best
way forward, SSE will engage directly
with universities and other research
establishments to make appropriate
investments in new technologies.
SSE is a major contributor to a £6m fund
to support renewable energy developments
in Scotland. The Sigma Sustainable Energies
Fund is being financed by a range of
partners – including the Scottish Executive –
to stimulate growth in renewable energy.
The Fund considers energy-related projects
in a wide range of fields including wind,
solar, hydro electric, biomass (including
biofuels), ocean, hydrogen and geo-thermal.
Its early investments include Ocean Power
Delivery Ltd, which is developing the
Pelamis marine energy device, and Xipower
Ltd, which has developed patented battery
power management and monitoring
technologies.
Micro generation technologies have the
potential to become a key way of reducing
the demand for energy from the national
electricity and gas grids by giving the
buildings connected to them the means
to produce at least some of the energy
that their occupants need. During 2006/07,
SSE invested £2.0m to increase its stake
in Solarcentury, the leading independent
solar photovoltaics company in the UK,
to 13.3% of the issued share capital.
The development of low carbon buildings
is an example of where new business
opportunities should arise for SSE, with
Southern Electric Contracting (SEC) now
the preferred installer for Solarcentury.
The two companies have been appointed
by the Department of Trade and Industry
to supply and install solar panels on
Britain’s public buildings as part of its
£50m Low Carbon Buildings Programme.
SSE’s investment in Edinburgh-based
Renewable Devices (Swift Turbines) Ltd
has not been successful to date. The Swift
rooftop-mountable wind energy system will
require further work before its long-term
feasibility can be confirmed beyond doubt.
SSE’s subsidiary Renewable Technology
Ventures Ltd has continued with the
development of an underwater tidal turbine
demonstrator. It is keen to continue to
invest in marine energy and is looking for
investment opportunities in this area to
establish a position as the UK’s leading
developer of tidal-based electricity
generation technologies.
Energy White Paper
In the Energy White Paper, published in
May 2007, the UK government said that
‘we need a diverse electricity generation
mix’. It defined the long-term energy
challenges facing the UK – to encourage
lower carbon and more secure supplies
of energy. SSE agrees that diversity in the
electricity generation mix is vitally important
and also agrees that the challenges which
have been defined by the government
are the ones that need to be addressed
with practical, consistent and long-term
policy framework.
The publication of the White Paper followed
the European Union agreement to adopt
a binding target on the use of renewable
energy, the Approved National Allocation
Plan for Phase II of the EU Emissions
Trading Scheme and the draft Climate
Change Bill. All of these developments
point in a single direction: there will have
to be a reduction in the amount of carbon
dioxide which is produced per unit of
electricity generated.
Against this background, SSE has set itself
a target to reduce by 20% over 10 years the
amount of carbon dioxide per kilowatt hour
of electricity produced at power stations in
which it has an ownership or contractual
interest. The base year for SSE’s target is
2005/06, when its emissions of carbon
dioxide were 620g/kWh, and it is aiming to
achieve the 20% reduction, to 496g/kWh or
less, by 2015/16.
Did you know?
We own
13.3
per cent of the share capital
of Solarcentury
SSE invested £2.0m during
2006/07 to increase its stake
in Solarcentury, the UK’s
leading independent solar
photovoltaics company. The
development of low carbon
buildings is an example of
the new opportunities for
SSE, with Southern Electric
Contracting now the preferred
installer for Solarcentury.
Did you know?
We are targeting a
20
per cent reduction in the
carbon intensity of our
electricity production
SSE has set itself a target to
reduce by 20% the amount
of carbon dioxide per kilowatt
hour of electricity produced at
power stations in which it has
an ownership or contractual
interest. The base year for SSE’s
target is 2005/06 and it is aiming
to achieve the target by 2015/16.
Scottish and Southern Energy
Annual Report 2007
Chief Executive’s Statement continued
22
EMISSIONS
STATEMENT
Sustainability
We aim to operate ethically, taking the long-term view
to achieve growth while safeguarding the environment.
Evidence shows it’s important to minimise the release
of carbon dioxide from using fossil fuels. That’s why
we’ve committed to reducing the amount of carbon
dioxide for each unit of electricity produced from
power stations. It’s all part of the move to a more
sustainable way of producing energy.
Scottish and Southern Energy
Annual Report 2007
23
SSE will report on its progress against
the 2016 target each year and the decisions
it takes and the investments it makes
will be guided by it. Like most long-term
targets, achievement will be influenced
by circumstances outside its control, but
SSE is very serious in its aim to make
such a significant cut in carbon intensity.
That is why it already has such extensive
involvement in developments designed to
deliver much more renewable energy,
carbon capture and storage and increased
thermal efficiency of power plant. It will
maintain a balanced approach to reducing
carbon intensity in the years ahead.
Alongside the White Paper, the UK
government published its consultation
on proposals to modify the Renewables
Obligation, so that it ceases to be ‘technology
neutral’ and features four technology bands
to be fixed from 2009 to 2013. It remains
unfortunate that the Obligation has been
the subject of a fundamental review when
it was originally conceived and presented as
a stable mechanism for the long-term. The
key test for the proposals in the consultation
document is whether they represent an
adequate framework for future investment in
those mature renewable energy technologies
which are most likely to make a meaningful
contribution to the achievement of EU and
UK government targets, while protecting
capital already invested on the basis of the
Obligation’s original structure. Specifically,
therefore, SSE is considering the proposals
with regard to biomass investment and the
future potential for hydro electricity.
Generation Priorities for 2007/08
During 2007/08, SSE’s key objectives in
generation will be to ensure that its diverse
portfolio of power stations is available to
generate electricity, with the maximum
possible efficiency, in response to customer
demand and market conditions, while
complying fully with all safety standards and
environmental regulations. The achievement
of these objectives will be supported by the
delivery of a comprehensive programme
which has been established to identify further
improvements in the management and
operation of its portfolio of power stations.
SSE will also be working to ensure that
all generation plant is well-maintained,
with timely investment in asset replacement
and refurbishment projects and that
the new generation projects at Beatrice,
Drumderg, Ferrybridge, Fiddler’s Ferry,
Glendoe, Marchwood, Tangy and Toddleburn
proceed on time and on budget.
It will also consider whether to install a
Super-critical Boiler and post-combustion
carbon capture equipment at Ferrybridge,
and progress needs to be made with its
plans for new onshore wind developments.
As is the case throughout the generation
sector, these projects and plans may be
subject to the impact of increasing capital
costs and skills shortages as worldwide
demand for electricity infrastructure
continues to rise.
SSE will also continue to monitor
developments in other generation
technologies such as offshore wind
and carbon capture and storage.
Following the publication of the Energy
White Paper, it will also continue to
participate actively in the debate about
how best to meet the UK’s need for
diverse, more secure and lower carbon
sources of energy.
Energy Supply
Further growth in customer numbers was
a key priority for SSE during 2006/07 and
its energy supply business had 7.75 million
energy supply customers at 31 March 2007,
a net gain of 1.05 million in 12 months.
This comprises 4.95 million electricity
customers and 2.80 million gas customers.
In addition, SSE had reached 100,000 ‘talk’
telecoms customers, giving it an overall
customer base of 7.85 million. Within the
total, SSE’s business customers now cover
390,000 sites throughout Great Britain.
Including telecoms, SSE has achieved
a net gain of 3.35 million customers in
the past five years, an increase of 74%.
This growth is deliberately and clearly
related to SSE’s responsible pricing policy.
It meant that, during periods of rising
wholesale energy prices, SSE passed
on to its domestic gas and electricity
customers much less than the full extent
of the increases and it deliberately delayed
any price rises. As a result, its customers
paid an average of £340 less for their gas
and electricity over three years than
customers of British Gas.
On 1 March 2007, SSE started implementing
cuts in prices for domestic gas customers,
the first such cuts for six years, and it
started to implement cuts in prices for
domestic electricity customers on 1 April.
The price cuts meant SSE continued to be
the UK’s cheapest supplier of energy and
it is hoped that they marked the start of
a sustained downward trend in the prices
paid by customers.
Customer Service
Central to success in Energy Supply is
maintaining the highest possible standards
of customer service. In May 2007, SSE
again secured recognition for the best
overall customer service in the large-scale
customer satisfaction survey in energy
supply, organised by uSwitch.com. In the
results of the JD Power 2006 UK Electricity
and Gas Customer Satisfaction Study,
announced in November, SSE was ranked
first amongst gas suppliers and second
amongst electricity suppliers.
This recognition followed the introduction
by SSE of a Domestic Energy Customer
Charter in 2006, the first of its kind in
the UK energy supply industry. Part of a
comprehensive performance improvement
programme in SSE’s Customer Service
division, the completion of which was one
of SSE’s priorities for 2006/07, the Charter
reflects a ‘commitment-based’ approach
to general customer enquiries, so that
a much greater number of customer
enquiries are dealt with at the first
point of contact.
It is in line with research which has
confirmed that the key frustrations for
customers are the length of time they
spend on hold when seeking help over the
telephone and being passed to more than
one company representative. In other words,
while technology has its part to play in
Did you know?
We supply energy to over
7.75
million customers
SSE is one of the largest
suppliers of electricity and gas
with over 7.75 million customers.
It brings together the Southern
Electric, Scottish Hydro Electric,
SWALEC and Atlantic brands.
In addition, SSE provides its
‘talk’ telecoms product to
around 100,000 customers,
taking its total customer
base to over 7.85 million.
Did you know?
We achieved a
47
per cent reduction
in the number of
customer complaints
SSE had the lowest number
of customer complaints in the
UK energy supply industry in
2006/07. Watchdog energywatch
received 840 complaints about
SSE. This compares with 2,509
for the second-best performing
company and 37,100 for the
poorest-performing company,
British Gas.
Scottish and Southern Energy
Annual Report 2007
Chief Executive’s Statement continued
24
supporting service delivery, customers
like to interact directly with company
representatives. SSE has, therefore,
broadened the role of its advisers and
actively extended call times to ensure
there is a full understanding of customers’
requirements. In 2006/07, this helped SSE
to bring its customer ‘churn’ rate down
from over 14% in the previous year to
below 13% for the first time.
Other achievements stemming from
the programme include a large increase
in the number of customers receiving a
minimum of two bills each year based on
actual (as opposed to estimated) meter
readings. Bills themselves have been
totally re-designed to make them clearer
and easier to understand.
SSE believes that this approach is having
a positive impact on its customers’
dealings with, and perceptions of, its
Customer Service division. Despite the
sustained growth in customer numbers,
SSE secured during 2006/07 another
significant reduction, of 47%, in the number
of customer complaints received by
energywatch for resolution. In its statement
in April 2007, energywatch said that it had
received 840 complaints about SSE, which
was the best-performing company, over
the year. This compares with 2,509 for
the second best-performing company and
37,100 for the poorest-performing company,
British Gas. The number of complaints
about SSE sent to energywatch has fallen
by almost 60% in the last two years, during
which time the number of customers has
grown by 27%.
Product Marketing
Energy supply remains intensely competitive
and, in addition to responsible pricing,
the key to long-term growth will be greater
success in gaining and retaining customers’
loyalty. The performance improvement
programme is designed to achieve that,
as is product development and marketing.
In line with that, SSE has a suite of
energyplus ‘loyalty’ products, ranging
from energyplus Argos, which rewards
customers with money-off discount
vouchers, to energyplus Pulse, which
supports the British Heart Foundation.
Of SSE’s 7.75 million energy supply
customers, around 1.34 million now
have ‘loyalty’ products – an increase
of around 60% during the period.
As part of a six-figure, three-year
sponsorship package agreed in January
2007, SSE (under the brand name Scottish
Hydro Electric) and Scottish Rugby have
agreed to collaborate on the provision and
marketing of a new electricity and gas tariff,
energyplus Rugby, which is scheduled for
launch later in 2007.
The Energy White Paper said ‘the starting
point for our energy policy is to save energy’.
It said the government would ‘empower
consumers to make more informed energy
choices’ and it also referred to trials of
smart meters and real-time displays
which enable people to track their energy
use, and in which SSE has been selected
to participate.
Against this background, SSE will, later this
year, launch a unique energy programme,
which will enable and encourage customers
to commit to using less energy – and reward
them for doing so with vouchers enabling
them to get money off their energy bills,
A-rated electrical and gas appliances
and energy efficiency measures.
This progress in product development and
marketing, allied to its policy of responsible,
value-based pricing and commitment to
improving further its customer service,
means that SSE’s Energy Supply business
should be able to continue the period of
growth which began at the start of 2002.
Energy Services
The UK energy market is still focused on
the delivery of units of energy, but a market
is beginning to emerge for the supply of
energy services – warmth, light and power.
SSE’s goal is to deliver products and
services ‘beyond the meter’ which help
it to gain, retain and develop long-term
relationships with customers.
In line with this, in June 2006, SSE began
the phased introduction of a new domestic
boiler installation and maintenance and
repair service for gas central heating
systems. The product features an annual
inspection, full breakdown and emergency
cover and a 24-hour, 365-day manned
customer helpline. It covers customers’
entire gas central heating system, including
the boiler, pipe work, radiators, cylinders
and tanks. Establishing the new business
was a priority for 2006/07, and its launch
has gone well. While its first-year losses
were around £4m, the service had already
attracted over 20,000 customers by the end
of March 2007. This growth should continue
and accelerate as the number of postcode
areas covered by the service has now
increased from 13 to 24, with a further
18 postcode areas due to be added in
2007/08. The business is, therefore, on
course to become profitable in 2009.
SSE is on course to be appointed as the
partner for the energy services requirements
for the first phase of a major development
by a leading UK developer. Under what will
be an ESCO (energy services company)
Agreement, SSE will be responsible for
installing an energy centre, including a
Combined Heat and Power (CHP) plant
for the development, which will serve over
450 apartments, a nursery unit, primary
care trust and commercial units. The
installation of CHP is in line with a planning
consent requirement for the development
to reduce carbon dioxide emissions and the
SSE design will achieve a 24% reduction,
helping the development to achieve the Eco
Homes ‘very good’ rating. The agreement,
when signed, will be a significant milestone
in the development of SSE’s energy services
business and other similar contracts are
expected to follow.
Energy Supply Priorities in 2007/08
During 2007/08, SSE will seek to capitalise
further on its strong regional brands, best-
in-sector customer service, responsible
pricing policy and range of value-adding
offers to increase further its number of
energy supply customers. Central to this
will be the development and deployment of
further improvements to the level of service
Did you know?
We gained over
20
thousand customers for
our new gas boiler business
SSE began the phased
introduction of a new
domestic boiler installation and
maintenance and repair service
for gas central heating systems.
It had already attracted over
20,000 customers by March
2007 and this should grow
further, with the service being
extended to an additional 18
postcode areas during 2007/08.
Did you know?
We have
55
regional offices in our
Contracting business
SSE’s Contracting business,
Southern Electric Contracting,
is one of the largest mechanical
and electrical contracting
businesses in the UK, with over
3,500 employees operating from
55 regional offices throughout
Great Britain. It also trades as
SWALEC Contracting, Scottish
Hydro Contracting and Eastern
Contracting.
Scottish and Southern Energy
Annual Report 2007
offered to customers, leading to higher
standards and fewer complaints, and the
successful launch of new products. The
expansion of SSE’s services ‘beyond the
meter’ will focus principally on the further
development of the gas boiler installation
and maintenance and repair service and
on securing additional ESCO Agreements.
CONTRACTING, CONNECTIONS AND
METERING
k Operating profit* up 9.8% to £51.6m,
excluding Thermal Transfer which
was sold on 31 March 2006
k Leeds City Council street lighting
PFI launched
k Continued expansion of out-of-area
electricity networks, with 38 now in
operation or under construction
k New water business on track for launch
k In-sourcing of Metering work in three
areas of the UK
Introduction to Contracting, Connections
and Metering
SSE’s Contracting business, Southern
Electric Contracting (SEC), has three main
areas of activity: industrial, commercial
and domestic mechanical and electrical
contracting; electrical and instrumentation
engineering; and public and highway
lighting. It is one of the largest mechanical
and electrical contracting businesses
in the UK, operates from 55 regional
offices throughout Great Britain and also
trades as SWALEC Contracting in Wales,
Scottish Hydro Contracting in Scotland
and Eastern Contracting in the east
of England.
SSE’s national Connections business provides
all utility infrastructures and connections
for new developments. It designs, finances,
builds, owns and operates gas, electricity
and telecommunications networks
throughout the country.
SSE’s Metering business provides services
to most electricity suppliers with customers
in central southern England and the north
of Scotland. It supplies, installs and
maintains domestic meters and carries
out metering work in the commercial,
25
industrial and generation sector. It also offers
data collection services to the domestic and
SME sectors.
Contracting, Connections and Metering
Overview
Contracting, Connections and Metering
delivered operating profit* of £51.6m during
2006/07, compared with £47.0m in the
previous year (excluding the £3.4m
operating profit from Thermal Transfer,
the specialist contracting business sold
by SSE on 31 March 2006).
Contracting
SEC made significant progress against its
key priorities for the year of broadening
further its geographic presence and
ensuring there continues to be good
performance in the long-term contracts
which are central to its ongoing business
development.
k In line with the priorities for 2006/07,
the integration of Harrison Smith has
been completed and is already allowing
SEC to offer its customers in the north
of England a more comprehensive range
of mechanical and electrical services.
k SEC’s Eastern Contracting division,
acquired in 2005, won the second phase
of an infrastructure contract at the
Colchester Barracks re-development,
one of the UK’s largest PFI projects to
date, following the successful completion
of phase one of Eastern Contracting’s
work.
k SEC also has contracts worth over £700m
to replace and maintain street lights for
four local authorities in England under
the Private Finance Initiative (PFI), in
partnership with the asset finance
division of The Royal Bank of Scotland.
This includes the largest-ever street
lighting PFI in the UK, with Leeds City
Council, the successful launch of which
was a priority for 2006/07. It will see
the majority of the 110,000 street lights,
illuminated signs and bollards in the
city replaced. The first 8,500 lighting
points have already been installed.
During 2006/07 SEC’s order book exceeded
£90m for the first time. The order book has
been supported by significant contract wins
with a number of leading organisations
such as Marks and Spencer, Texaco and
IBM. This business now employs 3,500
people and, to support future growth,
recruited 92 apprentice electricians
during the year and expects to recruit
a further 200 apprentices during 2007.
Connections
Continued expansion of its Connections
business was among SSE’s priorities for
2006/07, and during the year it completed
44,600 electrical connections, 1,700 more
than in the previous year. In addition,
it has continued to develop its portfolio of
electricity networks outside the Southern
Electric and Scottish Hydro Electric Power
Distribution areas. It now owns and operates
24 electricity networks outside these
two areas and 14 additional networks are
under construction, including: St David’s
Centre, Cardiff; Manor Royal, Crawley; and
Quartermile, Edinburgh. As with its domestic
gas boiler service, this is a relatively new
business for SSE, which is on course to
become profitable during 2007/08.
SSE’s Connections business is also a
licensed gas transporter, owning and
operating gas mains and services in many
parts of the country. The number of new
premises connected to its gas networks
has continued to grow, and during the year,
it connected a further 9,200 premises, 1,300
more than in the previous year, taking the
total number of connections to over 44,000.
With interests in electricity, gas and
telecoms connections, SSE completed
a review of the extent of its ability to
offer ‘multi-utility’ services to larger
customers. This ability is presently limited
to a contracting role in providing water
connections services. Subject to a short
public consultation, SSE has, therefore,
sought and secured from Ofwat a so-called
‘inset’ licence which will allow it to install,
own, operate and supply water and
sewerage services for end-user customers
for the first time.
Did you know?
We have
38
‘out-of-area’ electricity
networks
SSE now owns and operates
24 electricity networks outside
the Southern Electric and
Scottish Hydro Electric Power
Distribution areas and a
further 14 networks are
under construction, including
St David’s Centre, Cardiff;
Manor Royal, Crawley; and
Quartermile, Edinburgh.
Did you know?
We own and operate
325
million cubic metres
of gas storage
SSE owns and operates the
UK’s largest onshore gas
storage facility at Hornsea
in East Yorkshire, which has
a total storage capacity of
around 325 million cubic
metres. It operates as
a tool for meeting peak
demand for gas.
Scottish and Southern Energy
Annual Report 2007
Chief Executive’s Statement continued
26
CONCRETE
SOLUTIONS
Excellence
We continue to get better, smarter and more innovative
because we want to be the best in everything we do.
That’s why our Fiddler’s Ferry power station will be the
first plant in the UK to convert the ash arising from
power generation into cement substitute products
and industrial minerals. Recycling in this way makes
ash a useful product and helps reduce carbon dioxide
emissions from cement production.
Scottish and Southern Energy
Annual Report 2007
27
The first installation would be at a Charles
Church Southern development near Salisbury.
Ofwat said this will create the first new
water and sewerage company to serve
domestic customers since privatisation
in England and Wales 18 years ago.
Metering
In total, SSE owns 3.7 million meters and
changes around 250,000 meters each year
as they reach the end of their useful life
or to meet customer requests for changed
functionality. During 2006/07, it collected
around 4.3 million electricity readings and
1.4 million gas readings.
SSE’s Metering activities have expanded
following the in-sourcing of meter reading
operations in South West England and South
Wales electricity distribution areas in April
2007, and will expand further in July 2007
with the in-sourcing of the meter operator
work for the South Wales distribution area.
This is resulting in the transfer of over 150
employees from Western Power Distribution
to SSE and is intended to result in both
efficiency savings and high standards of
service for SSE’s customers in these areas.
Later this year, SSE will also in-source
meter reading operations and then meter
operator work in central and southern
Scotland, resulting in around 50 posts
becoming part of SSE.
Contracting, Connections and Metering
Priorities in 2007/08
The first priority for SEC in 2007/08 is to
ensure that it delivers a high standard of
service to all customers in all of the sectors
in which it operates, given such a major
proportion of its business is ‘repeat’. It will
also seek to secure further increases in its
order book. To position itself for long-term
growth, it expects to recruit 200 apprentices.
The Connections business’ focus will be on
the successful delivery of a growing number
of utility connections and on continuing to
expand its range of electricity networks
outside the Southern Electric and Scottish
Hydro Electric Power Distribution areas,
reinforcing its position as a leading provider
of utility infrastructure solutions to the UK
land development sector. Subject to the
outcome of the Ofwat consultation on its
‘inset’ appointment, SSE will seek to make
a successful start in water connections.
For Metering, the key priority is the
successful completion of the ‘in-sourcing’
of work in the three additional distribution
areas, which will be a significant milestone
in SSE’s long-term objective of building
a national metering business. It is also
important that SSE’s participation in the
DTI/DEFRA/Ofgem-sponsored Energy
Demand Research Project, with its focus on
‘smart’ metering technologies, is successful.
GAS STORAGE
k Operating profit* up 104.8% to £55.9m
k Commissioning of first new storage
capacity at Aldbrough set to start in
the autumn of 2007
k Planning permission secured to double
the size of Aldbrough development to
over 800mcm
Introduction to Gas Storage
SSE owns and operates the UK’s largest
onshore gas storage facility at Hornsea in
East Yorkshire. Nine salt caverns have been
leached into a salt layer 1.8 kilometres
below the surface, creating 325 million cubic
metres (mcm) of gas storage capacity. Gas
can be injected at a rate of 2mcm per day
and withdrawn at a rate of 18mcm per day,
which is equivalent to the requirements of
around four million homes. The services
offered at Hornsea provide customers with
a reliable source of flexibility with which to
manage their gas supply/demand balance
and exploit market opportunities. Capacity
is sold in Standard Bundled Units (SBUs),
of which Hornsea has 195 million available
in total, and each SBU provides capacity to
inject gas into the facility, store gas there
and withdraw gas from it.
Gas Storage – Operations
Gas Storage delivered an operating profit*
of £55.9m, an increase of 104.8% compared
with the previous year. The value of, and
demand for, gas storage facilities in the UK
continued to be high. This was demonstrated
in July 2006, when SSE completed the
auction of around 23% of the capacity
(43.9 million SBUs) at Hornsea for a five-year
term commencing in May 2007. The average
price achieved per SBU was 41.7 pence per
annum over each of the five years.
In March 2006, SSE auctioned 54 million
SBUs for the one-year term which
commenced in May 2006. The average price
achieved per SBU then was 54.2 pence
per annum. After this auction took place,
a number of significant infrastructure
projects designed to address the UK’s
increasing dependence on imports of gas
were completed, which means that 2006/07
is likely to prove to be a high point for
securing value from gas storage units.
In March 2007, SSE completed its storage
auction of around 63% of the capacity
(121.7 million SBUs) at Hornsea for a
one-year term which commenced on
1 May. The average price achieved per
SBU was 30.1 pence per annum.
One of SSE’s priorities for 2006/07 was to
ensure that Hornsea maintained its excellent
record of reliability, and during the year it
was 100% available to customers, except
in instances of planned maintenance.
This enabled customers to manage their
gas market risks and exploit gas trading
opportunities.
Gas Storage – Investment
In line with SSE’s priorities for the year,
the joint venture with Statoil (UK) Ltd to
develop at Aldbrough what will become
the UK’s largest onshore gas storage
facility is continuing to make good progress.
Commissioning of the first three of the nine
storage caverns is expected to get under
way in 2007. SSE is investing around £150m
in Aldbrough, out of a total of around £225m
for the development. With a total new
capacity of around 420mcm, of which SSE
will have ownership interest in 280mcm,
Aldbrough will provide valuable gas storage
for the UK energy industry. Its flexibility is
demonstrated by the fact that it will enable
gas to be injected at a rate of up to 30mcm
per day and withdrawn at a rate of 40mcm.
SSE and Statoil (UK) Ltd have secured
consent from East Riding of Yorkshire
Council to increase the storage capacity
Did you know?
We are developing
420
million cubic metres of new
gas storage
SSE, in partnership with Statoil
UK, is already developing at
Aldbrough what will become
the UK’s largest onshore gas
storage facility. It will have a
total new capacity of around
420 million cubic metres (mcm),
of which SSE will have the
ownership interest in 280mcm.
SSE’s investment is £150m.
Did you know?
We delivered
13.9
million pounds operating
profit from telecoms
SSE’s combined telecoms
business (SSE Telecom and
Neos) achieved an operating
profit of £13.9m during 2006/07,
compared with £13.2m in the
previous year. The improvement
was mainly the result of higher
sales achieved by Neos.
Scottish and Southern Energy
Annual Report 2007
Chief Executive’s Statement continued
28
at the Aldbrough site beyond that currently
under development (subject to reaching
agreement under Section 106 of the Town
and Country Planning Act). They are now
able to develop a further nine gas storage
caverns, taking the total to 18. If developed
in full, this would approximately double
the amount of gas that can be stored,
to over 800mcm. After the completion of
the extension to its maximum capacity,
the Aldbrough facility would be able to
provide enough gas in a day to supply
around 13 million homes.
The extension is designed to be largely
under ground, and the intention is to use
above ground facilities already on site,
although some additional development
would be required. Construction of the
extension would help to ensure that the
UK can meet gas demand during periods
of high energy usage. It is expected that
it would cost less than the current
development. SSE would contribute 50%
of the cost of the extension in return
for ownership of 50% of the capacity.
On completion of the extension, SSE would
have effective ownership of over 800mcm
of gas storage capacity, including Hornsea.
Gas Storage Priorities in 2007/08
SSE’s priorities in Gas Storage during
2007/08 are to: maintain its excellent
record of reliability at Hornsea; ensure that
the first of the new caverns at Aldbrough are
commissioned; and make material progress
with the preparation and planning for the
extension of the Aldbrough development.
TELECOMS
k Operating profit* up 5.3% to £13.9m
k £5m investment to upgrade ethernet
platform
Introduction to Telecoms
SSE Telecom currently provides radio sites
for local authorities, mobile operators and
emergency services throughout central
southern England and the north of Scotland,
enabling customers to improve their coverage
and capacity. Its subsidiary, Neos, operates
a 7,500km UK-wide telecoms network,
including 1,100km of underground and
overhead fibre optic cable installed on SSE’s
electricity network, providing services to
other telecoms providers, companies and
public sector organisations.
Telecoms Operations
SSE’s combined Telecoms business
(SSE Telecom and Neos) achieved an
operating profit* of £13.9m during 2006/07,
compared with £13.2m in the previous year,
an increase of 5.3%. The business offers
customers a national telecoms network, and
has a UK-wide sales force and a competitive
range of products targeted at commercial
and public sector customers. As a subsidiary
of SSE, it is also able to position itself as one
of the UK’s most financially secure telecoms
network operators, which gives an important
competitive advantage.
The improvement in performance during
2006/07 was mainly the result of higher
sales achieved by Neos, one of the telecoms
priorities during the year, and important
contracts were signed with a diverse range
of major organisations, such as Opal
Telecom (part of the Carphone Warehouse)
and AT&T and new customers such as
Schlumberger Limited, one of the world’s
leading oilfield services corporations.
Telecoms Investment
Neos has decided to upgrade its ethernet
platform (a frame-based technology
connecting computer systems to form
a network), with an investment of over
£5m to be made over five years. This will
support future new business growth.
Telecoms Priorities in 2007/08
SSE’s priority in Telecoms in 2007/08 is
to continue to grow its sales, using its
already-established nationwide network,
with its competitive range of products
targeted at commercial and public sector
customers. It will also seek to complete
the process of re-focusing its telecoms
business on network-related services,
including possible fibre optic extensions
as opposed to site-related services.
EXCEPTIONAL ITEM
k Distribution payments totalling
£33.0m received (plus £0.9m in
respect of Barking Power Ltd)
k On course for recovery of around
98% of agreed claim
TXU Europe Group plc
In July 2006, SSE received a fourth
distribution payment of £24.5m from the
administrators of TXU Europe Group plc
in respect of its agreed claim of £294.2m
relating to a 14-year contract originally
entered into in 1997. This was followed
by a fifth distribution payment of £8.5m,
taking the total direct receipt from the
administration process (excluding Barking
Power) to £33.0m in 2006/07 and to £284.2m
overall. Following the fifth distribution,
SSE has received 96.6% of its agreed claim.
In addition, SSE received in July 2006 a
share (£0.9m) of the distribution payment
to Barking Power Ltd, in which SSE now
has a total stake of 30.4%.
When it received its first distribution in
March 2005, SSE said it expected that over
75% of its agreed claim would be settled.
It expects to receive further, smaller
distributions over the next few years,
which would result in around 98% of
its agreed claim being settled.
INVESTMENT AND CAPITAL EXPENDITURE
Investment and capital expenditure is a key
means by which SSE seeks to enhance and
create value and it totalled £663.4m during
2006/07, including £32.5m in respect of
Marchwood Power Ltd, compared with
£502.1m in the previous year.
Capital expenditure in Power Systems was
£204.5m, compared with £172.1m in the
previous year. The increase is in line with
the Distribution Price Control Review for
2005-10. A major part of the investment
programme is focused on the reinforcement
and replacement of parts of the electricity
network that date as far back as the 1960s.
Did you know?
We delivered
663
million pounds of investment
and capital expenditure
SSE delivered £663.4m of
investment and capital
expenditure during 2006/07,
compared with £502.1m in
the previous year. Its capital
expenditure will continue to be
substantial during the rest of
this decade, with investment
in Generation, Gas Storage
and Electricity Networks.
Did you know?
We plan to invest over
2.0
billion pounds over the next
three years
Over the three years to March
2010, SSE’s capital expenditure
and investment is estimated to
be over £2bn, compared with
£1.5bn in the three years to
March 2007. All investments
are expected to achieve returns
which are greater than the cost
of capital and are expected to
enhance earnings.
Scottish and Southern Energy
Annual Report 2007
29
Teamwork
We support and value our colleagues and enjoy
working together as a team in an open and
honest way. That’s why over 1,000 SSE people
were mobilised from all parts of the country,
to become involved and help restore supplies
to our 200,000 customers who lost their power
in the January 2007 storm in central southern
England. It was yet another team effort by SSE.
Scottish and Southern Energy
Annual Report 2007
Chief Executive’s Statement continued
30
In addition, there was investment of £220.9m
for growth in Generation during the year,
with the progress of the Marchwood
development, construction work being
carried out at Glendoe and the installation
of FGD equipment and other work such as
the installation of re-designed high-pressure
turbines and static blades at Fiddler’s Ferry
and Ferrybridge.
As well as Power Systems and Generation,
£41m was invested in the ongoing
development of the new gas storage
facility at Aldbrough.
Of its expected total investment of around
£150m, SSE has so far invested £123m
at Aldbrough. Within the total, capital
expenditure for growth, including
Marchwood, was £394m during 2006/07.
This mainly comprised electricity generation
and gas storage.
Capital expenditure will continue to be
substantial during the rest of this decade,
with investment of around £850m expected
in 2007/08. This will focus on Generation,
including FGD installation and Marchwood,
Electricity Networks and Gas Storage.
In total, over the next three years to
March 2010, SSE’s capital expenditure
and investment is currently estimated to
be over £2bn, compared with £1.5bn in the
three years to March 2007. All investments
are expected to achieve returns which are
greater than the cost of capital and are
expected to enhance earnings.
FINANCIAL MANAGEMENT
Treasury Policy
SSE’s operations are financed by a
combination of retained profits, bank
borrowings, long-term debt issuance and
commercial paper. As a matter of policy,
a minimum of 50% of SSE’s debt is subject
to fixed rates of interest. Within this policy
framework, SSE borrows as required at
both fixed and floating rates, with interest
rate swaps and forward rate agreements
being used to achieve the desired profile.
All borrowings in foreign currencies are
swapped back into Sterling.
At 31 March 2007, 82.6% of SSE’s
borrowings were at fixed rates, after
taking account of interest rate swaps.
SSE’s liquidity policy is to ensure that it has
committed borrowings and facilities equal
to at least 105% of forecast borrowings over
a rolling 12 month period and on 31 March
2007 it held undrawn borrowings and
facilities of £650m.
As the United Kingdom is SSE’s main
area of operation, foreign currency risk
is limited mainly to procurement contracts,
fuel purchases and commodity hedging
transactions. Its policy is to hedge all
material foreign exchange exposures
through the use of forward currency
purchases and/or derivative instruments.
Indirect exposures created by SSE’s gas
purchasing are similarly hedged on an
ongoing basis.
Net Debt and Cash Flow
As at 31 March 2007, SSE’s net debt
was £2.233bn, compared with £2.166bn
at 31 March 2006, an increase of £66.5m.
Underlying cash generated from operations
increased significantly compared with
the previous year, reflecting increased
profitability.
Borrowings and Facilities
The objective for SSE is to maintain a
balance between continuity of funding
and flexibility, with debt maturities
staggered across a broad range of dates.
Its average age of debt as at 31 March 2007
was 13.8 years, compared with 12.7 years
as at 31 March 2006.
During the year, a new £100m index-linked
bond, maturing in 2056, with a coupon
of 1.429%, was issued by Scottish Hydro
Electric Power Distribution; and in March
2007, a £150m bond originally issued by
Scottish Hydro Electric Power Distribution,
with a coupon of 7.875% matured. As a
result, the average cost of SSE’s longer-
dated debt has decreased and the average
age of its debt has increased.
The maturity profile reflects the medium-to-
long term nature of SSE’s underlying assets
and means that its debt structure continues
to be strong going forward, with around
£1.8bn of borrowings in medium to long-
term funding in the form of issued bonds
and European Investment Bank borrowings.
A total of 20.4% of SSE’s borrowings will
mature in the 12 months to March 2008.
Net Finance Costs
The basis of the presentation of net finance
costs changed on adoption of IFRS and the
table below reconciles reported net finance
costs to adjusted net finance costs, which
SSE believes is a more meaningful measure.
Following review during the year, net income
associated with pension scheme assets and
liabilities is no longer excluded in arriving at
adjusted net finance costs. In line with this,
SSE’s adjusted net finance costs during
2006/07 were £151.8m, compared with
£139.6m in the previous year.
March 07 March 06
£m
£m
Reported net finance costs
48.1
89.4
add/(less)
Share of JCE
Associate interest
Convertible debt
IAS 32 adjustment
Movement on derivatives
117.9
97.3
(3.6)
(10.6)
(3.6)
(43.5)
Adjusted net finance costs
151.8
139.6
Return on pension
scheme assets
Interest on pension
scheme liabilities
130.1
115.7
(107.2)
(100.0)
Notional interest arising
on discounted provisions
(1.4)
Adjusted interest costs** 173.3
(4.3]
151.0
**Adjusted finance income and costs
for interest cover calculation
The average interest rate for SSE, excluding
JCE/Associate interest, during the year was
5.31%, compared with 5.42% in the previous
year. Underlying interest cover was 11.0
times, compared with 9.2 times the previous
year, and including interest related to SGN it
was 7.1 times (6.6 times in the previous year).
Did you know?
The average age of our debt is
13.8
years
SSE seeks to maintain a
balance between continuity
of funding and flexibility,
with debt maturities staggered
across a broad range of dates.
Its average age of debt as at
31 March 2007 was 13.8 years,
compared with 12.7 years as
at 31 March 2006.
Did you know?
The tax rate was
26.2
per cent
The effective adjusted current
tax rate, based on adjusted
profit before tax, was 26.2%,
compared with 26.5% in the
previous year, on the same
basis.
Scottish and Southern Energy
Annual Report 2007
Within the adjusted net finance costs of
£151.8m, SGN’s net finance costs were
£70.6m (compared with £54.1m in the
previous year), after netting loan stock
interest payable to SSE. Its contribution
to SSE’s profit before tax* was, therefore,
£32.5m, compared with £48.6m in
the previous year, reflecting lower
transportation volumes.
TAX
To assist the understanding of SSE’s tax
position, the adjusted current tax charge
is calculated as follows:
March 07 March 06
£m
£m
Reported tax charge
301.5
254.6
add back:
Share of JCE/
Associate tax
less:
Deferred tax
Exceptional tax
33.8
29.9
(27.3)
(25.4)
(37.7)
(15.3)
Adjusted current tax charge 282.6
231.5
The adjusted effective current tax rate,
based on adjusted profit before tax, was
26.2%, compared with 26.5% in the previous
year, on the same basis. The impact of SSE’s
higher capital expenditure programme and
the changes introduced in Budget 2007 are
likely to have a positive effect on the effective
current tax rate in the coming years. The
headline tax charge was 26.6%, compared
with 28.3% in the previous year.
BALANCE SHEET
SSE maintains one of the strongest balance
sheets in the global utility sector. This
gives it significant competitive advantages.
It enables SSE to pay interest at lower
rates than would otherwise be the case
and also enables it to respond speedily to
opportunities which emerge to invest in,
or acquire assets. It is also characteristic
of utility companies which are built to last.
scheme asset of £128.1m are recognised
in the balance sheet at 31 March 2007,
gross of deferred tax. This means that there
was a reduction of over half in net liabilities
compared with the position at March 2006,
from £193.8m to £91.9m.
During 2006/07, employer cash contributions
to the Scottish Hydro Electric scheme
amounted to £11.6m. Contributions to the
Southern Electric scheme, including deficit
repair contributions of £34.3m, amounted
to £50.3m. As part of the Distribution Price
Control for 2005-10, it was agreed that
allowances for 76% of deficit repair
contributions should be recoverable
via price controlled revenue.
At 31 March 2007, there was a net asset
arising from IAS 39 of £45.0m, before tax,
compared with a net asset of £46.5m,
before tax, at 1 April 2006.
PURCHASE OF OWN SHARES
The Directors of SSE did not exercise
their authority to purchase, in the market,
the company’s own shares during 2006/07.
They are, however, seeking at the Annual
General Meeting on 26 July 2007 renewal
of their authority to purchase, in the market,
the company’s own shares should conditions
be appropriate.
CORPORATE RESPONSIBILITY
Risk Management
SSE is mindful of the risk factors that may
affect it and they were again reviewed by the
Board in March 2007. Broadly, the principal
risk factors fall into four categories:
the operation of assets, equipment and
processes; financial risks, such as interest
rate and commodity exposure; the impact
of public policy or regulatory developments
in the areas of energy and the environment;
and the impact of the weather on SSE’s
interests in the generation of electricity
from renewable sources, in energy supply
and in energy distribution.
In line with the IAS 19 treatment of pension
scheme assets, liabilities and costs, pension
scheme liabilities of £220.0m and a pension
At a corporate level, SSE seeks to address
these risks by: maintaining the strongest
possible focus on the consistent delivery
31
of excellence across all aspects of its
operations; adhering to the series of
well-defined and established financial
principles set out under ‘Financial Overview’;
and operating and investing in a balanced
range of regulated and non-regulated
energy-related businesses, thereby limiting
both the extent of any single risk and the
value associated with it.
At an operational level, comprehensive
procedures for internal control and risk
management are in place throughout SSE.
These procedures are actively maintained
and regularly reviewed through an audit
programme which addresses the full
spectrum of SSE’s potential risks. This is
complemented by an ongoing programme
of business improvement initiatives designed
to secure continuous progress in processes
and procedures and further improve the
overall management and performance
of SSE.
Safety and the Environment
SSE aims to create value for shareholders
by running the business with a strong
emphasis on safety and on sustainability –
achieving growth while safeguarding the
environment. During 2006/07, the number
of lost time and reportable accidents within
the company was 11, compared with 17 in
both 2005/06 and 2004/05. This means there
were 0.05 reportable and lost time injuries
per 100,000 hours worked in SSE during
2006/07 compared with 0.17 five years ago,
in 2001/02.
The number of serious, or potentially
serious, road traffic accidents involving
employees driving company vehicles was 19,
compared with 17 in 2005/06, 24 in 2004/05
and 50 in 2003/04, the first year for which
data is available. They included a fatal injury
to a trainee linesman in a tragic accident
in Hampshire in February 2007 and SSE’s
condolences continue to be extended to
his family and friends.
SSE’s target for any given year is zero
reportable environmental incidents. There
were no such incidents during 2006/07.
Did you know?
Our net pension liabilities were
91.9
million pounds
During 2006/07, there was
a significant improvement
in SSE’s net pension scheme
liabilities, which fell by more
than half, from £193.8m
to £91.9m.
Did you know?
We had
0.05
reportable and lost-time
injuries per 100,000 hours
worked
During 2006/07, the number
of lost time and reportable
accidents within SSE was 11,
compared with 17 in both
2005/06 and 2004/05. This
means there were 0.05 such
accidents per 100,000 hours
worked, compared with
0.08 in the previous year.
Scottish and Southern Energy
Annual Report 2007
Chief Executive’s Statement continued
32
Corporate Responsibility Index and
Business in the Environment Index
Business in the Community’s Corporate
Responsibility Index provides an authoritative
benchmark for companies to evaluate their
management practice in four key areas
of corporate responsibility (community,
environment, marketplace and workplace)
and performance in a range of environmental
and social impact areas material to their
business.
The results of the Index for 2006, in
which 128 companies participated, were
published in May 2007. SSE’s score was
98.5%, compared with 97.5% in the previous
year, putting the company in the highest
possible performance band of ‘Platinum’.
Within the main Index is the Business in the
Environment Index. SSE’s score was 99.58%,
compared with 99.20% in the previous year.
Teamwork
The progress made by SSE is due to
the professionalism, commitment and
teamwork of its employees. For that reason,
and reflecting the performance delivered
in 2006/07, every person who was employed
by SSE on 31 March 2007, and who is still
in employment will receive a special award
comprising: an offer, free of charge, of 20
shares in the company; a cash award of
£150; a £50 ‘virtual voucher’ to spend
online with WWF-UK, the world’s largest
independent conservation organisation;
and an additional day’s holiday.
STRATEGY AND OUTLOOK
SSE’s core purpose is to provide the energy
people need in a reliable and sustainable
way. In line with this, its strategy has been
and will continue to be the delivery of
sustained real growth in the dividend
payable to shareholders through the
efficient operation of, and investment in,
a balanced range of regulated and non-
regulated energy-related businesses.
Implementation of the strategy is founded
on a series of well-established financial
principles.
This strategy and these principles have
been shown to be robust in a wide variety of
financial and operational conditions and SSE
will continue to adhere to them in the future.
SSE’s financial and operational
performance during 2006/07 was strong,
and the foundations have been laid for this
to continue well into the future. That future
will be shaped to a significant degree by
the ongoing developments in energy and
environment policy taking place within
the UK and at EU level. These policy
developments are geared to addressing
what the UK government has described
as ‘immense challenges... energy security
and climate change’.
This means there will have to be significant
reductions in emissions of carbon dioxide,
while maintaining reliable and affordable
supplies of energy in a carbon-constrained
world. In other words, there will have to be
a substantial fall in the amount of carbon
dioxide emitted per kWh of electricity
produced, while securing sustained increases
in the efficiency with which energy is used.
of SSE’s businesses. It is this operational
focus which has enabled SSE to gain over
three million customers in the past five
years, including one million customers
during 2006/07, and which is expected
to lead to further growth in customer
numbers and expansion in Energy
Services, Contracting and Connections.
As it did between 2002 and 2005, SSE may
also seek to create value for shareholders
through the acquisition of assets, but only
if such acquisitions are compatible with its
financial principles.
All of this illustrates the fact that there
are significant growth opportunities in UK
energy networks, supply and services. While
SSE is clearly the broadest-based UK energy
company, it is not yet the largest participant
in any part of it, except in the generation
of electricity from renewable sources. Its
carefully-maintained financial strength
and its focus on operational excellence
mean SSE is well-positioned to expand
its presence in those activities where it
is already a significant player.
This is presenting SSE with major investment
opportunities in electricity generation from
coal, gas and renewable sources. SSE’s
long-term objective of providing a wider
variety of energy-related services is also
fully in line with the direction of public
policy in the UK.
The recommended full-year dividend for
2006/07, of 55 pence per share, is double the
dividend paid to shareholders for 1999/2000.
With its first responsibility to shareholders
being to deliver sustained real growth in the
dividend, SSE’s next long-term objective
must be to double it again.
The need for secure supplies of energy,
including the primary fuel with which to
generate power, and robust means of
distributing it, is also paramount, and sets
the context for SSE’s plans for significant
investment in new gas storage capacity in
the UK and in its electricity networks.
As a result of all of this, SSE’s asset base
in each of its key areas of activity will again
expand significantly in the coming years.
This value created through investment will
be complemented by value enhancement
through the strongest possible focus on
operational excellence across all aspects
Did you know?
We achieved
98.5
per cent in the Corporate
Responsibility Index
SSE’s score in the Business in
the Community Corporate
Responsibility Index was 98.5%.
This gave it the highest possible
performance band of ‘Platinum’
in the Index, which evaluates
management practice in four
key areas of corporate
responsibility – community,
environment, marketplace
and workplace.
Did you know?
We recommend a dividend of
55
pence per share
The recommended full-year
dividend for 2006/07, of 55 pence
per share, is double the dividend
paid to shareholders for
1999/2000. With its first
responsibility to shareholders
being to deliver sustained real
growth in the dividend, SSE’s
next long-term objective must
be to double it again.
Scottish and Southern Energy
Annual Report 2007
33
CORPORATE RESPONSIBILITY KEY INDICATORS
ENVIRONMENT
Water consumption in principal offices per
employee – cubic metres
81
SAFETY
Non-power station CO2 emissions – tonnes
75
Lost time and reportable accidents
69
2007
2006
2005
-1.9%
16,687
17,019
17,434
2007
2006
2005
-2.6%
24.98
25.65
25.23
Energy consumption in operational buildings –
GWh
82
2007
2006
2005
11
-35.3%
17
17
Breaches of IPC/IPPC
Lost time and reportable accidents – per 100,000
hours worked
70
76
2007
2006
2005
-1.9%
34.16
34.81
34.38
2007
2
2006
2005
-66.7%
6
7
Energy consumption in principal offices – GWh
83
0.05
2007
2006
2005
0.08
0.09
-37.5%
Oil leaked – litres
77
2007
2006
2005
+9.7%
31.05
28.31
29.15
2007
2006
2005
31,761
27,941
+13.7%
38,105
Waste produced – offices and depots tonnes
78
2007
2006
2005
-11.7%
25,052
28,380
28,776
Waste sent to landfill – offices and depots tonnes
79
2007
2006
2005
7,787
10,217
11,281
-23.8%
Water consumption in principal offices –
cubic metres
80
2007
2006
2005
118,611
108,564
+9.3%
88,652
Energy consumption in principal offices –
kWh per employee
84
2007
2006
2005
10.4
10.9
12.5
-4.6%
Distance travelled on SSE business – million
kilometres
85
2007
2006
2005
198.51
194.49
+2.1%
167.43
Distance travelled on SSE business – kilometres
per employee
86
2007
2006
2005
-2.8%
15,416
15,855
15,174
Serious or potentially serious road traffic
accidents
71
2007
2006
2005
19
17
+11.8%
24
Serious or potentially serious road traffic accidents
– number per 1,000 employees
72
2007
2006
2005
1.41
1.28
+10.2%
2.17
Scotia Gas Networks lost time accidents
73
2007
2006
2005
21
20
+5.0%
30
Injury-free business units
74
2007
2006
2005
66
+32.0%
50
51
Scottish and Southern Energy
Annual Report 2007
Chief Executive’s Statement continued
34
Business flights
87
Operational vehicles – million kilometres
93
Energy efficient appliances subsidised –
thousands
99
2007
2006
2005
+15.2%
9,311
8,079
7,602
2007
2006
2005
156.9
153.8
+2.0%
2007
2006
23.4
24.8
-5.6%
126.5
2005 5.5
Flights per 1,000 employees
88
Company cars – million kilometres
94
Calls to Energy Efficiency Advice Line –
thousands
100
2007
2006
2005
693
659
689
+5.2%
2007
2006
2005
31.5
33.2
34.2
-5.1%
2007
2006
2005 18.1
54.2
55.8
-2.9%
Business rail journeys
89
Travel saved by use of video conferencing
facilities – million kilometres (estimated)
95
Customers registered with Priority Service
Register – thousands
101
2007
2006
2005 550
1,511
2,545
+68.4%
2007
2006
2005
-12.9%
1.15
1.32
1.47
2007
2006
2005
219.9
172.6
297.8
+35.4%
Rail journeys per 1,000 employees
90
MARKETPLACE
Customers with ‘tailor made’ payment plans –
thousands
102
2007
2006
2005
50
123
189
+53.7%
Business flights – million kilometres
91
EEC energy savings – GWh
96
2007
2006
7,125
+45.7%
4,891
3 yr av. 2005 3,109
2007
2006
2005
158.3
229.0
235.6
-2.8%
Customers on loyalty plans – millions
103
2007
2006
2005
6.97
6.59
9.22
+32.3%
Homes insulated – thousands
97
2007
2006
2005 0.27
0.84
1.34
+59.5%
Business rail journeys – million kilometres
92
2007
2006
2005 0.19
0.56
0.86
+53.6%
2007
2006
2005
120
229
+14.5%
200
Low energy lamps subsidised – thousands
98
2007
2006
2005
239
560
+36.6%
410
New goods and services providers appointed
104
1,112
1,085
2007
2006
2005
2,155
+2.5%
Scottish and Southern Energy
Annual Report 2007
35
WORKPLACE
Employees – other whole time equivalent
110
Employees in Share Incentive Plan – %
116
Employees – SSE Group headcount
105
2007
2006
2005
5,985
6,017
5,582
-0.5%
2007
2006
2005
44
48
-8.3%
36
2007
2006
2005
13,427
12,287
+9.3%
11,034
Employees – SSE Group monthly average
106
2007
2006
2005
12,472
11,755
+5.7%
10,642
Employees – SSE Group whole time equivalent
107
2007
2006
2005
12,876
12,266
+5.0%
11,034
Employees – Generation and Supply
whole time equivalent
108
2007
2006
2005
5,053
4,450
+13.6%
3,698
Employees – Power Systems whole time
equivalent
109
Average age of employees – years
111
COMMUNITY
2007
2006
2005
+2.6%
40
39
39
Absence from work per employee – days
112
2007
2006
2005
-5.6%
6.01
6.37
5.92
Annual turnover of employees – %
113
2007
2006
2005
+3.8%
13.8
13.3
13.0
All employees – male/female – %
114
2007
2006
2005
75/25
76/24
n/a
n/a
Employees in receipt of Into Action Grants
117
2007
2006
2005
-8.2%
278
303
259
Employees participating in Quids In
118
2007
2006
2005
+5.7%
943
892
n/a
Community Benefit paid – £000s
119
2007
2006
2005
292,180
349,001
n/a
-16.3%
Charitable donations – £000s
120
2007
2006
2005
+2.2%
1,838
1,799
1,754
Managers – male/female – %
2007
2006
2005
115
507
400
685
+35.1%
2007
2006
2005
89/11
n/a
n/a
n/a
Research, development and demonstration
project expenditure – £m
121
2007
2006 1.4
2005 0.6
6.3
+350%
Scottish and Southern Energy
Annual Report 2007
Directors’ Report
Principal Activities
Scottish and Southern Energy plc is a
holding company. Its subsidiaries are
organised into the main businesses of:
generation, transmission, distribution and
supply of electricity; storage, distribution
and supply of gas; electrical and utility
contracting; domestic appliance retailing
and telecoms. A review of the year’s
operations and future developments is
contained in the Chief Executive’s Statement
on pages 10 to 34 and the Corporate
Governance Report on pages 38 to 41
which form part of this report.
Business Review
The Business Review has been divided
into three areas and dealt with in the
Annual Report as follows:
k Principal risks and uncertainties –
pages 40 and 41 of the Corporate
Governance Report;
k Review of the development and
performance of the business – included
in the Chief Executive’s Statement on
pages 10 to 34; and
k Key performance indicators – on pages
6 to 9.
Directors
The Directors at the date of this report are:
Executive
Gregor Alexander
Colin Hood
Ian Marchant
Alistair Phillips-Davies
Non-Executive
Sir Robert Smith (Chairman)
Nick Baldwin
Richard Gillingwater
René Médori
David Payne
Susan Rice
Sir Kevin Smith
Nick Baldwin was appointed as a non-
Executive Director on 1 September 2006,
and Richard Gillingwater was appointed as
a non-Executive Director on 25 May 2007.
Alistair Phillips-Davies, Sir Kevin Smith and
David Payne retire by rotation at the Annual
General Meeting and, being eligible and in
accordance with the Articles of Association,
Alistair Phillips-Davies and Sir Kevin Smith
offer themselves for re-election. David Payne
will retire as a non-Executive Director on
26 July 2007 and is not seeking re-election.
Biographical details for all Directors are
set out on pages 42 and 43. Details of the
service contract for Alistair Phillips-Davies
and the letters of appointment for Nick
Baldwin, Richard Gillingwater and Sir Kevin
Smith are set out in the Remuneration
Report on pages 46 and 47 respectively.
The interests of the Directors in the ordinary
shares of the company are set out in the
Remuneration Report on page 48.
Resolution 2 to be proposed at the Annual
General Meeting seeks shareholders’
approval of the Remuneration Report.
Directors’ Indemnity
The Directors have the benefit of the
indemnity provision contained in the
company’s Articles of Association. This
provision, which is a qualifying third party
indemnity provision as defined by section
309B of the Companies Act 1985, was in force
throughout the financial year and is currently
in force. The company also purchased and
maintained throughout the financial year
directors’ and officers’ liability insurance
in respect of itself and its Directors.
36
Results and Dividends
The Group profit attributable to shareholders
for the financial year amounted to £830.5m.
The Directors recommend a final dividend
of 39.9p per ordinary share which, subject
to approval at the Annual General Meeting,
will be payable on 21 September 2007 to
shareholders on the register at close of
business on 24 August 2007. With the
interim dividend of 15.1p per ordinary
share paid on 23 March 2007, this makes
a total dividend of 55p per ordinary share.
Share Capital
Details of the company’s authorised and
issued share capital at 31 March 2007,
which includes options granted under the
Group’s employee share option schemes,
are detailed in notes 24 and 27 to the
Financial Statements.
Annual General Meeting
The 18th Annual General Meeting of the
company will be held on 26 July 2007 at
12 noon at the Perth Concert Hall, Mill Street,
Perth PH1 5HZ. The Notice of Meeting
together with full explanations of special
business is set out on pages 101 to 103.
Substantial Shareholdings
As at the date of this report the company
had received the following notifications of
beneficial interests of three per cent or
more in the company’s issued share capital:
Number
of shares
Percentage
Capital Group
International. Inc. 40,589,213
Legal & General
Group Plc
Barclays
32,183,700
29,750,083
4.71
3.73
3.45
Did you know?
We have
11
Directors on our board
SSE’s Board comprises four
Executive Directors and six non-
Executive Directors, plus the
Chairman. One of the non-
Executive Directors, David
Payne, intends to retire at the
Annual General Meeting in July
2007.
Did you know?
Our AGM is on
26
July 2007, in Perth
SSE’s Annual General Meeting
will take place at 12 noon on
Thursday 26 July 2007, in the
Perth Concert Hall. The 2008
Meeting is currently scheduled
for Thursday 24 July and will
take place in Bournemouth.
Scottish and Southern Energy
Annual Report 2007
Research and Development
During the year the company invested
£6.3m in research, development and
demonstration initiatives, which are
generally environmentally driven and which
are designed to secure changes in the way
electricity is produced, distributed and used.
Many of the principal initiatives are set out
in the Generation and Supply section of the
Chief Executive’s Statement and include,
for example, the company’s involvement
in the deep water offshore wind research,
development and demonstration project
in the Moray Firth and in the Sigma
Sustainable Energy Fund. There are
initiatives in other parts of the Group. For
example, the Power Systems business is
actively engaged in responding to Ofgem’s
Innovation Funding Incentive, which
encourages electricity network companies
to innovate in ways which deliver benefits
to customers in areas such as quality of
electricity supply, safety, the environment or
cost savings. During 2006/07, the company
agreed to become a partner in the new
Energy Technologies Institute, providing
it with up to £2.5m a year for five years.
Employees
The number of staff directly employed by
the Group at 31 March 2007 was 13,427.
Employees are encouraged to participate in
the business of the company in a variety of
ways. In support of the Board’s commitment
to providing opportunities for employees to
become shareholders, the company offers
a Share Incentive Plan and a Sharesave
Scheme which is open to all eligible
employees. Employee participation in
these schemes is around 44% and 37%
respectively.
37
The company places a strong emphasis on
employee communication and involvement.
An employee newspaper – ssenews –
is published in-house and distributed to
employees. Participation is also encouraged
through team meetings, briefings and
the intranet. During the year, the senior
management held a series of roadshows
around the Group to present and discuss
the Group’s vision, values and strategy.
Donations
Charitable donations amounted to £685,000
(2006 – £507,000). There were no payments
for political purposes.
Financing Policy and Derivatives
The Group’s policies together with details
of financial instruments and derivatives are
set out in notes 1 and 28 to the Financial
Statements.
Auditors
Resolutions to re-appoint KPMG Audit Plc
as auditors, and to authorise the Directors
to fix their remuneration, will be proposed
at the forthcoming Annual General Meeting.
Each of the Directors who held office at the
date of approval of this Directors’ Report
confirms that, so far as the Director is
aware, there is no relevant audit information
of which the company’s auditors are
unaware; and the Director has taken all
the steps that ought to have been taken
as a Director to be aware of any relevant
audit information and to establish that
the company’s auditors are aware of that
information.
By Order of the Board
Vincent Donnelly
Company Secretary
30 May 2007
The company has in place an extensive
range of policies to safeguard the interests
of employees and potential employees. In
particular, its equal opportunities policy
aims to ensure that all employees and job
applicants are no less fairly treated due to
age, sex, marital status, race, disability or
other reasons not justified in law or relevant
to performing their job. The company also
aims to ensure that employees have the
right skills to deliver the high standards
of performance that are necessary to
achieve its objectives. Detailed information
about the company’s approach to these
and related matters is set out in its
Corporate Responsibility Report 2007
(see www.scottish-southern.co.uk).
Creditor Payment Policy
The company complies with the CBI Prompt
Payment Code. The main features of the
Code are that payment terms are agreed
at the outset of a transaction and are
adhered to; that there is a clear and
consistent policy that bills are paid in
accordance with the contract; and that
there are no alterations to payment terms
without prior agreement. The numbers
of suppliers’ days represented by trade
creditors was 36 days at 31 March 2007.
Did you know?
We invested
6.3
million pounds in research,
development and demonstration
projects
Did you know?
During 2006/07, SSE invested
around £6.3m in research,
development and demonstration
initiatives. These initiatives are
generally environmentally-
driven and are designed to
secure changes in the way
electricity is produced,
distributed and used.
We employ more than
13.4
thousand people
The number of people directly
employed by SSE at the end
of March 2007 was 13,427 –
an increase of 9.3% on the
previous year. They work from
over 150 sites throughout
Great Britain.
Scottish and Southern Energy
Annual Report 2007
Corporate Governance Report
The Board of Directors is committed to the
highest standards of corporate governance
and believes that strong corporate
governance improves the performance of
the Group and enhances shareholder value.
Due regard is given to the continuing
developments in this field, including policy
guidelines which are regularly issued and
updated by organisations representing major
institutional investors. Recently there have
been some new appointments to the Board,
designed to broaden the range of skills
available to the Board. This report sets
out how the governance framework
is implemented across the Group.
The Remuneration Report on pages 44
to 49 details the remuneration policies
and practices.
Combined Code Compliance
The Board considers that this report on how
the company complies with the UK Financial
Reporting Council’s Combined Code on
Corporate Governance (the ‘Combined
Code’) provides the information necessary
to enable shareholders to evaluate how the
principles of the Combined Code have been
applied. Throughout the year, the company
has complied with all the provisions set out
in Section 1 of the Combined Code and the
Board therefore considers that the company
has satisfied its obligations under the
Combined Code.
ORGANISATION AND STRUCTURE
Board Membership
The non-Executive Chairman, Sir Robert
Smith, chairs the Board. The Board consists
of six non-Executive Directors and four
Executive Directors in addition to the
Chairman, ensuring an appropriate balance
of independence and experience. Nick
Baldwin joined the Board on 1 September
2006, and Richard Gillingwater joined the
Board on 25 May 2007. David Payne will
retire at the forthcoming AGM.
All Directors are subject to election by
shareholders at the first AGM following
appointment and thereafter to re-election
at least every 3 years.
Alistair Phillips-Davies and Sir Kevin Smith
come up for re-election at the forthcoming
AGM. Following the Board evaluation
reported on below, it is confirmed that the
performance of the Directors coming up
for re-election continues to be effective
and they have demonstrated commitment in
their respective roles. In addition, Sir Kevin
Smith as a non-Executive Director, has the
appropriate experience, knowledge, and
independence to scrutinise effectively the
performance of management. Nick Baldwin
and Richard Gillingwater, both of whom have
been appointed since the last AGM, come up
for election at the forthcoming AGM.
Biographical details for all the Directors
are shown on pages 42 and 43.
Division of Responsibilities
The roles of the Chairman and the Chief
Executive are separate and clearly defined
and have been approved by the Board. The
Chairman is responsible for the operation,
leadership and governance of the Board.
The Chief Executive is responsible for
the management of Group business and the
implementation of strategy and policy once
agreed by the Board. In discharging his
responsibilities, the Chief Executive is advised
and assisted by a number of committees
including the Executive Committee
comprising the senior management
of the Group’s main businesses.
Director Independence
All of the non-Executive Directors are
considered to be independent according
to the principles of the Combined Code.
The non-Executive Directors bring a wide
range of skills and experience to the Group,
including independent judgement on issues
of strategy, performance, financial controls
and systems of risk management.
The Senior Independent Director is the
Deputy Chairman, David Payne. He is a
member of the Audit, Nomination and
Remuneration Committees.
38
The Chairman and non-Executive Directors
met during the year without the executive
management being present. The non-
Executive Directors would consider meeting
without the Chairman if there were concerns
which the Chairman had failed to resolve or
if there were any issues concerning his
performance. The Directors are fully briefed
in advance of all Board meetings on all
matters to be discussed, including regular
business and financial reports, and they
also receive copies of analysts’ and brokers’
reports on the company.
The non-Executive Directors’ appointment
letters are available on the company’s
website. (www.scottish-southern.co.uk).
Directors’ Attendance
In addition to the AGM, the Board had nine
scheduled meetings during the year and
would meet more frequently as required. The
attendance of Directors at Board meetings
and meetings of its Committees during the
year to 31 March 2007 are set out in the
table below. There was full attendance at
all Board and relevant Committee meetings
during the year with the exception of Susan
Rice who was unable to attend the Board
meeting held in July 2006 due to unforeseen
travel problems.
Board Procedures
The Board has a schedule of matters
specifically reserved to it for decision,
which includes strategic items, Board and
Committee appointments and related
governance matters, approval of the annual
budget, Company Reports and Financial
Statements, significant contracts and
capital expenditure and certain key policies.
The Board regularly reviews this schedule.
The Board receives detailed financial and
operational information to allow it to monitor
effectively the performance of the key areas
of the business. It also receives regular
updates on the progress and performance
of investments and other major decisions
made by it, together with regular business
reports and presentations from senior
management.
Board
Audit
Committee
Nomination
Committee
Remuneration
Committee
Executive
Committee
Risk
Committee
Nick Baldwin*
Gregor Alexander
Colin Hood
Ian Marchant
René Médori
David Payne
Alistair Phillips-Davies
Susan Rice
Sir Kevin Smith
Sir Robert Smith
9 meetings
3 meetings
1 meeting
4 meetings**
12 meetings
12 meetings
6
9
9
9
9
9
9
8
9
9
1
–
–
–
3
3
–
2
–
–
–
–
–
1
–
1
–
1
1
1
–
–
–
–
2
4
–
2
4
2
–
12
12
12
–
–
12
–
–
–
–
12
–
12
–
–
12
–
–
–
* Nick Baldwin was appointed to the Board with effect from 1 September 2006 and he attended all meetings from that date.
** All members of the Remuneration Committee attended meetings while members of the Committee.
Health,
Safety and
Environmental
Committee
3 meetings
–
–
3
–
–
–
–
–
2
–
Scottish and Southern Energy
Annual Report 2007
All of the non-Executive Directors have been
appointed for fixed terms of three years.
BOARD EFFECTIVENESS
Induction and Professional Development
Directors receive a comprehensive induction
course on joining the Board tailored to their
individual requirements which includes
meetings with senior management, visits to
key sites, and a meeting with the company
broker and analysts. It also covers a review
of all risks facing the Group including key
operational issues such as safety and
environmental performance.
During the year, the Board and its key
committees received briefings on new
developments affecting the Group’s
activities, such as company law reform,
corporate governance, regulatory
developments and financial reporting
standards. Directors were also able to
update their knowledge of the business
through regular presentations by senior
management on the full range of the
Group’s activities, and visits to key offices
and operational sites. Separate more
informal meetings were also held with
groups of key managers. There is an agreed
procedure for Directors to be able to take
independent professional advice in the
furtherance of their duties, if necessary,
at the Group’s expense and all Directors
have access to the advice and services
of the Company Secretary.
The company continues to operate an
enhanced programme of performance
coaching for members of the Executive
Committee which was rolled out to senior
managers of the Group during the year.
The purpose of the programme is to
develop the Executive Directors and senior
management and maximise individual
and group performance to ensure that
the business is managed effectively.
Performance Evaluation
During the year the Chairman conducted
a comprehensive evaluation of the
performance of the Board, its six
Committees and the individual Directors.
Each Director completed a questionnaire
which covered such areas as Board reports
and presentations, effectiveness,
development, strategy, management of risk
and corporate responsibility. The Chairman
and, where appropriate, the Chairmen of the
Committees then discussed these matters
with each Director and the Company
Secretary during a series of individual
meetings. The outcome of this process
was reported to the Board at its meeting
on 22 January 2007. Following the review,
a number of improvements were made to
the Board and Committee procedures.
However, the outcome was that generally
the Board continued to set clear objectives,
it monitored performance well, and was
focussed on the correct areas. This review
will continue to be carried out on an annual
basis. The Board was satisfied that the
review of its performance was a worthwhile
exercise and the Directors had participated
in an open and frank basis.
Led by the senior independent director,
David Payne, the non-Executive Directors
evaluated the performance of the Chairman.
BOARD COMMITTEES
The Board has six committees. The terms
of reference for all Committees are available
on the company’s website (www.scottish-
southern.co.uk).
AUDIT COMMITTEE
Role of the Committee
The principal responsibilities of the
Committee are:
k ensuring the financial reports represent
an accurate, clear and balanced
assessment of the company’s position;
k monitoring the effectiveness of internal
control and risk management in areas
such as Energy Trading and Treasury;
k monitoring and reviewing the Group’s
internal audit function; and
k ensuring the independence of the
external auditor.
The Chairman of the Committee reports
to the Board following each Committee
meeting on the main areas and subjects
the Committee has reviewed such as risk
management, internal control, internal
audit reports and any issues arising from
its review of Group Financial Statements.
Membership and Experience
All members of the Committee are
independent non-Executive Directors. The
membership of the Committee is as follows:
k René Médori (Committee Chairman);
k David Payne, (the company’s Senior
Independent Director and Deputy
Chairman);
k Nick Baldwin; and
k Richard Gillingwater
Susan Rice stood down as a Committee
member on 13 November 2006 and Nick
Baldwin joined the Committee on that date.
Richard Gillingwater joined the Audit
Committee on 25 May 2007.
The Board considers that the membership of
the Audit Committee as a whole has sufficient
recent and relevant financial experience to
discharge its functions. René Médori has
particular relevant financial experience in
his executive career. Currently he is the
Finance Director of Anglo American plc.
The Deputy Company Secretary is Secretary
of the Audit Committee.
Evaluation of the Committee
39
As reported above, an evaluation of the
performance of this Committee was carried
out during the year. This evaluation also
included the principal attendees of the
Committee, namely the Finance Director,
the Group Audit Manager and the external
auditors.
Activities of the Committee in 2006 – 2007
The Committee had three meetings during
the year. Where appropriate other Directors,
the internal and external auditors and senior
management attend Committee meetings
to present reports and respond to questions
posed by the Committee.
Financial Statements
The Committee ensured that the annual and
interim statements represented an accurate,
clear and balanced assessment of the
Group’s position. It reviewed the effectiveness
of the overall audit process and met with the
external auditor and management separately
to identify any areas of concern in the
preparation of the financial statements.
Internal Financial Control and Risk
Management Systems
The Committee considers areas where
there could be significant risk such as
Energy Trading and Treasury. Follow-up
reports are also provided to the Committee
to ensure appropriate actions are completed.
The review by the Committee of the
effectiveness of the company’s internal
financial control and risk management
systems is described in the Internal Control
and Risk Management section below.
External Auditors
The Committee has an established policy
which restricts the engagement of the
auditors for non-audit services. The policy
details non-audit work from which the
auditors are excluded, and other non-audit
work which may be awarded to them in a
competitive tender process where non-audit
fees exceed a threshold of £30,000 for
general advice and £75,000 for tax related
advice. Where such non-audit work was
awarded, the Committee was satisfied that
it was best handled by the auditors because
of their knowledge of the Group. The non-
audit work awarded during the year related
primarily to taxation and regulatory reporting
advice. The Committee is confident that the
objectivity and independence of the auditors
was not affected by this further work. It is
clear from independent surveys that the
company continues to award a low amount
of non-audit work to its auditors KPMG
Audit Plc, compared to most FTSE100
companies. Full disclosure of the non-
audit fees paid during the year is made
in Note 3 to the Accounts.
The external auditors attended each
committee meeting. In addition, the
Committee met with the external auditors
without the presence of management.
Scottish and Southern Energy
Annual Report 2007
Corporate Governance Report continued
40
During the year the Committee approved the
terms of appointment of the external auditors
and their remuneration. The Committee
recommended to the Board that KPMG Audit
Plc be proposed for reappointment, having
been satisfied with the scope and results
of the audit work, their objectivity and
their independence. The Board endorsed
the Committee’s recommendation.
Internal Audit
The Committee reviews the plans and
work of internal audit. The Group Audit
Manager reports to the Committee on the
audit programme, progress against the
programme and any follow-up actions.
Further details relating to internal audit
can be found below in the section headed
‘Internal Control and Risk Management’.
REMUNERATION COMMITTEE
The principal responsibilities of the
Remuneration Committee are:
k formulation of remuneration policy and
approval of all aspects of the Executive
Directors’ remuneration, including
bonuses and the granting of incentives
under the company’s schemes;
k ensuring that an appropriate proportion
of pay is linked to corporate and
individual performance; and
k review and approval of the Chairman’s
fees.
During the year the Remuneration
Committee met four times.
The Committee members are Susan Rice,
Sir Robert Smith, Sir Kevin Smith and
David Payne.
On 13 November 2006 the following changes
were made to the membership of the
Committee;
k Susan Rice replaced David Payne as
Chairman;
k Sir Robert Smith joined the Committee;
and
k René Médori stood down as a
Committee member.
Full details of Directors’ remuneration,
general policy and developments during the
year are given in the Remuneration Report
set out on pages 44 to 49. The Company
Secretary is Secretary to the Remuneration
Committee.
NOMINATION COMMITTEE
The Nomination Committee reviews the
composition and balance of the Board
and following a formal and rigorous
review recommends suitable candidates
for appointment as Directors.
Membership of the Nomination Committee
is made up of: four non-Executive Directors,
Susan Rice, David Payne, Sir Kevin Smith
and René Médori; the Company Chairman,
Sir Robert Smith (who chairs the committee);
and Ian Marchant. Members do not take part
in discussions about their own appointment.
On 13 November 2006, René Médori joined
the Committee. The Company Secretary is
Secretary to the Nomination Committee.
During the year the Nomination Committee
reviewed the current and future structure of
the Board including Board committee
membership, general succession planning,
and the appointment of new non-Executive
Directors.
It is the Committee’s practice to identify
possible future non-Executive Directors
with the assistance of a professional search
firm. The appointments of Nick Baldwin
and Richard Gillingwater were confirmed
by the Board following all Directors having
the opportunity to meet them. Nick Baldwin
was chosen because of his experience
of the industry, and Richard Gillingwater
because of his investment banking and
city experience.
RISK COMMITTEE
The Risk Committee comprises Alistair
Phillips-Davies (Chairman), Ian Marchant,
Gregor Alexander and senior managers
from Energy Trading, Electricity Generation
and Finance. It met 12 times during the
year to review and manage the operational
and financial risks and exposures in
Energy Trading, interest rates and currency
markets. A senior manager in Energy
Trading is Secretary to the Audit Committee.
EXECUTIVE COMMITTEE
The Executive Committee comprises all the
Executive Directors and other senior Group
Executives. The Chairman is Ian Marchant,
apart from meetings on operational
performance matters, which are chaired by
Colin Hood. It met 12 times during the year
and was responsible for all key management
issues arising from the business of the
Group; the implementation of the Group
strategy; and monitoring the operational
and financial performance and assessing
and reviewing risks arising from the Group’s
business. The Company Secretary is
Secretary to the Executive Committee.
HEALTH SAFETY AND ENVIRONMENTAL
ADVISORY COMMITTEE
The Committee met three times during
the year and was responsible for ensuring
that health, safety and environmental
policies had been implemented, setting
targets and monitoring performance,
and promoting awareness of these issues
throughout the Group.
The Committee members are Colin Hood
(Chairman), the Director of Human
Resources, the Group Safety and
Environmental Manager and Sir Kevin Smith,
non-Executive Director, with Ian Marchant
attending as appropriate. A senior member
of the Safety Team is Secretary to the
Committee.
INTERNAL CONTROL AND RISK
MANAGEMENT
The Directors acknowledge that they have
responsibility for the Group’s systems of
internal control and risk management and
for monitoring their effectiveness. The
purposes of these systems are to manage,
rather than eliminate, the risk of failure to
achieve business objectives, and provide
reasonable assurance as to the quality of
management information and to maintain
proper control over the income, expenditure,
assets and liabilities of the Group.
No system of control can, however, provide
absolute assurance against material
misstatement or loss. Accordingly, the
Directors have regard to what controls, in
their judgement, are appropriate to the
Group’s businesses, to the materiality
of the risks inherent in these businesses,
and to the relative costs and benefits of
implementing specific controls.
The Board and its Committees maintain an
ongoing process of identifying, evaluating
and managing the significant commercial,
financial, social, ethical, environmental
and general risks to the Group’s business.
Throughout the year, each business unit
evaluates risks with the key risks being
reflected in reports to the Board and/or
the appropriate Committee. This process is
regularly reviewed by the Board, has been
in place throughout the year and up to the
date of approval of the accounts. As part
of this process the Audit Committee reviews
the arrangements by which staff can, in
confidence, raise concerns about any possible
improprieties in financial and other matters.
Control is maintained through an
organisation structure with clearly defined
responsibilities, authority levels and lines
of reporting; the appointment of suitably
qualified staff in specialised business areas;
and continuing investment in high quality
information systems. These methods of
control are subject to periodic review as
to their implementation and continued
suitability.
Scottish and Southern Energy
Annual Report 2007
The main financial risks which the Group
could face includes those in respect of
interest rates and, to a lesser extent,
inflation, foreign exchange, liquidity and
credit. The Board reviews and agrees
policies for addressing each of these risks.
The other key financial risk of exposure to
energy prices and volumes is addressed by
the Risk Committee and is further explained
in note 28 to the Financial Statements.
during its annual review of the effectiveness
of the Group’s systems of internal control
and risk management did not identify nor
was advised of any failings or weaknesses
which it has determined to be significant.
Therefore a confirmation in respect of
necessary actions has not been considered
appropriate. The Board is satisfied that the
Group complies with the Turnbull Guidance
on Internal Control.
There is relatively little exposure to foreign
currency risk as the United Kingdom is the
Group’s main area of operation. If either fuel
or plant are contracted in foreign currency,
it is the Group’s policy to hedge all material
purchases through the use of foreign
currency swaps and forward rate contracts.
There is also the risk of mechanical or
process failure in the Group’s operations.
Any material failure in the Group’s licensed
operations in electricity generation,
transmission, distribution and supply and
in the supply and storage of gas would
be particularly significant. Operating risk
is addressed through the Group’s focus
on seeking operational excellence and
on maintaining the highest standards
of safety and quality.
The Group is exposed to economic
regulation and government policy. There
are management structures in place to
mitigate, influence and respond to such
developments, and to engage with the
Industry Regulator, Government ministers
and officials, and other key bodies.
There are established procedures in place
for regular budgeting and reporting of
financial information. The Group’s
performance is reviewed by the Board and
the Executive Committee. Reports include
variance analysis and projected forecasts
of the year compared to approved budgets
and non-financial performance indicators.
There are Group policies in place covering
a wide range of issues and risks such as
financial authorisations, IT procedures,
health, safety and environmental risks,
crisis management, and a policy on ethical
principles. The business risks associated
with the Group’s operations are regularly
assessed by the Board and the Audit
Committee. The Risk Committee comprising
three Executive Directors, together with
senior managers, meets regularly to review
risks and authority levels in key areas of the
Group’s activities.
This process did not extend to joint ventures
and associates for the purposes of this
report, although the Group seeks to ensure
such joint ventures and associates have
appropriate corporate governance systems
in place.
GOING CONCERN
The Directors consider that the Group
has adequate resources to continue in
operational existence for the foreseeable
future. The Financial Statements are
therefore prepared on a going concern basis.
COMMUNICATION WITH SHAREHOLDERS
AND MAJOR BUSINESS STAKEHOLDERS
The Directors acknowledge the importance
of communication with shareholders. There
is a continuing programme of meetings
between Executive Directors and institutional
shareholders on a wide range of issues. The
non-Executive Directors receive feedback on
these meetings on a regular basis to allow
them to form a view of the priorities and
concerns of institutional investors.
All Directors were present at the Annual
General Meeting in 2006 apart from Susan
Rice who could not attend due to unforeseen
travel problems. All intend to be present
at the Annual General Meeting in 2007
to answer shareholders’ questions.
The company’s shareholders are widely
distributed throughout the country. To
ensure that the maximum number of
shareholders have the chance to attend
an AGM, its location is alternated between
Scotland and the south of England. The
Chairman gave a presentation on the
company’s business at the AGM in 2006,
and will do so again at the forthcoming AGM.
The Chairman introduces the presentation
of the company’s interim and preliminary
results to analysts and investors and he and
the Senior Independent Director also meet
with major shareholders from time to time.
Review of the System of Internal Control
The effectiveness of the Group’s systems of
internal control is monitored by the internal
audit department which distributes reports
and where appropriate action plans to senior
managers, Directors and the external
auditors. Throughout the year, the Audit
Committee kept these systems under review
reporting regularly to the Board. The Board
In September 2006, the Board held its
meeting in Edinburgh and took the opportunity
of hosting a meeting with representatives
of a number of organisations which have
an interest in the Group’s activities in areas
such as the environment, energy efficiency,
the community and customer service. The
purpose of this was to hear their views,
suggestions and any concerns, and also
41
to explain the Group’s position on a wide
range of business and policy issues.
The company promotes the use of electronic
communications with shareholders. For all
shareholders who have opted for this service
where they can view documents online and
lodge their proxy vote over the internet, the
company has undertaken to plant a native
species tree in a designated woodland.
The company runs a dividend reinvestment
plan, details of which can be found on the
company’s website.
Shareholders can also access Investor
Centre, a free-internet based service
provided through our registrar where
shareholders can view their shareholdings,
update their details and manage their share
portfolio online. In addition shareholders can
also make use of the share dealing service
also provided through our registrar. Details
of both services can be found on the
company’s website.
In early 2007 the first provisions of the
Companies Act 2006 were brought into
force. The key change allows companies
to use electronic communications with
its shareholders as a default position.
The purpose of this change is to reduce
the number of paper copies of the Annual
Report and Accounts that are printed and
posted to shareholders. The company is
seeking approval for this proposal at the
forthcoming AGM, and more details
accompany the notice of meeting. It is
intended to review the company’s Articles
of Association following full implementation
of the Companies Act 2006, and bring the
proposed changes to the Articles to the
AGM in 2008 for approval.
To ensure that shareholders have easy
access to as much information as possible,
the company website (www.scottish-
southern.co.uk) contains financial and
other information about the Group, including
shareholder presentations, stock exchange
announcements, and general business
news. In addition, the website contains
information relating to the governance of
the company, including the Memorandum
and Articles of Association, the schedule of
matters reserved to the Board, the terms
of reference for each Board Committee
and the letters of appointment for the
non-Executive Directors.
Scottish and Southern Energy
Annual Report 2007
Directors’ Biographies and Responsibilities
42
Ian Marchant
David Payne
Sir Robert Smith
Sir Kevin Smith
Colin Hood
Susan Rice
Richard Gillingwater
Ian Marchant (46)
Chief Executive
Ian was appointed Chief Executive in October
2002 having been Finance Director since
1998. He joined Southern Electric in 1992
and joined the Board on becoming Finance
Director in 1996. Previously he worked for
Coopers & Lybrand (now PwC), including a
two-year secondment to the Department of
Energy working on electricity privatisation.
Ian is Chairman of the United Kingdom
Business Council for Sustainable Energy and
of the Climate Change Business Delivery
Group, a member of Ofgem’s Environmental
Advisory Group, the Coal Forum and of
the Energy Research Partnership. Ian
is a non-Executive Director of Maggie’s
Cancer Centres and was appointed as a
non-Executive Director of John Wood Group
PLC on 18 May 2006. He is a member
of the Nomination Committee and is
lead Director for the Environment and
Corporate Responsibility.
David Payne (64)
Deputy Chairman
David joined the Board as a non-Executive
Director of Scottish Hydro Electric in June
1998 and became Deputy Chairman in
January 2005. He held a number of senior
positions with the BP Group and was Deputy
Chief Executive of BP Oil. He is the Senior
Independent Director and a member of the
Remuneration, Audit and Nomination
Committees.
Sir Robert Smith (62)
Chairman
Sir Robert joined the Board as a non-
Executive Director in June 2003, was
appointed Deputy Chairman in November
2003 and became Chairman in January
2005. He is Chairman of The Weir Group plc
and a non-Executive Director of 3i Group plc,
Standard Bank Group Limited, and Aegon
UK plc. Sir Robert was formerly Chief
Executive of Morgan Grenfell Asset
Management Limited, a member of the
Financial Services Authority and the
Financial Reporting Council, a Governor
of the BBC, a Board Trustee of the British
Council, Chairman of Stakis plc and a
Past President of the Institute of Chartered
Accountants of Scotland. He is Chairman of
the Nomination Committee and a member
of the Remuneration Committee.
Sir Kevin Smith CBE (52)
Non-Executive Director
Sir Kevin joined the Board as a non-
Executive Director in June 2004. He is Chief
Executive of GKN having previously been
Managing Director, Aerospace. Prior to GKN,
he held various positions in BAE Systems
over a 20-year period, latterly as Group
Managing Director – New Business. Sir
Kevin is Deputy President of The Society
of British Aerospace Companies Ltd and
Co-Chairman of the government’s
Manufacturing Forum. He is a member
of the Nomination and Remuneration
Committees.
Colin Hood (52)
Chief Operating Officer
Colin joined the Board of Scottish and
Southern Energy as Power Systems Director
in January 2001, becoming Chief Operating
Officer in October 2002. Previously he was
Director of Distribution for Southern Electric,
having joined the industry with the North of
Scotland Hydro Electric Board in 1977. He is
Chairman of Scotia Gas Networks plc and a
member of the Forum for Renewable Energy
Developments in Scotland. Colin is the lead
Director for Health and Safety matters and
has Board level responsibility for Generation,
Power Systems, Customer Service, Human
Resources, I.T. and Contracting.
Susan Rice CBE (61)
Non-Executive Director
Susan joined the Board as a non-Executive
Director in July 2003. She is Chief Executive
of Lloyds TSB Scotland plc, having previously
been Managing Director, Personal Banking,
for the Bank of Scotland. She chairs the
Board of the Edinburgh International Book
Festival, is a non-executive director of Charity
Bank and several other organisations. Susan
chairs the Remuneration Committee and is
a member of the Nomination Committee.
Richard Gillingwater (50)
Non-Executive Director
Richard joined the Board as a non-Executive
Director in May 2007. He is Dean of Cass
Business School and is a non-Executive
Director of Debenhams and Tomkins.
Scottish and Southern Energy
Annual Report 2007
Alistair Phillips-Davies Nick Baldwin
René Médori Gregor Alexander
Capital and Towerbrook Capital Partners
and is Chairman of Worcester Community
Housing. He is a member of the Audit
Committee.
René Médori (49)
Audit Committee Chairman
René joined the Board as a non-Executive
Director in June 2003. He is Finance Director
of Anglo American plc and is a non-
Executive Director of AngloGold Ashanti and
DB (De Beers) Investments. He is a former
Finance Director of the BOC Group plc,
and previously worked for Accenture and
Schlumberger Limited. He is Chairman
of the Audit Committee and a member
of the Nomination Committee.
Gregor Alexander (44)
Finance Director
Gregor joined the Board of Scottish and
Southern Energy as Finance Director in
October 2002. He was appointed Group
Treasurer and Tax Manager in 1998 having
held a number of senior positions within
the Finance team. He worked with Arthur
Andersen for five years before joining
Scottish Hydro Electric in 1990, six months
before privatisation. Gregor is a Director
of Scotia Gas Networks plc.
He has held senior appointments in the City,
including at Kleinwort Benson, BZW and
CSFB. He has advised HM Government
and most recently was Chief Executive
then Chairman of the government’s
Shareholder Executive. He is a member
of the Audit Committee.
Alistair Phillips-Davies (39)
Energy Supply Director
Alistair joined the Board in January 2002,
having previously held various positions
in the finance and commercial operations
areas of the company. He joined Southern
Electric in February 1997 having previously
worked for HSBC and the National
Westminster Bank in corporate finance
and business development roles. He is
a Chartered Accountant and a Director
of the Energy Retail Association. Alistair is
Chairman of the Risk Committee and has
Board level responsibility for Energy Trading,
Electricity and Gas Supply, Sales, Marketing
and Energy Services.
Nick Baldwin (54)
Non-Executive Director
Nick joined the Board of Scottish and
Southern Energy as a non-Executive
Director in September 2006. Previously he
worked in electricity, gas and water utilities,
culminating in being the Chief Executive of
Powergen plc. He is a non-Executive
Director of the Nuclear Decommissioning
Authority and a non-Executive Director of
the Forensic Science Service. He also serves
on the Advisory Boards of Climate Change
43
Statement of Directors’ Responsibilities
in Respect of the Annual Report and the
Financial Statements
The directors are responsible for preparing
the annual report and the Group and parent
company financial statements in accordance
with applicable law and regulations.
Company law requires the directors to
prepare Group and parent company financial
statements for each financial year. Under
that law they are required to prepare the
Group financial statements in accordance
with IFRS as adopted by the EU and have
elected to prepare the parent company
financial statements on the same basis.
The Group and parent company financial
statements are required by law and IFRS
as adopted by the EU to present fairly the
financial position of the Group and the
parent company and the performance
for that period; the Companies Act 1985
provides in relation to such financial
statements that references in the relevant
part of the Act to financial statements
giving a true and fair view are references
to their achieving a fair presentation.
In preparing each of the Group and
parent company financial statements,
the directors are required to:
k select suitable accounting policies
and then apply them consistently;
k make judgements and estimates
that are reasonable and prudent;
k state whether they have been prepared
in accordance with IFRS as adopted
by the EU; and
k prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the
Group and the parent company will
continue in business.
The directors are responsible for keeping
proper accounting records which disclose
with reasonable accuracy at any time the
financial position of the parent company
and enable them to ensure that its
financial statements comply with the
Companies Act 1985. They have a general
responsibility for taking such steps as are
reasonably open to them to safeguard the
assets of the Group and to prevent and
detect fraud and other irregularities.
Under applicable law and regulation,
the directors are also responsible for
preparing a Directors’ Report, Directors’
Remuneration Report and the Corporate
Governance Statement that comply with
that law and those regulations.
The directors are responsible for
the maintenance and integrity of the
corporate and financial information
included on the company’s website.
Legislation in the UK governing the
preparation and dissemination of
financial statements may differ from
legislation in other jurisdictions.
Scottish and Southern Energy
Annual Report 2007
Remuneration Report
The following is the report of the Board of
Directors in compliance with the Directors’
Remuneration Report Regulations 2002
(the Regulations).
The Remuneration Committee
The Remuneration Committee’s members
are Susan Rice, who chairs the Committee,
Sir Robert Smith, David Payne and Sir Kevin
Smith. Biographical details of the current
Committee members are given on pages 42
and 43. The membership of the Committee
changed on 13 November 2006, when Susan
Rice joined as Committee Chairman, Sir
Robert Smith joined the Committee, and
René Médori stepped down. The Committee
met on four occasions, with full attendance
at all meetings. The Terms of Reference
were reviewed during the year to ensure
they conform to best practice, and they
are available on the company’s website
(www.scottish-southern.co.uk).
The Committee sets the overall
remuneration policy and determines,
on behalf of the Board, the detailed
remuneration terms of the Executive
Directors including their service contracts.
It also reviews the remuneration of the
Chairman and the Company Secretary. The
Board as a whole reviews the fees of the
non-Executive Directors. Where requested
by the Committee the Chief Executive,
Ian Marchant, attends and assists the
Committee in respect of those Directors
reporting to him. He does not participate
in decisions on his own remuneration.
The Director of Human Resources, Jim
McPhillimy, provides information and advice
on various issues relating to the Directors’
remuneration, including comparative data
drawn from published remuneration and
benefit surveys, and advice on appropriate
awards of bonuses and long term incentives.
The Company Secretary, Vincent Donnelly,
provides information to the Committee on
developments in corporate governance
guidelines as they affect the Committee.
During the year the Committee received
advice from Towers Perrin on remuneration
structures, and in particular received advice
from them and from Freshfields Bruckhaus
Deringer on the new Performance Share
Plan which was approved at the Annual
General Meeting held on 27 July 2006 to
which amendments will be put forward at
the forthcoming Annual General Meeting.
Both Towers Perrin and Freshfields
Bruckhaus Deringer were appointed by
the Company on behalf of the Committee.
The views of the company’s Brokers, Merrill
Lynch, were also sought on the proposals
for amending the Performance Share Plan
in 2007.
Company Policy on Executive Directors’
Remuneration
The Remuneration Committee’s
composition, responsibilities and operation
comply with Section B of the Combined Code
annexed to the Listing Rules of the Financial
Services Authority. In forming remuneration
policy, the Committee has given full
consideration to the best practice provisions
set out in Section B1 of the Combined Code.
This report sets out the company’s policy
on Executive Directors’ remuneration for
the year ended 31 March 2007 and, so far
as is reasonable, for subsequent years. The
Remuneration Committee considers that a
successful remuneration policy needs to be
sufficiently flexible to take account of future
changes in the company’s business
environment and in remuneration practice.
Any changes in policy for years after 2007
will be described in future Remuneration
Reports, which will continue to be subject
to shareholder approval.
The company’s policy is to attract, retain
and incentivise Executive Directors to
run the company effectively and meet
the expectations of shareholders whilst
adopting a competitive approach to overall
remuneration. This has been achieved by
providing remuneration consisting of basic
salary and benefits, together with an Annual
Bonus Scheme and a Performance Share
Plan both of which require the achievement
of demanding performance targets. Given
the nature of the company’s business, the
Committee believes that around half of
total remuneration should be performance
related, with up to two thirds for superior
performance. The Committee is satisfied
that the overall remuneration structure
is set at levels which are reasonable and
appropriate.
The Committee is fully aware of the need to
ensure there is an appropriate relationship
between Executive Director remuneration,
and the levels of remuneration of other
Senior Management within the Group.
The Committee took account of this when
reviewing remuneration of the Executive
Directors during the year.
Executive Directors are entitled to accept
a non-Executive appointment outside the
company with the consent of the Board.
Any fees received can be retained by the
Director. In 2006/07 Ian Marchant held
a non-Executive Director position with
the John Wood Group plc, and received
£26,100 in fees.
44
Shareholding Policy
Share ownership is encouraged throughout
the Group. The company has adopted a
policy that the Executive Directors and
certain other senior Executives should
acquire and maintain a level of shareholding
approximately equivalent to one year’s
salary. This level should be attained within
a reasonable timescale. Consent to sell
shares under the Company’s Share Dealing
Code is not normally given (unless in
exceptional circumstances or to fund a
connected tax liability) until this level of
shareholding is reached. It is also expected
that all non- Executive Directors should hold
a minimum of 2,000 shares in the company.
Annual Salary and Benefits
The Committee continues to follow the broad
principle that salaries should take account
of those in comparable companies with
variations to reflect individual performance,
experience and job size. While salary levels
are generally set below median, regard is
paid to retention objectives in setting overall
remuneration packages.
As part of the review of overall
remuneration, the Committee considered
independent salary survey data and also the
advice of Towers Perrin. The overall levels
of remuneration continued to be significantly
below median, and the Committee was
satisfied that in order to maintain an
effective retention regime, salaries should
increase whilst remaining within the
prudent, below median, policy approach.
The Executive Directors’ salary increases
with effect from 1 January 2007 were
therefore in the range 9%-17%. The current
annual base salary levels for the Executive
Directors are as follows: Ian Marchant
£720,000; Gregor Alexander £405,000; Colin
Hood £540,000; Alistair Phillips-Davies
£405,000.
Deferred Bonus Scheme
The Deferred Bonus Scheme, which applied
to Executive Directors and a selection of
senior managers was originally designed
to contribute to increasing shareholder
return and motivation of senior management
over the longer-term. It also facilitated the
building of share ownership in the company.
Directors were granted awards of shares
based on their actual annual bonus. The
value of the award was adjusted by reference
to three retrospective factors: the company’s
relative performance in terms of Total
Shareholder Return (TSR) over the
three-year period to the date of the
award (compared to the FTSE100);
Safety (externally verified and compared
to other energy companies by the Electricity
Networks Association); and relative
performance in terms of Account and
Billing Complaints, as recorded by the
independent regulatory body, energywatch.
Scottish and Southern Energy
Annual Report 2007
45
Dependent on actual performance each
factor gave a multiplier of between 0.7 and
1.35 with the highest multiplier requiring
upper quartile performance. A weighted
average was then taken using TSR (40%),
Safety (40%) and Account and Billing
Complaints (20%), to create a single factor
which was then applied to the award. The
award in 2006 applied the factor of 1.29.
The awards were based on bonuses earned
for 2006 and therefore in respect of
performance for the year ending 31 March
2006. They have however been deferred
for three years and will vest in 2009. Upon
vesting, the participant usually receives
additional shares representing the dividends
on the shares during the three-year period
they are held in trust.
If a participant resigns voluntarily in the
three years following award, all outstanding
awards lapse. The shares under award
normally vest after three years, but can vest
earlier in certain exceptional circumstances
such as retirement or redundancy.
No further awards to Executive Directors
will be made under this scheme following
approval of the new Performance Share Plan
at the Annual General Meeting in July 2006.
Current Incentive Arrangements
Following the Committee’s review of
performance related remuneration, the
following arrangements were put in place for
2006/07 and future years. The first awards
under the new Performance Share Plan will
vest subject to the company’s performance
between April 2006 to March 2009. The new
Annual Bonus arrangements operated from
2007 based on the annual bonus payable in
respect of 2006/07.
Annual Bonus Scheme
The maximum bonus level is 100% of base
salary and which for 2006/07 comprised 60%
for corporate financial performance, 25% for
personal objectives, and 15% for relative
safety and service standards based on
externally verified data from Health and
Safety Executive and other utilities and
energywatch respectively. Of the bonus
awarded, 75% is paid in cash, and the
remainder is compulsorily deferred into
shares which only vest, subject to continued
service, after three years. The number of
shares under an award is determined by
dividing the relevant pre-tax amount of
bonus by the share price shortly after
announcement of results for the Financial
Year to which the bonus relates. The share
award is satisfied by a transfer of shares
from the Employee Share Ownership Trust
together with shares representing dividends
during the period the shares have been held
in trust. The bonuses are non-pensionable.
The maximum corporate element is payable
if performance exceeds by 10% or more the
budgeted profit before tax target, but no
corporate element is payable if performance
falls below 95% of this target (formerly 90%).
The personal objectives are based on a wide
range of specific business activities. The
specific standards of performance set are
commercially confidential but they include
objectively measurable improvements in
areas such as:
k improvement in Group safety
performance;
k improvement in customer service;
k delivery of investment opportunities;
k generation plant availability;
k innovation and sustainable development;
k achievement of customer growth targets;
k improved financial and working capital
management; and
k development and delivery of new market
opportunities.
The company’s performance in all these
areas is described in the Chief Executive’s
Statement on pages 10 to 34 of this
Annual Report. The majority of targets
are operational in nature, set against
measurable and verifiable data either
within the Group or more generally within
the energy sector. However, some targets
are set which require some subjective
assessment. This is done by the Chief
Executive and reported by the Director of
Human Resources to the Committee for
consideration, except in the case of targets
for the Chief Executive himself, where they
are assessed by the Committee, with
assistance from the Director of Human
Resources and the Company Chairman.
The bonus for 2006/07 was based on
performance relative to measures and
targets set at the beginning of the year,
as well as other factors the Remuneration
Committee determined were relevant.
The Corporate Performance of profit before
tax outturned at above 110% of budget,
and the maximum bonus was therefore paid
for this element (60%). The Group again
achieved excellent safety and customer
service ratings, as externally verified, and
the maximum bonus was awarded for this
element (15%). The personal objectives were
assessed by the Committee. Whilst the
majority of individual targets were met, such
as customer growth (one million accounts
added), safety performance (35% reduction
in accident rates) and complaint reduction
(a 46% reduction) there was still scope for
improvement in areas such as renewable
consents and customer retention. The range
of payments for the personal element was
therefore 17%-21%, against a maximum
possible of 25%.
For 2007/08, the bonus will comprise 60%
for corporate financial performance, 20%
based on teamwork within the Executive
team [including performance in Service and
Safety], and 20% for individual objectives.
Performance Share Plan (‘PSP’)
The PSP replaced the previous Deferred
Bonus Scheme in 2006.
Under the PSP, the maximum value of share
awards made to Executive Directors and
other Senior Executives each year is 100%
of base salary. Awards will be released after
three years to the extent that performance
conditions are met. One-half of the award
is subject to total shareholder return (‘TSR’)
performance relative to other FTSE100
companies. For full vesting, the company’s
TSR must be at or above the 75th percentile
over the three-year performance period.
30% of the award will vest if the company’s
TSR is at the median. Awards will vest on a
straight-line pro rata basis between median
and 75th percentile. Awards based on TSR
will only vest if the Committee is satisfied
with the underlying financial performance of
the company over the performance period.
The remaining one-half of the award will be
subject to an adjusted earnings per share
(EPS) growth target. For the three-year cycle
commencing in 2006/07, full vesting will
occur if the annual growth in adjusted EPS is
equivalent to 8% above RPI per annum. If the
annual growth in adjusted EPS is equivalent
to 3% above RPI per annum, 30% of the
shares will vest with vesting on a straight-
line basis between 3% and 8% above RPI.
There will be no vesting of the appropriate
portion of award if the TSR minimum target
of median is not achieved, or if the minimum
real annual growth of EPS is not achieved.
The Committee considers the use of two
measures, in these proportions, to be
appropriate. The relative TSR performance
measure is dependent on the company’s
relative long-term share price performance,
and therefore brings a market perspective to
the Performance Share Plan. Further vesting
of this element requires the Committee to
be satisfied with the underlying financial
performance of the company. The TSR
measure is balanced by a key internal
measure, adjusted EPS growth, which is
critical to the company’s long-term success
and ties in with the Group’s strategic goals.
The Committee considered that the
achievement of real annual adjusted EPS
growth of 8% above RPI per annum was
a suitably demanding target for maximum
vesting in light of the regulatory regime in
which the company operates and on the
basis of independent advice. The target
range was set in the light of consensus
expectations and the company’s own
forecasts.
Scottish and Southern Energy
Annual Report 2007
Remuneration Report continued
46
The Committee believed that for 2006/07
this target range struck the right balance
between being stretching at the top end,
and being achievable and motivational at
the lower end. As reported last year, the
Committee may set different vesting levels
in future years for the EPS or TSR elements
in order to ensure that the target remains
sufficiently stretching. There will be no
retesting of either the TSR or EPS
performance measures.
Proposed Changes to PSP
Following the introduction of the PSP last
year, the Committee reviewed the scope
and operation of the plan in the light of
the desired pay mix and emphasis on
performance-related pay. The PSP award
levels last year were set at a cap of 100%
of salary following advice and feedback from
shareholders. Since then, the Committee
has looked at further developments and has
concluded that the cap of 100% is clearly
below median. As salaries are also below
median and mindful of the need to ensure
appropriate incentives are in place to retain
the management and to ensure the
continuing success of SSE, the Committee,
subject to shareholders’ approval, proposes
to raise the maximum annual award level
under the PSP to 150% of base salary, with
effect from 2007 in respect of performance
in 2007-2010 but also to make the vesting
conditions more stringent. The Committee
believes that it is appropriate to make more
stretching the performance range in respect
of the EPS performance criterion by
increasing the top end of the range from
EPS growth of 8% in excess of RPI to 9%
in excess of RPI. Further, the percentage of
shares that will vest for threshold or median
performance in respect of both criteria will
also be reduced from 30% to 25%.
In short, these proposed changes represent
an increase in potential payment, but with
a consequential toughening of the vesting
criteria.
The Committee has consulted with major
shareholders and the proposed changes
are being put to the AGM in July 2007 for
approval. Further information is contained
in the explanatory notes accompanying
the Notice of AGM.
All-Employee Share Schemes
Executive Directors are eligible to participate
in the company’s all-employee share
schemes on the same terms as other
employees. These schemes comprise:
(a) the Sharesave Scheme, a savings-related
share option scheme available to all
employees. This scheme operates
within specific tax legislation (including
a requirement to finance exercise of the
option using the proceeds of a monthly
savings contract of up to £250 per
month), and, in common with all such
schemes, exercise of the option is not
subject to satisfaction of a performance
target. The option price is set at a
discount of 10% to market value;
(b) the Share Incentive Plan (the SIP), also
available to all employees, under which
employees allocate part of their pre-tax
salary to purchase shares up to a
maximum of £125 per month. The SIP
operates within specific tax legislation.
During the year, the company matched
the first five shares purchased by the
participating employees each month
and intends to continue to do so;
(c) the company is also offering 20 free
shares to all eligible employees under
the SIP, with no performance conditions
attached, in recognition of the overall
staff contribution to the performance
of the Group in 2006/07; and
(d) there is a long service award scheme
whereby shares worth £100, £200,
£300 and £400 are purchased on behalf
of an employee on the occasion of the
employee reaching 10, 20, 30 or 40 years
service respectively with the Group.
Service Contracts
It is the company’s policy that Executive
Directors should have service contracts
with the company which are terminable on
12 months’ notice given by either party. The
key aspects of each contract are as follows:
The Executive Directors are employed under
service contracts with the company each
dated 11 March 2005. They are eligible under
the contracts to participate in the company’s
Executive Directors’ bonus scheme, the
company’s Sharesave or other employee
share schemes and profit sharing schemes
(if any). They are each entitled to a company
car (or a cash allowance), membership of
the company’s pension scheme including life
assurance cover equal to four times salary,
and private health insurance which also
covers dependants.
The contracts are each for an indefinite
term ending automatically on retirement
date (age 60), but may be terminated by
12 months’ notice given by the company or
by 12 months’ notice given by the Director.
The company may at its discretion elect to
terminate any Executive Director’s contract
by making a payment in lieu of notice equal
to the basic salary which would have been
received during the notice period (excluding
any bonus and any other emolument
referable to the employment). Payments
in lieu of notice will be made in staged
payments, and such payments will either
reduce or cease completely in circumstances
where the departing Executive Director gains
new employment. There is also a specific
provision obliging the departing Executive to
mitigate his/her loss in these circumstances.
There are no special provisions applying in
the event of change of control.
Remuneration and Pensions
The remuneration of Directors who served
during the year was as shown below. All the
Executive Directors are members of either
the Southern Electric Pension Scheme or
the Scottish Hydro Electric Pension Scheme,
which are funded final salary pension
schemes. The Directors’ service contracts
provide for a possible maximum pension of
two thirds final salary at age 60. In relation
to Executive Directors who are subject to the
scheme specific salary cap (which mirrors
the provisions of the previous HM Revenue
and Customs cap arrangements) the
company provides top-up (unfunded)
arrangements which are designed to provide
an equivalent pension on retirement at age
60 to that which they would have earned if
they had not been subject to the salary cap.
The Executive Directors have no right to any
special or preferential pension benefit terms
upon leaving. However, in common with all
members of the pension schemes, who
joined at the time the Directors joined the
schemes, in the case of retirement through
ill-health an unreduced pension based on
service to expected retirement is paid. In
the case of reorganisation or redundancy
an unreduced accrued pension is paid to
a member who has reached the age of 50
or above, with at least five years’ service,
or for a member who has not yet reached
that age, it is payable with effect from 50.
Following legislative changes, from April
2006, existing HM Revenue & Customs limits
ceased to apply to benefits provided by the
pension schemes. If a member’s accrued
fund exceeds the new lifetime allowance
(‘LTA’), the benefits payable by the scheme
from that excess will be subject to a higher
rate of income tax. The company is
maximising the use of the new allowance
thereby providing Executive Directors with
more of their existing benefits via registered
schemes. In the case of Colin Hood, who
was not subject to the previous earnings
cap but is now limited by the LTA, further
accrual for future service is via an unfunded
arrangement. There are no arrangements
to compensate members for any change
in their personal tax liability.
Scottish and Southern Energy
Annual Report 2007
Non-Executive Directors
The remuneration of non-Executive
Directors, apart from the company
Chairman, is determined by the Board,
with the non-Executive Directors concerned
not participating in this process. The non-
Executive Directors do not have service
contracts but instead have letters of
appointment. They are appointed for fixed
terms of three years, subject to retirement
by rotation and re-election at AGMs in terms
of the Company’s Articles of Association.
They do not participate in the Annual Bonus
Scheme, Performance Share Plan any of the
share option schemes, or contribute to any
Group pension scheme. During the year, the
Chairman of the Audit Committee received
an additional fee of £10,000, the other
members of the Audit Committee received
£5,000, and the non-Executive Director on
the Health, Safety and Environmental
Advisory Committee received £5,000.
Performance Graph
The following graph charts the cumulative
Total Shareholder Return of the company
since 1 April 2002 compared to the FTSE100
Index over the same period. The company
is a member of the FTSE100 index, and this
was considered to be the most relevant index
for comparative purposes.
Total Shareholder Return
47
SSE
FTSE 100
350
300
250
200
150
100
50
0
Mar 02 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07
The Auditors are required to report on the information contained in tables A, B and D.
Table A – Directors’ Emoluments
The emoluments of each of the Directors were as follows:
Executive Directors
Ian Marchant
Gregor Alexander
Colin Hood
Alistair Phillips-Davies
Non-Executive Directors
Nick Baldwin (i)
René Médori
David Payne
Susan Rice
Sir Kevin Smith
Sir Robert Smith(Chairman)
Former Directors
Henry Casley
Salary/fee
£000
Bonuses
£000
Benefits
£000
675
360
506
360
24
47
69
42
42
266
–
2,391
518
282
373
285
–
–
–
–
–
–
–
1,458
17
14
15
14
–
–
–
–
–
–
–
60
Total
2007
£000
1,210
656
894
659
24
47
69
42
42
266
–
3,909
Total
2006
£000
1,040
531
772
531
0
44
64
39
36
218
6
3,281
(i) From date of appointment to the Board on 1 September 2006
In addition to the annual cash bonus amount for the year, Ian Marchant, Gregor Alexander, Colin Hood and Alastair Phillips-Davies will
be awarded £173, £94, £124 and £95 respectively in the form of deferred shares in respect of the bonus due to them for 2006/07. These
share awards will not be made until June 2007 and, therefore, the number of shares to which the Executive Directors will be entitled will
not be known until that date. These shares will, subject to continued employment, be released on the third anniversary of grant.
David Sigsworth, a former Director, has provided consultancy services to the company in the Energy Services business and represents
the company in general industry forums. He received £63,750 (2006 – £105,000) for the provision of these services during the year.
These consultancy services have been extended with a reduced time commitment until September 2007.
Scottish and Southern Energy
Annual Report 2007
Remuneration Report continued
48
Table B – Retirement Benefits
Details of Directors’ retirement benefits are as follows:
Years of
industry
service
At 31 March
2007
£000
Increase in year
including
inflation
£000
Accrued benefit
Increase in year
excluding
inflation
£000
At 31 March
2007
£000
At 31 March
2006
£000
15
Ian Marchant
16
Gregor Alexander
Colin Hood
29
Alistair Phillips-Davies 10
234
126
237
87
35
23
30
18
28
20
23
16
3,356
1,548
3,999
1,002
2,944
1,329
3,424
797
Transfer value of accrued benefit
Increase
less directors’
contributions
£000
Increase in
year excluding
inflation
£000
396
203
559
189
388
249
366
176
Members of the scheme have the option to pay additional voluntary contributions; neither the contributions nor the resulting benefits are
included in the above table. The retirement age of Executive Directors is 60.
The following is information relating to the pension of Gregor Alexander as a participant in the HMRC approved Scottish Hydro Electric
Pension Scheme.
(i) Dependants’ pensions on death are half of members’ pension entitlements, together with a capital sum equal to four times pensionable pay.
On death in retirement, the Director’s spouse will receive a pension equal to half of that payable to the Director. In addition, on death within the first five years of retirement,
a lump sum is payable equal to the balance outstanding of the first five years’ pension payments.
(ii) All benefit payments are guaranteed to increase annually by the same percentage as state pensions, which are currently linked to movements in the UK Retail Price Index.
The following is information relating to the Directors’ pensions of Colin Hood, Ian Marchant and Alistair Phillips-Davies, as participants
in the HMRC approved Southern Electric Group of the Electricity Supply Pension Scheme.
(i) Dependants’ pensions on death are four-ninths of the member’s pensionable pay, together with a capital sum equal to four times pensionable pay. If death occurs after attaining
the age of 55 an additional lump sum between three to five times notional pension is payable dependent upon age and length of service. On death in retirement, the Director’s
spouse will receive a pension equal to two-thirds of that payable to the Director. In addition, on death within the first five years of retirement, a lump sum is payable equal to the
balance outstanding of the first five years’ pension payments.
(ii) Post retirement increases are expected to be in line with inflation (guaranteed up to the level of 5% per annum and discretionary above that level).
All the Executive Directors have unfunded retirement benefits which are included in their pension benefits above with provision in respect
of their accrued value included in the Company’s Balance Sheet.
Table C – Directors’ Interests
The interests of the Directors, all of which are beneficial, in the ordinary shares of the company on the dates shown were as follows:
Gregor Alexander
Nick Baldwin
Colin Hood
Ian Marchant
René Médori
David Payne
Alistair Phillips- Davies
Susan Rice
Sir Kevin Smith
Sir Robert Smith
Shares held
21,589
2,000
26,710
94,785
2,000
8,000
31,116
4,254
2,000
15,800
31 March 2007
Shares under
option
87,837
0
162,097
172,266
0
0
87,074
0
0
0
Shares held
13,034
2,000*
24,896
73,155
2,000
8,000
20,498
4,000
2,000
15,800
1 April 2006
Shares under
option
48,161
0*
88,640
103,224
0
0
50,754
0
0
0
* At date of appointment to the Board on 1 September 2006.
From 31 March 2007 to 30 May 2007, the following changes to the interests of Directors took place:
Under the Share Incentive Plan, on 30 April 2007, Ian Marchant, Colin Hood, Gregor Alexander and Alistair Phillips-Davies
each acquired 13 shares.
Under a standing order for reinvestment of a PEP, Ian Marchant acquired 1 share on 4 April 2007.
A further analysis of the Directors’ shares under option as at 31 March 2007, and options granted and exercised during the year,
is set out below.
The Register of Directors’ Interests (which is open to shareholders’ inspection) contains full details of Directors’ shareholdings
and options to subscribe for shares.
Scottish and Southern Energy
Annual Report 2007
Table D – Directors’ Share Options and Long-Term Incentive Arrangements
Option scheme
Ian Marchant
Savings-related
Deferred Bonus
Performance Share Plan
Colin Hood
Savings-related
Deferred Bonus
Performance Share Plan
Gregor Alexander
Savings-related
Deferred Bonus
Performance Share Plan
Alistair Phillips-Davies
Savings-related
Deferred Bonus
Performance Share Plan
Options at
1 April
2006
2,253
100,971
0
2,088
86,552
0
2,628
45,831
0
1,865
48,889
0
Awarded
during
year
0
46,081
54,142
0
33,446
40,607
0
23,311
28,301
0
23,311
28,301
Options
exercised
596
35,338
0
596
0
0
0
14,132
0
0
17,667
0
#£1 per grant. No price was paid for the award of any option.
49
Market
price at
time of
exercise
(pence)
–
1142
–
–
–
–
–
1142
–
–
1142
–
Options at
31 March
2007
1,657
116,467
54,142
1,492
119,998
40,607
2,628
56,908
28,301
1,865
56,908
28,301
Weighted
average
option price
per share
(pence)
622
#
886
613
#
886
#
Normally
exercisable
or called for
10/07 – 03/10
7/07 – 6/16
7/09
10/10 – 3/11
7/06 – 6/16
7/09
10/08 – 03/11
7/07 – 6/16
7/09
10/10 – 3/11
7/07 – 6/16
7/09
Shares exercised under the Deferred Bonus Scheme included the following arising from dividend reinvestment: Ian Marchant – 4,753 shares,
Alistair Phillips-Davies – 2,375 shares, Gregor Alexander – 1,898 shares.
The closing market price of the shares at 31 March 2007 was 1541.5p and range for the year was 1,077.5p to 1,592.00p. The options granted
during the year were granted under either the Deferred Bonus Scheme, the Savings-related Scheme, or the Performance Share Plan.
The aggregate amount of gains made by Directors on the exercise of share options during the year was £777,337 (2006 – £284,723).
Under the Deferred Bonus Scheme, the aggregate value of the shares placed in trust for Directors in the year to 31 March 2007 was
£1,433,053 (2006 – £972,294). Under the Performance Share Plan, the aggregate value of the shares placed in trust for Directors in the
year to 31 March 2007 was £1,844,969 (2006 – £0). The aggregate amount of gains made by the highest-paid Director, Ian Marchant was
£408,876 (2006 – £136,481).
This report was approved by the Board and signed on its behalf by:
Susan Rice
Remuneration Committee Chairman
30 May 2007
Scottish and Southern Energy
Annual Report 2007
Independent Auditors’ Report
to the members of Scottish and Southern Energy plc
50
We have audited the group and parent company financial statements (the ‘’financial statements’’) of Scottish and Southern Energy plc for
the year ended 31 March 2007 which comprise the Consolidated Income Statement, the Consolidated and Parent Company Balance Sheets,
the Consolidated and Parent Company Cash Flow Statements, the Consolidated and Parent Company Statement of Recognised Income and
Expense and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also
audited the information in the Directors’ Remuneration Report that is described as having been audited.
This report is made solely to the company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit
work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective Responsibilities of Directors and Auditors
The directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements
in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU are set out in the
Statement of Directors’ Responsibilities on page 43.
Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report to be audited in accordance
with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and
the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985
and, as regards the financial statements, Article 4 of the IAS Regulation. We also report to you if, in our opinion, the Directors’ Report is
not consistent with the financial statements. The information given in the Directors’ Report includes that specific information presented in
the Chief Executive’s Statement section of the Directors’ Report. We also report to you if, in our opinion, the company has not kept proper
accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by
law regarding directors’ remuneration and other transactions is not disclosed.
We review whether the Corporate Governance Statement reflects the company’s compliance with the nine provisions of the 2003 FRC
Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not
required to consider whether the board’s statements on internal control cover all risks and controls or form an opinion on the effectiveness
of the group’s corporate governance procedures or its risk and control procedures.
We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements.
We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial
statements. Our responsibilities do not extend to any other information.
Basis of Audit Opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the
part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements
made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s
and company’s circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide
us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report
to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also
evaluated the overall adequacy of the presentation of information in the group financial statements and the part of the Directors’
Remuneration Report to be audited.
Opinion
In our opinion:
k the consolidated financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the
group’s affairs as at 31 March 2007 and of its profit for the year then ended;
k the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU as applied
in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as at 31 March 2007;
k the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in
accordance with the Companies Act 1985 and, as regards the financial statements, Article 4 of the IAS Regulation; and
k the information given in the Director’s Report is consistent with the financial statements
KPMG Audit Plc
Chartered Accountants
Registered Auditor
Edinburgh
30 May 2007
Scottish and Southern Energy
Annual Report 2007
Consolidated Income Statement
for the year ended 31 March
2007
2006
Before
exceptional
items and certain
re-measurements
£m
Exceptional
items and certain
re-measurements
(note 4)
£m
11,867.1
(10,247.7)
1,619.4
(557.5)
–
–
1,061.9
169.2
(117.9)
–
(31.8)
19.5
1,081.4
193.4
(230.9)
1,043.9
(276.4)
767.5
767.5
–
61.3
61.3
–
33.0
–
94.3
0.9
–
5.5
(2.0)
4.4
98.7
–
(10.6)
88.1
(25.1)
63.0
63.0
Before
exceptional
items and certain
re-measurements
£m
Exceptional
items and certain
re-measurements
(note 4)
£m
10,145.2
(8,816.4)
1,328.8
(482.4)
–
–
846.4
167.1
(97.3)
–
(28.8)
41.0
887.4
164.9
(210.8)
841.5
(244.3)
597.2
597.2
–
(14.4)
(14.4)
–
92.1
18.6
96.3
16.7
–
(13.0)
(1.1)
2.6
98.9
–
(43.5)
55.4
(10.3)
45.1
45.1
Total
£m
11,867.1
(10,186.4)
1,680.7
(557.5)
33.0
–
1,156.2
170.1
(117.9)
5.5
(33.8)
23.9
1,180.1
193.4
(241.5)
1,132.0
(301.5)
830.5
830.5
96.5p
93.9p
Revenue
Cost of sales
Gross profit
Operating costs
Other operating income
Gain on disposal of subsidiary
Note
2
3
4
14
Operating profit before jointly
controlled entities and associates
Jointly controlled entities and associates:
Share of operating profit
Share of interest
Share of movement on derivatives
Share of tax
Share of profit on jointly controlled
entities and associates
12
Operating profit
Finance income
Finance costs
Profit before taxation
Taxation
Profit for the year
Attributable to:
Equity holders of the parent
Basic earnings per share (pence)
Diluted earnings per share (pence)
Dividends paid in the year (£m)
2
6
6
7
9
9
8
The accompanying notes are an integral part of these financial statements.
£411.3m
£378.8m
51
Total
£m
10,145.2
(8,830.8)
1,314.4
(482.4)
92.1
18.6
942.7
183.8
(97.3)
(13.0)
(29.9)
43.6
986.3
164.9
(254.3)
896.9
(254.6)
642.3
642.3
74.7p
72.9p
Scottish and Southern Energy
Annual Report 2007
Balance Sheets
as at 31 March
Assets
Property, plant and equipment
Intangible assets:
Goodwill
Other intangible assets
Investments in associates and jointly controlled entities
Investments in subsidiaries
Other investments
Trade and other receivables
Retirement benefit assets
Deferred tax assets
Derivative financial assets
Non-current assets
Intangible assets
Inventories
Trade and other receivables
Cash and cash equivalents
Derivative financial assets
Current assets
Total assets
Liabilities
Loans and other borrowings
Trade and other payables
Current tax liabilities
Provisions
Derivative financial liabilities
Current liabilities
Loans and other borrowings
Deferred tax liabilities
Trade and other payables
Provisions
Retirement benefit obligations
Derivative financial liabilities
Non-current liabilities
Total liabilities
Net assets
Equity:
Share capital
Share premium
Capital redemption reserve
Equity reserve
Hedge reserve
Retained earnings
Total equity attributable to equity holders of the parent
Consolidated
Company
Note
2007
£m
2006
restated
£m
11
10
10
12
13
16
26
22
28
10
15
16
17
28
21
18
19
23
28
21
22
18
23
26
28
24
25
25
25
25
25
5,042.1
4,646.6
293.2
12.9
702.3
–
4.1
–
128.1
66.0
54.5
293.4
12.5
703.1
–
3.3
–
90.2
86.0
34.4
6,303.2
5,869.5
177.7
214.1
1,861.4
56.1
452.9
2,762.2
9,065.4
474.8
1,935.1
199.2
8.0
351.9
2,969.0
1,803.8
923.7
327.7
104.4
220.0
120.9
3,500.5
6,469.5
2,595.9
431.0
99.1
13.7
14.6
(10.5)
2,048.0
2,595.9
284.7
164.2
1,662.9
49.9
287.2
2,448.9
8,318.4
417.3
1,834.6
165.4
2.8
205.2
2,625.3
1,797.6
919.1
396.7
79.0
284.0
71.3
3,547.7
6,173.0
2,145.4
430.2
90.7
13.7
14.6
6.6
1,589.6
2,145.4
2007
£m
–
–
–
516.9
777.9
–
1,783.5
128.1
–
–
3,206.4
–
–
1,754.3
5.8
–
1,760.1
4,966.5
349.5
2,573.9
10.1
–
–
2,933.5
820.8
27.9
–
–
–
44.9
893.6
3,827.1
1,139.4
431.0
99.1
13.7
14.6
(10.9)
591.9
52
2006
£m
–
–
–
521.9
777.9
–
1,794.3
90.2
–
–
3,184.3
–
–
1,083.1
25.7
–
1,108.8
4,293.1
384.8
1,900.5
18.1
–
–
2,303.4
816.5
24.9
–
–
–
20.9
862.3
3,165.7
1,127.4
430.2
90.7
13.7
14.6
3.1
575.1
1,139.4
1,127.4
These financial statements were approved by the Board of Directors on 30 May 2007 and signed on their behalf by:
Gregor Alexander
Finance Director
Sir Robert Smith
Chairman
Scottish and Southern Energy
Annual Report 2007
Statements of Recognised Income and Expense
for the year ended 31 March
(Losses)/gains on effective portion of cash flow hedges (net of tax)
Actuarial gain/(loss) on retirement benefit schemes (net of tax)
Jointly controlled entities and associates
Share of gains on effective portion of cash flow hedges (net of tax)
Share of actuarial (loss) on retirement benefit schemes (net of tax)
Other movements
Net income/(expense) recognised directly in equity
Profit for the year
Total recognised income and expense for the year
Attributable to:
Equity holders of the parent
Consolidated
Company
2007
£m
(22.6)
33.2
5.5
(1.4)
–
14.7
830.5
845.2
845.2
2006
£m
(11.7)
(9.9)
–
–
(0.4)
(22.0)
642.3
620.3
620.3
2007
£m
(14.0)
12.3
–
–
–
(1.7)
415.8
414.1
414.1
53
2006
£m
9.8
(20.3)
–
–
–
(10.5)
472.7
462.2
462.2
Scottish and Southern Energy
Annual Report 2007
Cash Flow Statements
for the year ended 31 March
Cash flows from operating activities
Profit for the year after tax
Taxation
Movement on financing and operating derivatives
Finance costs
Finance income
Share of jointly controlled entities and associates
Gain on disposal of subsidiary
Pension service charges less contributions paid
Depreciation and impairment of assets
Amortisation and impairment of intangible assets
Deferred income released
(Increase) in inventories
(Increase) in receivables
Increase in payables
Increase/(decrease) in provisions
Charge in respect of employee share awards
Profit on disposal of property, plant and equipment
Loss on disposal of replaced assets
Cash generated from operations
Dividends received from jointly controlled entities
Dividends received from subsidiaries
Finance income
Finance costs
Income taxes (paid)/received
Payment for consortium relief
Net cash from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Purchase of software
Deferred income received
Proceeds from sale of property, plant and equipment
Net proceeds from sale of business (note 14)
Loans to jointly controlled entities
Loans to associates
Initial investment in Scotia Gas Networks (note 12)
Initial investment in Marchwood Power (note 12)
Loans repaid by jointly controlled entities
Loans repaid by associates
Investment in associate
Increase in other investments
Purchase of businesses and subsidiaries (note 14)
Net cash from investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Dividends paid to company’s equity holders
Employee share awards share purchase
New borrowings
Repayment of borrowings
Net cash from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the start of year (note 17)
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the end of year (note 17)
Consolidated
Company
2007
£m
830.5
301.5
(50.7)
230.9
(193.4)
(23.9)
–
(31.6)
239.1
57.2
(15.1)
(48.7)
(225.0)
40.4
25.7
6.8
(5.0)
1.7
1,140.4
22.7
–
63.4
(118.8)
(212.2)
(26.6)
868.9
(564.1)
(3.7)
12.4
13.0
–
(5.5)
–
–
(5.0)
33.8
0.8
–
(2.8)
–
(521.1)
9.2
(411.3)
(8.2)
236.5
(169.4)
(343.2)
4.6
43.8
4.6
48.4
2006
£m
642.3
254.6
57.9
210.8
(164.9)
(43.6)
(18.6)
(22.3)
200.1
3.9
(16.4)
(30.8)
(585.1)
436.8
(14.5)
4.0
(5.2)
5.2
914.2
8.0
–
51.4
(119.5)
(217.9)
–
636.2
(529.4)
(1.2)
7.9
16.3
17.3
–
(0.7)
(505.0)
–
10.8
7.3
(15.0)
(1.9)
(0.6)
(994.2)
9.9
(378.8)
(9.5)
552.4
–
174.0
(184.0)
227.8
(184.0)
43.8
2007
£m
–
–
–
–
–
–
–
(11.6)
–
–
–
–
(259.9)
645.6
–
–
–
–
374.1
–
33.8
148.6
(157.2)
(4.8)
–
394.5
–
–
–
–
–
–
–
–
–
23.0
–
–
–
–
23.0
9.2
(411.3)
–
114.7
(150.0)
(437.4)
(19.9)
25.7
(19.9)
5.8
54
2006
£m
–
–
–
–
–
–
–
(9.3)
–
–
–
–
(11.4)
11.3
–
–
–
–
(9.4)
–
458.6
148.5
(135.1)
3.8
–
466.4
–
–
–
–
–
–
–
(505.0)
–
–
–
–
–
–
(505.0)
9.9
(378.8)
–
235.7
–
(133.2)
(171.8)
197.5
(171.8)
25.7
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements
for the year ended 31 March 2007
1. SIGNIFICANT ACCOUNTING POLICIES
55
General information
Scottish and Southern Energy plc (the Company) is a company domiciled in Scotland. The address of the registered office is given on
page 101. The Group’s principal activities are set out in the Directors’ Report at page 36. A review of the Group’s operations is set out in
the Chief Executive’s Statement at pages 10 to 35. The consolidated financial statements for the year ended 31 March 2007 comprise those
of the Company and its subsidiaries (together referred to as the Group). The Company financial statements present information about the
Company as a separate entity and not about the Group. Under section 230(4) of the Companies Act 1985 the Company is exempt from the
requirement to present its own income statement and related notes.
BASIS OF PREPARATION
Statement of compliance
The financial statements were authorised for issue by the Directors on 30 May 2007. The financial statements have been prepared in
accordance with International Financial Reporting Standards and its interpretations as adopted by the European Union (adopted IFRS).
Basis of measurement
The financial statements of the Group and the Company are prepared on the historical cost basis except that the following assets and
liabilities are stated at their fair value: certain derivative financial instruments and financial instruments classified as available for sale.
The Directors believe the financial statements present a true and fair view. The financial statements are presented in pounds sterling.
Use of estimates and judgements
The preparation of financial statements conforming with adopted IFRS requires the use of certain accounting estimates. It also requires
management to exercise judgement in the process of applying the accounting policies. The Group’s critical accounting estimates are
summarised at page 61.
As permitted by IAS 1 Presentation of Financial Statements, the Group has disclosed additional information in respect of jointly controlled
entities and associates, exceptional items and certain re-measurements on the face of the income statement to aid understanding of the
Group’s financial performance. An item is treated as exceptional if it is considered unusual by nature and scale and of such significance
that separate disclosure is required for the financial statements to be properly understood.
The following published standards and interpretations are not yet effective and have not been adopted early by the Group:
k IFRS 7 Financial Instruments: Disclosures
k IFRIC 8 Scope of IFRS 2 Share-based Payment
k IFRIC 9 Reassessment of Embedded Derivatives
k IFRIC 10 Interim Financial Reporting and Impairment (not yet endorsed)
k IFRIC 11 IFRS 2 – Group and Treasury share transactions (not yet endorsed)
k IFRIC 12 Service Concession Arrangements (not yet endorsed)
Restated amounts
Certain balance sheet items have been reclassified as current and non-current assets or liabilities to enhance understanding of the prior
year results and to aid comparability with the current year presentation. No revision on valuations has been made.
BASIS OF CONSOLIDATION
The financial statements consolidate the financial statements of the Company and its subsidiaries together with the Group’s share of the
results and net assets of its jointly controlled entities and associates.
Subsidiaries
Subsidiaries (including special purpose entities) are those entities controlled by the Group or the Company. Control exists when the Group
has the power, directly or indirectly, to govern the financial and operating policies of an entity in order to obtain benefits from its activities.
In assessing control, potential voting rights that are exercisable or convertible are taken into account. The financial statements of subsidiaries
acquired are consolidated in the financial statements of the Group from the date that control commences until the date control ceases.
All business combinations are accounted for by applying the purchase method of accounting.
In the Company, investments in subsidiaries are carried at cost less any impairment charges. Pre-acquisition dividends are accounted for
as a reduction in the cost of investment in the subsidiary.
Associates
Associates are those entities in which the Group has significant influence but not control over the financial and operating policies, namely
where the Group has a shareholding of between 20% and 50% of the voting rights. The consolidated financial statements include the Group’s
share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence
commences until the date that significant influence ceases.
Joint ventures
Jointly controlled entities are those entities over whose activities the Group has joint control, established by contractual agreement. In the
consolidated financial statements, investments are accounted for under the equity method of accounting, as permitted by IAS 31: Interests
in Joint Ventures. Jointly controlled operations are businesses which use assets and liabilities that are separable from the rest of the Group.
In these arrangements, the Group accounts for its own share of property, plant and equipment, carries its own inventories, incurs its own
expenses and liabilities and raises its own finance.
In the Company, investments in jointly controlled entities are carried at cost less any impairment charges.
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
56
for the year ended 31 March 2007
1. SIGNIFICANT ACCOUNTING POLICIES continued
Basis of consolidation continued
Transactions eliminated on consolidation
Intra-Group balances and any unrealised gains and losses or income and expenses arising from intra-Group transactions, are eliminated in
preparing the consolidated financial statements. Unrealised gains and losses arising from transactions with associates and jointly controlled
entities are eliminated to the extent of the Group’s interest in the entity.
Accounting policies
Revenue recognition: energy, services and goods relating to the sale of energy
Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and that the revenue can be reliably
measured. Revenue comprises sales of energy, use of system income, gas storage facility revenue, the value of services and facilities
provided and goods sold during the year in the normal course of business.
Revenue on energy sales, including monies received from the electricity and gas balancing markets in the UK and wholesale market energy
sales, includes an estimate of the value of electricity and gas supplied to customers between the date of the last meter reading and the year
end.
Revenue from use of energy systems includes an estimation of the volume of electricity distributed or transmitted by customers based
on independently procured electricity settlement systems data. Annual revenue is dependent on being approved by the industry regulator,
Ofgem. Certain circumstances may result in the regulatory ‘allowed’ income being over- or under-recovered in the financial year. Any
over- or under-recovery is included into the calculation of the following year’s regulatory use of system revenue within agreed parameters.
No adjustment is made for over- or under-recoveries in the year that they arise.
Where the Group has an ongoing obligation to provide services, revenues are recognised as the service is performed and amounts billed in
advance are treated as deferred income and excluded from current turnover.
Gas storage facilities revenues are recognised evenly over the contract period, whilst revenues for the injection and withdrawal of gas are
recognised at the point of gas flowing into or out of the storage facilities.
Sales of goods are recognised when goods are delivered and title has passed, along with the risks and rewards of ownership.
Government grants and customer contributions
A government grant is recognised in the balance sheet initially as deferred income when there is reasonable assurance that it will be
received and that the Group will comply with the conditions attaching to it. Grants that compensate the Group for expenses incurred are
recognised in the income statement on a systematic basis in the same years in which the expenses are incurred. Grants that compensate
the Group for the cost of an asset are recognised in the income statement on a systematic basis over the useful life of the asset to match
the depreciation charge. Customer contributions and capital grants have been recorded as deferred income and released to the income
statement over the estimated life of the related assets.
Operating lease payments
Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.
Lease incentives received are recognised in the income statement as an integral part of the total lease expense.
Finance lease payments
Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is
allocated to each year during the lease term in order to produce a constant periodic rate of interest on the remaining balance of the liability.
Finance income and costs
Finance income comprises interest receivable on funds invested and returns on pension scheme assets recognised in the income statement.
Finance costs comprise interest payable on borrowings, the release of discounting on provisions, interest on pension scheme liabilities and
accretion of the debt component on the convertible less capitalised interest.
Interest income and costs are recognised in the income statement as they accrue, on an effective interest method. The issue costs
and interest payable on bonds and all other interest payable and receivable is reflected in the income statement on the same basis.
Foreign exchange
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated
in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. Any gain or loss arising on the restatement of
such balances is taken to the income statement.
Scottish and Southern Energy
Annual Report 2007
57
Taxation
Taxation on the profit for the year comprises current and deferred tax. Taxation is recognised in the income statement unless it relates
to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance
sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is calculated using the balance sheet liability method, providing for temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are
not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities other than in business combinations
that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably
not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of
the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
Deferred tax assets and liabilities are offset where there is a legally enforceable right of offset within the same tax authority and where the
Company intends to either settle them on a net basis, or to realise the asset and settle the liability simultaneously.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset
can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Dividends
Dividend income is recognised on the date the entity’s right to receive payments is established.
Property, plant and equipment
(i) Owned assets
Items of property, plant and equipment are stated at cost less accumulated depreciation and impairments. The cost of self-constructed
assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. Interest on the funding
attributable to major capital projects is capitalised during the years of construction and depreciated as part of the total cost over the
useful life of the asset. All items of property, plant and equipment are accounted for under the cost model within IAS 16.
Where an item of property, plant and equipment comprises major components having different useful lives, the components are
accounted for as separate items of property, plant and equipment, and depreciated accordingly.
It is the Group policy to capitalise replacement expenditure and depreciate it over the expected useful life of the replaced asset.
Replaced assets are derecognised at this point. Where an item of property, plant and equipment is replaced and it is not practicable to
determine the carrying amount of the replaced part, the cost of the replacement adjusted for inflation will be used as an approximation
of the cost of the replaced part at the time it was acquired or constructed.
(ii) Leased assets
Leases where the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. All other leases
are classified as operating leases. Rentals payable under operating leases are charged to the income statement on a straight line basis
over the lease term.
Assets held under finance leases are recognised as assets of the Group at the fair value or, if lower, at the present value of the minimum
lease payments, each determined at the inception of the lease. The corresponding liability is included in the balance sheet as a finance
lease obligation. Lease payments are apportioned between finance charges and reduction of lease obligation so as to achieve a constant
rate of interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they are directly
attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs.
Benefits received and receivable as an incentive to enter into an operating lease are also allocated on a straight line basis over the
lease term.
(iii) Hydro civil assets
The Group is obliged under the Reservoirs Act 1975 to maintain its hydro infrastructure network, including its dams, tunnels and other
hydro civil engineering structures (hydro civil assets). All items of property, plant and equipment within hydro civil assets, with the
exception of land, are subject to depreciation.
In accordance with the transition provisions of IFRS 1, the Group identified the carrying value of these assets at privatisation and has
treated this value as deemed cost. Following this assessment, the assets, and all subsequent enhancement and replacement expenditure,
has been subject to depreciation over a useful economic life of 100 years. All subsequent maintenance expenditure is chargeable directly
to the income statement.
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
58
for the year ended 31 March 2007
1. SIGNIFICANT ACCOUNTING POLICIES continued
Accounting policies continued
(iv) Depreciation
Depreciation is charged to the income statement to write off cost, less residual values, on a straight line basis over their estimated
useful lives. Depreciation policy, useful lives and residual values are reviewed at least annually, for all asset classes to ensure that
the current method is the most appropriate. The estimated useful lives are as follows:
Hydro civil assets
Power stations
Gas storage facilities
Overhead lines, underground cables and other network assets
Other transmission and distribution buildings, plant and equipment
Shop refurbishment, fixtures, equipment, vehicles and mobile plant
Heritable and freehold land is not depreciated.
Years
100
20 to 60
25 to 50
40 to 80
10 to 45
3 to 10
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter,
over the term of the relevant lease.
(v) Subsequent expenditure
Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately is capitalised.
Other subsequent expenditure is capitalised only when it increases the future economic benefits of the item of property, plant and
equipment to which it relates.
Business combinations
The acquisition of subsidiaries is accounted for under the purchase method. The acquired business is measured at the date of acquisition
as the aggregate fair value of assets, liabilities and contingent liabilities as required under IFRS 3 Business Combinations. The excess of
the cost of acquisition over the fair value of the acquired business is represented as goodwill.
Intangible assets
i) Goodwill
Goodwill arising on a business combination represents the excess of the cost of acquisition over the Group’s interest in the fair value
of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition.
Goodwill is recognised as an asset and is reviewed for impairment at least on an annual basis. Any impairment is recognised
immediately as a charge in the income statement and is not subsequently reversed.
From 1 April 1998 to 31 March 2004, any purchased goodwill was capitalised and amortised on a straight-line basis to the income
statement. This was normally over a period of up to 20 years from the date of acquisition, with the exception of goodwill relating to the
acquisitions of the Hornsea and Neos businesses, which were amortised over a period of 30 years and 10 years respectively. Goodwill
arising on acquisitions purchased prior to 1 April 1998 was written-off to reserves in accordance with the accounting standard then in
force. In respect of acquisitions prior to 1 April 2004, goodwill is included on the basis of deemed cost which represents the carrying
amount at 1 April 2004. The goodwill amortised between 1 April 2004 and 31 March 2005 was reinstated. On disposal or closure of a
previously acquired business, any attributable goodwill will be included in determining the profit or loss on disposal, with the exception
of any goodwill written off prior to 1 April 1998.
ii) Research and development
Expenditure on research activities is charged to the income statement as incurred. Expenditure on development activities, whereby
research findings are applied to a plan or design for the production of new or substantially improved products or processes, is
capitalised if the product or process is considered to be technically and commercially feasible and the Group intends to complete
the intangible asset for use or for sale.
iii) Allowances and emissions
The European Emissions trading scheme (EU ETS) has been in operation since 1 January 2005. The IASB withdrew IFRIC 3 Emission
Rights in June 2005 and it has not been replaced with definitive guidance or interpretation for carbon emissions trading. The Group
recognises carbon allowances granted as a current intangible asset at fair value at the date of grant and does not subsequently revalue
these allowances. Carbon emission liabilities incurred are recorded as a current liability. Carbon allowances purchased are recorded
at cost. Up to the level of allowances held the liability is measured at the cost of purchased or granted allowances held. When carbon
emissions liabilities exceed the carbon allowances held, the net liability is measured at the market price of allowances. Forward carbon
contracts are measured at fair value.
The Renewable Obligations Certificates (ROCs) scheme is administered and accounted for in a similar but not identical manner to
the European Emissions trading scheme. ROCs obtained from own generation are awarded by a third party. Self-generated ROCs are
recorded at market value and purchased ROCs are recognised at cost, both within intangible assets. The liability under the renewables
obligation is recognised based on electricity supplied to customers, the percentages set by Ofgem and the prevailing market price.
Scottish and Southern Energy
Annual Report 2007
59
iv) Other intangible assets
Other intangible assets that have been acquired by the Group, including the Atlantic brand, are stated at cost less accumulated
amortisation and impairment losses. Software licenses are stated at cost less accumulated amortisation. Expenditure on internally
generated brands is expensed as incurred. Amortisation is charged to the income statement on a straight-line basis over the
estimated useful life of these other intangible assets. The amortisation periods utilised are as follows:
Brand values
Application software licences
Years
10
5
Impairment testing
The carrying amounts of the Group’s assets, other than inventories or deferred tax assets, are reviewed each financial year to determine
whether there is any indication of impairment. If there is evidence of impairment, the recoverable amount of the asset is estimated to
determine the extent of any such impairment. For goodwill and other intangible assets with an indefinite life, the test for impairment is
carried out annually.
The recoverable amount is the higher of fair value less costs to sell and value in use. Value in use is based on projected cash flows which
are discounted for risks and the time value of money. Where the cash flows of the asset under review cannot be assessed independently
from other assets, the Group estimates to which cash-generating unit (CGU) the asset belongs. Once established, the discounted projected
cash flows of the asset or CGU are calculated and measured against the carrying amount of the asset or CGU. Where the recoverable
amount is lower than the carrying amount an impairment charge is recognised.
Inventories and work in progress
With the exception of fuel stocks, inventories are valued at the lower of cost (on a first-in, first-out basis) and net realisable value.
Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling
expenses. The value of fuel stocks is based on the weighted average principle. The valuation of work in progress is based on the cost of
labour, the cost of contractors, the cost of materials plus appropriate overheads.
Recognition of revenue and profit on construction contracts
Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage
of completion of the contract activity at the balance sheet date. This is normally measured as the proportion of cost incurred on work
performed to date compared to the estimated total contract cost, except where this would not be representative of the stage of completion.
Variations in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer.
When it becomes probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense
immediately in the income statement.
Employee benefit obligations
(i) Defined benefit pension schemes
The Group operates two defined benefit pension schemes, one of which is operated by the Company. Pension scheme assets are
measured using bid market values. Pension scheme liabilities are measured using the projected unit credit actuarial method and
are discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability.
Any increase in the present value of liabilities within the Group’s defined benefit pension schemes expected to arise from employee
service in the year is charged as service costs to operating profit.
The expected return on the schemes’ assets and the increase during the year in the present value of the schemes’ liabilities arising
from the passage of time are included in finance income and finance costs, respectively. Actuarial gains and losses are recognised in
full in the consolidated statement of recognised income and expense. Pension scheme surpluses, to the extent that they are considered
recoverable, or deficits are recognised in full and presented on the face of the balance sheet.
(ii) Defined contribution pension schemes
The Group also operates a number of defined contribution pension schemes. The assets of the schemes are held separately from those
of the Group in independently administered funds. The amounts charged represent the contributions payable to the schemes in the year
and are charged directly to the income statement.
(iii) Equity and equity-related compensation benefits
Following the transitional provisions of IFRS 1, the requirements of IFRS 2 Share-based Payments have been applied to all grants
of equity instruments after 7 November 2002 that had not vested as at 1 January 2005.
The Group operates a number of employee share schemes as described in the Remuneration Report and note 27. These schemes
enable Group employees to acquire shares of the Company.
The exercise prices of the sharesave scheme are set at a discount to market price at the date of the grant. The fair value of the sharesave
scheme option granted is measured at the grant date by use of a Black-Scholes model. The fair value of the options granted is recognised
as an expense on a straight-line basis over the period that the scheme vests. Estimates are updated for non-market conditions at each
balance sheet date with any adjustment in respect of the current and prior years being recognised in the income statement.
The costs associated with the other main employee schemes are recognised over the period to which they relate.
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
60
for the year ended 31 March 2007
1. SIGNIFICANT ACCOUNTING POLICIES continued
Accounting policies continued
Financial instruments
The Group uses a range of financial instruments to hedge exposures to financial risks, such as interest rate, foreign exchange and energy
price fluctuations in its normal course of business and in accordance with the Group’s risk management policies. The Group’s risk management
policies are further explained in Note 28.
Accounting policies under IAS 32 and 39
(i)
Interest rate and foreign exchange derivatives
Financial derivative instruments are used by the Group to hedge interest rate and currency exposures. All such derivatives are recognised
at fair value and are re-measured to fair value each reporting period. Certain derivative financial instruments are designated as being
held for hedging purposes. The designation of the hedge relationship is established at the inception of the contract and procedures
are applied to ensure the derivative is highly effective in achieving its objective and that the effectiveness of the hedge can be reliably
measured. The treatment of gains and losses on re-measurement is dependent on the classification of the hedge and whether the
hedge relationship is designated as either a ‘fair value’ or ‘cash flow’ hedge. Derivatives that are not designated as hedges are treated
as if held for trading, with all fair value movements attributable to the risk being hedged being recorded through the income statement.
A derivative classified as a ‘fair value’ hedge recognises gains and losses from re-measurement immediately in the income statement.
Loans and borrowings are measured at cost except where they form the underlying transaction in an effective fair value hedge
relationship. In such cases, the carrying value of the loan or borrowing is adjusted to reflect fair value movements with the gain
or loss being reported in the income statement.
A derivative classified as a ‘cash flow’ hedge recognises the portion of gains or losses on the derivative which are deemed to be effective
directly in equity in the hedge reserve. Any ineffective portion of the gains or losses is recognised in the Income Statement. The gains or
losses that are recognised directly in equity are transferred to the income statement in the same period in which the forecast
transaction actually occurs.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for
hedge accounting. At the point of discontinuation, any cumulative gain or loss on the hedging instrument recognised in equity remains
in equity until the forecast transaction settles. On settlement, the cumulative gain or loss recognised in equity is recognised in the
income statement.
(ii) Commodity derivatives
Within its regular course of business, the Group routinely enters into sale and purchase derivative contracts for commodities such
as electricity, gas, coal and oil. Where the contract was entered into and continues to be held for the purpose of receipt or delivery
in accordance with the Group’s expected sale, purchase or usage requirements, the contracts are designated as ‘own use’ contracts
and are measured at cost. These contracts are not within the scope of IAS 39.
Derivative commodity contracts which are not designated as own use contracts are accounted for as trading derivatives and are
recognised in the balance sheet at fair value. Where a hedge accounting relationship is designated and is proven to be effective,
the changes in fair value will be recognised in accordance with the rules noted in part (i) to this note.
Other commodity contracts, where own use is not established and a hedge accounting relationship is not designated, are measured
at fair value with gains and losses on re-measurement being recognised in the income statement.
(iii) Embedded derivatives
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives where the
characteristics of the derivatives are not closely related to those of the host contracts.
(iv) Convertible bond
The Group has issued a convertible bond which represents debt that can be converted to share capital at the option of the holder, where
the number of shares issued does not vary with changes in their fair value. This is accounted for as a compound financial instrument,
net of transaction costs. The equity component of the convertible bond is calculated as the excess of the issue proceeds over the present
value of the future interest and principal payments, discounted at the market rate of interest applicable to similar liabilities that do not
have a conversion option. The interest expense recognised in the income statement is calculated using the effective interest method.
(v) Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an
integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the
statement of cash flows.
(vi) Trade receivables
Trade receivables do not carry any interest and are measured at cost less an appropriate allowance for irrecoverable receivables.
Scottish and Southern Energy
Annual Report 2007
61
(vii) Interest-bearing loans and borrowings
All such loans and borrowings are initially recognised at fair value including transaction costs and are subsequently measured
at amortised cost, except where the loan or borrowing is the hedged item in an effective fair value hedge relationship.
(viii) Share capital
Ordinary shares are accounted for as equity. Costs associated with the issue of new shares are deducted from the proceeds of issue.
Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and
it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined
by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and,
where appropriate, the risks specific to the liability.
Critical accounting judgements and key sources of estimation uncertainty
In the process of applying the Group’s accounting policies, management necessarily makes judgements and estimates that have a
significant effect on the amounts recognised in the financial statements. Changes in the assumptions underlying the estimates could
result in a significant impact to the financial statements. The most critical of these accounting judgement and estimation areas are noted.
(i) Revenue recognition
Revenue on energy sales includes an estimate of the value of electricity or gas supplied to customers between the date of the last meter
reading and the year end. This will have been estimated by using historical consumption patterns and takes into consideration industry
reconciliation processes for total consumption by supplier. At the balance sheet date, the estimated consumption by customers will
either have been billed (estimated billed revenue) or accrued (unbilled revenue). Management apply judgement to the measurement of
the quantum of the estimated consumption and to the valuation of that consumption. The judgements applied, and the assumptions
underpinning these judgements are considered to be appropriate. However, a change in these assumptions would impact upon the
amount of revenue recognised.
(ii) Retirement benefits
The assumptions in relation to the cost of providing post-retirement benefits during the period are set after consultation with qualified
actuaries. While these assumptions are believed to be appropriate, a change in these assumptions would impact the earnings of the
Group.
(iii) Impairment testing
The Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that the
value of those assets is impaired. In assessing for impairment, assets that do not generate independent cash flows are allocated to
an appropriate cash generating unit (CGU). The recoverable amount of the assets, or the appropriate CGU, is measured as the higher
of their fair value less costs to sell and value in use.
Management necessarily apply judgement in allocating assets that do not generate independent cash flows to appropriate CGUs.
The value in use calculation also requires estimation of the timing and value of underlying projected cash flows. Subsequent changes
to these estimates or judgements may impact the carrying value of the assets within the respective CGUs.
(iv) Provisions and contingencies
The assessments undertaken in recognising provisions and contingencies have been made in accordance with IAS 37. The evaluation
of the likelihood of the contingent events has required best judgement by management regarding the probability of exposure to potential
loss. Should circumstances change following unforeseeable developments, this likelihood could alter.
(v) Financial Instruments – fair values
The valuation of the financial instruments reported in note 28 is based upon published price quotations in active markets and valuation
techniques where such information is not available. More detail on this is included in note 28.
2. SEGMENTAL INFORMATION
Primary reporting format – business segments
The primary segments are as reported for management purposes and reflect the day-to-day management of the business. The Group’s
primary segments are the distribution and transmission of electricity in the North of Scotland, the distribution of electricity in the South
of England (together referred to as Power Systems) and the generation and supply of electricity and sale of gas in Great Britain (Generation
and Supply). The Group’s 50% equity share in Scotia Gas Networks plc, a business which distributes gas in Scotland and the South of
England (see note 14) is included as a separate business segment where appropriate due to its significance.
Analysis of revenue, operating profit, assets, liabilities and other items by segment is provided below. All revenue and profit before taxation
arise from operations within Great Britain and Ireland.
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
62
for the year ended 31 March 2007
2. SEGMENTAL INFORMATION continued
Primary reporting format – business segments continued
a) Revenue by segment
Power Systems
Scotland
England
Generation and Supply
Other businesses
Total revenue
2007
£m
2006
£m
Intra-segment revenue (i)
2006
2007
£m
£m
External revenue
2007
£m
2006
£m
270.4
407.4
677.8
10,977.9
859.4
12,515.1
261.1
415.9
677.0
9,287.8
783.3
10,748.1
99.1
189.6
288.7
15.4
343.9
648.0
104.1
204.0
308.1
27.4
267.4
602.9
171.3
217.8
389.1
10,962.5
515.5
11,867.1
157.0
211.9
368.9
9,260.4
515.9
10,145.2
(i)
Intra-segment revenue is derived from use of system income received by the Power Systems businesses from Generation and Supply,
provision of Contracting, Metering and Connections services, use of Gas Storage facilities, Telecoms infrastructure charges, internal
heat and light charges and other Corporate services. All are provided on an arm’s length basis.
Revenue from the Group’s investment in Scotia Gas Networks (SSE share being 2007 – £297.3m; 2006 – £261.5m) is not recorded in the
revenue line in the income statement.
b) Operating profit by segment
2007
Power Systems
Scotland
England
Scotia Gas Networks
Energy Systems
Generation and Supply
Other businesses
Unallocated expenses (ii)
Power Systems
Scotland
England
Scotia Gas Networks
Energy Systems
Generation and Supply
Other businesses
Unallocated expenses (ii)
Adjusted
£m
144.0
224.0
368.0
103.1
471.1
642.6
125.2
1,238.9
(7.8)
1,231.1
Adjusted
£m
141.8
226.1
367.9
102.7
470.6
444.8
106.0
1,021.4
(7.9)
1,013.5
JCE/Associate
share of interest
Before
exceptional
items and certain
and tax (i) re-measurements
£m
£m
–
–
–
(122.2)
(122.2)
(27.1)
(0.4)
(149.7)
–
(149.7)
144.0
224.0
368.0
(19.1)
348.9
615.5
124.8
1,089.2
(7.8)
1,081.4
2006
Exceptional
items and certain
re-measurements
£m
–
–
–
3.8
3.8
94.9
–
98.7
–
98.7
JCE/Associate
share of interest
and tax (i)
£m
Before
exceptional
items and certain
re-measurements
£m
Exceptional
items and certain
re-measurements
£m
–
–
–
(97.9)
(97.9)
(28.2)
–
(126.1)
–
(126.1)
141.8
226.1
367.9
4.8
372.7
416.6
106.0
895.3
(7.9)
887.4
–
–
–
(9.1)
(9.1)
89.4
18.6
98.9
–
98.9
Total
£m
144.0
224.0
368.0
(15.3)
352.7
710.4
124.8
1,187.9
(7.8)
1,180.1
Total
£m
141.8
226.1
367.9
(4.3)
363.6
506.0
124.6
994.2
(7.9)
986.3
(i) The adjusted operating profit of the Group is reported after removal of the Group’s share of interest, fair value movements on financing
derivatives and tax from jointly controlled entities and associates. The share of Scotia Gas Networks plc interest and tax includes loan
stock interest payable to the consortium shareholders (£35.8m; 2006 – £28.8m), other interest payable (£70.6m; 2006 – £54.1m) and tax
(£15.8m; 2006 – £15.0m). The Group has accounted for its 50% share of the loan stock interest, £35.8m (2006 – £28.8m), as finance
income (note 6). The gas distribution network businesses owned by Scotia Gas Networks plc were acquired on 1 June 2005 (note 14).
Scottish and Southern Energy
Annual Report 2007
63
(ii) Unallocated expenses comprise corporate office costs which are not directly allocable to particular segments.
The Group’s share of operating profit from jointly controlled entities and associates has been recognised in Generation and Supply other than
that from Scotia Gas Networks plc, which is recorded as a separate segment, and PriDE (South East Regional Prime), which is recognised in
other businesses (£1.4m before tax; 2006 – nil).
c) Assets and liabilities
Power Systems
Scotland
England
Scotia Gas Networks (iii)
Energy Systems
Generation and Supply (iv)
Other businesses (iv)
Corporate and unallocated
Less: inter-segment
Segment Assets (i)
Segment Liabilities (ii)
Capital additions to Property
Plant and Equipment
(note 11)
2007
£m
1,363.8
2,202.9
3,566.7
438.8
4,005.5
8,992.9
1,203.7
6,907.5
2006
£m
1,338.7
2,030.7
3,369.4
455.0
3,824.4
7,837.3
1,069.8
5,515.2
2007
£m
898.4
1,446.0
2,344.4
–
2,344.4
7,590.8
742.5
7,836.0
2006
£m
473.4
1,331.4
1,804.8
–
1,804.8
6,105.4
669.4
7,521.7
21,109.6
(12,044.2)
9,065.4
18,246.7
(10,067.5)
8,179.2
18,513.7
(12,044.2)
6,469.5
16,101.3
(10,067.5)
6,033.8
2007
£m
73.9
130.6
204.5
–
204.5
299.6
126.8
–
630.9
–
630.9
2006
£m
61.0
111.1
172.1
–
172.1
228.7
101.3
–
502.1
–
502.1
(i) Segment assets consist of property, plant and equipment, goodwill, other intangible assets, investments in joint ventures and
associates, inventories, financial assets (operating derivatives), receivables and cash. Unallocated assets include pension assets,
deferred tax assets, financial assets (financing derivatives) and investments.
(ii) Segment liabilities consist of operating liabilities. Unallocated liabilities include taxation, corporate borrowings, pension liabilities
and deferred taxation.
(iii) The asset balance represents the Group’s net investment in Scotia Gas Networks plc. The Group’s share of the capital additions in
Scotia Gas Networks plc is not included within Property, Plant and Equipment.
(iv) Excluding Scotia Gas Networks plc, investments in joint ventures and associates included within segment assets constitute £262.5m
(2006 – £247.4m) in Generation and Supply and £1.0m (2006 – £0.7m) in Other businesses.
d) Other non-cash expenses
Power Systems
Scotland
England
Generation and Supply
Other businesses
Corporate and unallocated
Depreciation/
Impairment on Property,
Plant and Equipment
(note 11)
Amortisation/
impairment of capital
(note 10)
2007
£m
38.3
63.8
102.1
99.1
36.5
–
237.7
237.7
2006
£m
37.4
60.7
98.1
71.6
30.4
–
200.1
200.1
2007
£m
–
–
–
54.8
–
2.4
57.2
57.2
2006
£m
–
–
–
0.9
–
3.0
3.9
3.9
The Group’s share of Scotia Gas Networks plc depreciation (2007 – £39.9m; 2006 – £34.9m) and amortisation (2007 – nil; 2006 – nil) is not
included within operating costs. Property, plant and equipment impairment charges of £13.9m (2006 – nil) are included within Generation
and Supply. The impairment charge relating to granted carbon allowances of £53.9m (2006 – nil) has nil impact on the Income Statement
(note 10).
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
for the year ended 31 March 2007
3. OTHER OPERATING INCOME AND EXPENSE
Group operating costs can be analysed thus:
Distribution costs
Administration costs
Group operating profit is stated after charging (or crediting) the following items:
Depreciation and impairment of property, plant and equipment (note 11)
Impairment of investment
Research and development costs
Operating lease rentals (note 30)
Release of deferred income in relation to customer contributions and capital grants
Gain on disposal of property, plant and equipment
Loss on disposal of replaced assets
Amortisation of brand costs (note 10)
Amortisation of intangible assets (note 10)
2007
£m
265.8
291.7
557.5
2007
£m
237.7
1.4
6.3
235.8
(15.1)
(5.0)
1.7
0.9
2.4
No charge has been recognised in respect of the impairment of granted carbon allowances (£53.9m) as this has been offset by an equal
deduction in the related carbon emissions liability (note 10).
Auditor’s remuneration
Statutory audit services – SSE Group
Other Fees
Statutory audit of subsidiary accounts
Audit of parent and subsidiary entities
Other services
2007
£m
0.2
0.2
0.4
0.2
64
2006
£m
238.6
243.8
482.4
2006
£m
200.1
–
1.4
185.8
(16.4)
(5.2)
5.2
0.9
3.0
2006
£m
0.2
0.2
0.4
0.6
Tax service fees (included within Other above) incurred in the year were £0.04m (2006 – £0.03m).
In addition to the amounts shown above, the auditors received fees of £0.04m (2006 – £0.03m) for the audit of the Scottish Hydro-Electric
Pension Scheme. A description of the work of the Audit Committee is set out at pages 39 and 40 and includes an explanation of how auditor
objectivity and independence is safeguarded when non-audit services are provided by the auditors.
Amounts paid to the Company’s auditor in respect of services to the Company other than the audit of the Company’s financial statements
have not been disclosed as the information is required instead to be disclosed on a consolidated basis.
4. EXCEPTIONAL ITEMS AND CERTAIN RE-MEASUREMENTS
i)
Exceptional items
The financial statements to 31 March 2007 included net dividends of £33.0m (2006 – £92.1m) received or approved in relation to
the administration of TXU Europe Energy Trading Limited which had been placed into administration in 2002. The net receipts have
been shown separately in the income statement. In addition to this, the Group’s share of the net dividend from the administration
of TXU Europe Energy Trading Limited recognised as income by an associate company, Barking Power Limited, amounting to
£0.9m (2006 – £16.7m) is shown separately within share of operating profit from jointly controlled entities and associates.
A gain on disposal of Thermal Transfer Limited, a wholly owned subsidiary, of £18.6m was recognised in the year to 31 March 2006.
Details of this are included at note 14. There is no tax effect on this exceptional item.
Scottish and Southern Energy
Annual Report 2007
65
ii) Certain re-measurements
Certain re-measurements arising from IAS 39 are disclosed separately to aid understanding of the underlying performance of the Group.
This category includes the movement on derivatives as described in note 28.
These transactions can be summarised thus:
Exceptional items
Distributions from TXU administrator
Disposal of Thermal Transfer
Certain re-measurements
Movement on operating derivatives (note 28)
Movement on financing derivatives (note 28)
Share of movement on derivatives in jointly controlled entities (note 14)
Profit before taxation
Taxation (1)
Impact on profit for the year
(1) Taxation includes £2.0m (2006 – £1.1m) recognised within share of associates and jointly controlled entities on the face of the income statement.
5. DIRECTORS AND EMPLOYEES
(i) Staff costs
Staff costs:
Wages and salaries
Social security costs
Share-based remuneration (note 27)
Pension costs (note 26)
Less: capitalised as property, plant and equipment
Employee numbers:
Numbers employed at 31 March
Consolidated
Company
2007
Number
13,427
2006
Number
12,287
2007
Number
4
2006
Number
4
The monthly average number of people employed by the Group (including Executive Directors) during the year was:
Power Systems
Generation and Supply
Other businesses and corporate services
2007
Number
2,274
4,695
5,503
12,472
Consolidated
2006
Number
2,249
4,102
5,404
11,755
Company
2007
Number
2006
Number
–
–
4
4
–
–
4
4
The costs associated with the employees of the Company, who are the executive Directors of the Group, are borne by Group companies.
No amounts are charged to the Company.
(ii) Directors’ remuneration and interests
Information concerning Directors’ remuneration, shareholdings, options, long term incentive schemes and pensions is shown in the
Remuneration Report on pages 44 to 49. No Director had, during or at the end of the year, any material interest in any other contract
of significance in relation to the Group’s business.
2007
£m
33.9
–
33.9
61.3
(10.6)
5.5
56.2
90.1
(27.1)
63.0
2007
£m
369.0
35.5
6.8
34.3
445.6
(48.3)
397.3
2006
£m
108.8
18.6
127.4
(14.4)
(43.5)
(13.0)
(70.9)
56.5
(11.4)
45.1
Consolidated
2006
£m
324.3
30.5
4.0
25.2
384.0
(51.1)
332.9
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
66
for the year ended 31 March 2007
6. FINANCE INCOME AND COSTS
Finance income:
Return on pension scheme assets
Interest income from short term deposits
Other interest receivable
Scotia Gas Networks loan stock
Other jointly controlled entities and associates
Other receivable
Total finance income
Finance costs:
Bank loans and overdrafts
Other loans and charges
Interest on pension scheme liabilities
Accretion of convertible debt component (note 21)
Less: interest capitalised (i)
Notional interest arising on discounted provisions
Finance costs excluding movement on financing derivatives
Movement on financing derivatives (note 28)
Total finance costs
Net finance costs
Year ended
31 March 2007
£m
Year ended
31 March 2006
£m
130.1
3.8
35.8
9.5
14.2
59.5
193.4
(34.0)
(98.2)
(107.2)
(3.6)
13.5
(1.4)
(230.9)
(10.6)
(241.5)
115.7
3.3
28.8
10.4
6.7
45.9
164.9
(40.1)
(71.1)
(100.0)
(3.6)
8.3
(4.3)
(210.8)
(43.5)
(254.3)
(48.1)
(89.4)
(i) The capitalisation rate applied in determining the amount of borrowing costs to capitalise in the period was 5.42% (2006 – 5.52%).
Adjusted net finance costs are arrived at after the following adjustments:
Net finance costs
(add)/less:
Share of interest from jointly controlled entities and associates
Scotia Gas Networks loan stock
Other jointly controlled entities and associates
Accretion of convertible debt component (note 21)
Movement on financing derivatives (note 28)
Adjusted finance income and costs
(add)/less:
Return on pension scheme assets
Interest on pension scheme liabilities
Notional interest arising from discounted provisions
Adjusted finance income and costs for interest cover calculations
2007
£m
(48.1)
[35.8]
[82.1]
[117.9]
3.6
10.6
(151.8)
(130.1)
107.2
1.4
(173.3)
2006
£m
(89.4)
[28.8]
[68.5]
[97.3]
3.6
43.5
(139.6)
(115.7)
100.0
4.3
(151.0)
Scottish and Southern Energy
Annual Report 2007
7. TAXATION
Analysis of charge recognised in the income statement:
Current tax
UK corporation tax
Adjustments in respect of previous years
Total current tax
Deferred tax
Current year
Adjustments in respect of previous years
Total deferred tax
Total taxation charge
Before
exceptional
items and certain
re-measurements
£m
Exceptional
items and certain
re-measurements
£m
286.5
(19.9)
266.6
7.1
2.7
9.8
276.4
9.9
–
9.9
15.2
–
15.2
25.1
67
2006
£m
245.7
(0.4)
245.3
(2.7)
12.0
9.3
Before
exceptional
items and certain
re-measurements
£m
Exceptional
items and certain
re-measurements
£m
218.1
(0.4)
217.7
14.6
12.0
26.6
27.6
–
27.6
(17.3)
–
(17.3)
2007
£m
296.4
(19.9)
276.5
22.3
2.7
25.0
301.5
244.3
10.3
254.6
The charge for the year can be reconciled to the profit per the income statement as follows:
Group profit before tax
Less: share of results of associates and jointly controlled entities
Profit before tax
Tax on profit on ordinary activities at standard UK corporation tax
rate of 30% (2006 – 30%)
Tax effect of:
Expenses not deductible for tax purposes
Non taxable income
Adjustments to tax charge in respect of previous years
Consortium relief not paid for
Utilisation of tax losses
Group tax charge and effective rate
2007
£m
1,132.0
(23.9)
1,108.1
332.4
1.5
(6.3)
(17.1)
(8.9)
(0.1)
301.5
2007
%
30.0
0.1
(0.6)
(1.5)
(0.8)
–
27.2
2006
£m
896.9
(43.6)
853.3
256.0
0.7
(4.8)
11.6
(8.6)
(0.3)
254.6
2006
%
30.0
0.1
(0.6)
1.3
(1.0)
–
29.8
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
for the year ended 31 March 2007
7. TAXATION continued
The adjusted current tax charge is arrived at after the following adjustments:
Total taxation charge
Effect of adjusting items (see below)
Total taxation charge on adjusted basis
(add)/less:
Share of current tax from jointly controlled entities and associates
Exceptional items
Tax on movement on derivatives
Deferred tax (including share of jointly controlled entities)
Adjusted current tax charge and effective rate
The adjusted effective rate is based on adjusted profit before tax being:
2007
£m
301.5
–
301.5
16.0
(9.9)
(15.2)
(9.8)
282.6
Profit before tax
(add)/less:
Exceptional items and certain re-measurements
Share of tax from jointly controlled entities and associates
Accretion of convertible debt component (note 21)
Adjusted profit before tax
Tax charge/(credit) recognised directly in equity
Relating to:
Pension scheme actuarial movements
Cash flow hedge movements
Share based payments
2006
£m
254.6
–
254.6
13.8
(27.6)
17.3
(26.6)
231.5
2007
%
26.6
1.3
27.9
1.5
(0.9)
(1.4)
(0.9)
26.2
2007
£m
1,132.0
(88.1)
31.8
3.6
1,079.3
2007
£m
14.2
(9.8)
(8.8)
(4.4)
All tax recognised directly in equity is deferred tax other than £4.0m (2006 – nil) current tax (credit) relating to employee share awards.
8. DIVIDENDS
Amounts recognised as distributions from equity:
Final dividend for the previous year of 32.7p (2006 – 30.3p) per share
Interim dividend for the current year of 15.1p (2006 – 13.8p) per share
Proposed final dividend for the current year of 39.9p (2006 – 32.7p) per share
2007
£m
281.3
130.0
411.3
343.9
68
2006
%
28.3
0.8
29.1
1.6
(3.2)
2.0
(3.0)
26.5
2006
£m
896.9
(55.4)
28.8
3.6
873.9
2006
£m
(4.2)
(5.1)
–
(9.3)
2006
£m
260.0
118.8
378.8
281.3
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability
in these financial statements. The final dividend paid, £281.3m (32.7p, 2006 – 30.3p), was declared on 31 May 2006, approved at the Annual
General Meeting on 27 July 2006 and was paid to shareholders on 22 September 2006. An interim dividend, £130.0m (15.1p, 2006 – 13.8p),
was paid on 23 March 2007.
Scottish and Southern Energy
Annual Report 2007
9. EARNINGS PER SHARE
69
Basic earnings per share
The calculation of basic earnings per share at 31 March 2007 is based on the net profit attributable to equity shareholders and a weighted
average number of ordinary shares outstanding during the year ended 31 March 2007. All earnings are from continuing operations.
Adjusted earnings per share
Adjusted earnings per share has been calculated by excluding the charge for deferred tax and exceptional items and certain remeasurements.
Basic
Exceptional items and certain re-measurements (note 4)
Basic excluding exceptional items and certain re-measurements
Adjusted for:
Deferred tax (note 7)
Deferred tax from share of jointly controlled entities and associates results
Accretion of convertible debt component (note 6)
Adjusted
Basic
Convertible debt interest (net of tax) (note 21)
Dilutive effect of convertible debt
Diluted
Exceptional items and certain re-measurements (note 4)
Diluted excluding exceptional items and certain re-measurements
The weighted average number of shares used in each calculation is as follows:
For basic and adjusted earnings per share
Effect of exercise of share options
Effect of dilutive convertible debt
For diluted earnings per share
Year ended
31 March 2007
Earnings
£m
Year ended
31 March 2007
Earnings
per share
pence
Year ended
31 March 2006
Earnings
£m
Year ended
31 March 2006
Earnings
per share
pence
830.5
(63.0)
767.5
9.8
15.8
3.6
796.7
830.5
10.7
–
841.2
(63.0)
778.2
96.5
(7.3)
89.2
1.1
1.8
0.4
92.5
96.5
1.2
(3.8)
93.9
(7.0)
86.9
642.3
(45.1)
597.2
26.6
15.0
3.6
642.4
642.3
10.5
–
652.8
(45.1)
607.7
74.7
(5.2)
69.5
3.1
1.7
0.4
74.7
74.7
1.2
(3.0)
72.9
(5.0)
67.9
31 March 2007
Number of shares
(millions)
31 March 2006
Number of shares
(millions)
860.9
1.8
862.7
33.3
896.0
859.5
1.7
861.2
33.3
894.5
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
for the year ended 31 March 2007
10. INTANGIBLE ASSETS
Consolidated
Cost:
At 1 April 2005
Additions
Acquisitions (note 14)
Disposals
At 31 March 2006
Additions
Other (note 14)
Disposals
At 31 March 2007
Aggregate amortisation and impairment:
At 1 April 2005
Charge for the year
At 31 March 2006
Charge for year
At 31 March 2007
Carrying amount:
At 31 March 2007
At 31 March 2006
At 1 April 2005
Goodwill
£m
Allowances and
certificates
(i)
£m
Development
expenditure
(ii)
£m
Brands
(iii)
£m
Other
intangibles
(iv)
£m
292.6
–
0.8
–
293.4
–
(0.2)
–
293.2
–
–
–
–
–
293.2
293.4
292.6
94.0
389.6
–
(198.9)
284.7
349.3
–
(402.4)
231.6
–
–
–
(53.9)
(53.9)
177.7
284.7
94.0
–
–
1.4
–
1.4
–
–
–
1.4
–
–
–
–
–
1.4
1.4
–
9.0
–
–
–
9.0
–
–
–
9.0
(0.8)
(0.9)
(1.7)
(0.9)
(2.6)
6.4
7.3
8.2
70
Total
£m
410.4
390.8
2.2
(198.9)
604.5
353.0
(0.2)
(402.4)
554.9
(10.0)
(3.9)
(13.9)
(57.2)
(71.1)
483.8
590.6
400.4
2006
£m
284.7
305.9
590.6
14.8
1.2
–
–
16.0
3.7
–
–
19.7
(9.2)
(3.0)
(12.2)
(2.4)
(14.6)
5.1
3.8
5.6
2007
£m
177.7
306.1
483.8
Intangible assets have been analysed as current and non-current as follows:
Current
Non-current
(i) Allowances and certificates
Allowances and certificates consist of granted or purchased carbon emissions allowances and generated or purchased renewable
obligations certificates (ROCs). These assets are reported as current assets which represents a change in presentation from the accounts
to 31 March 2006. The impairment charge reflects the reduction in the fair value of granted carbon allowances following the date of
grant. The value of carbon emissions liabilities was reduced by an identical amount resulting in a nil impact on the Income Statement.
(ii) Development expenditure
Development costs relate to the design, construction and testing of renewable generation devices which the Group believes will generate
probable future economic benefits.
(iii) Brands
Included within brands is the Atlantic brand, acquired on the acquisition of Atlantic Electric and Gas Limited (in administrative
receivership) during the year ended 31 March 2005. The Group have assessed the economic life of the Atlantic brand to be 10 years
and the brand is being amortised over this period. The charge is reported as part of operating costs.
(iv) Other intangible assets
Included within other intangible assets are application software license fees, software development work, software upgrades and
purchased PC software packages. These assets are amortised over 5 years.
The Company does not hold intangible assets.
Scottish and Southern Energy
Annual Report 2007
Impairment testing of goodwill:
Goodwill description
Swalec
Medway
Fiddlers Ferry and Ferrybridge
Hornsea
Neos
Connect South West
Eastern Contracting
Harrison Smith (Batley)
Cash-generating unit
Swalec (i)
Generation (ii)
Generation (ii)
SSE Hornsea Limited (iii)
Neos Networks Limited (iv)
Contracting (v)
Contracting (v)
Contracting (v)
71
2006
£m
187.0
22.2
17.7
56.2
7.8
0.8
0.9
0.8
293.4
2007
£m
187.0
22.2
17.7
56.2
7.8
0.8
0.9
0.6
293.2
Impairment review on goodwill balances
Goodwill is tested annually for impairment. The impairment test involves determining the cash generating unit to which the goodwill belongs
and thereafter estimating the recoverable amount of the cash generating unit, which is the higher of fair value less costs to sell or the value
in use. Value in use calculations have been used to determine the recoverable amounts for the cash generating units noted above. These
are based on five year projected cash flows extracted from the corporate business model which has been approved by the Executive and the
Board. Discount rates in the range of 9.5% to 10.5% on a pre-tax basis have been applied to those cash flows. The Generation and Supply
business segment, which is managed and accounted for as an integrated business unit, has been split into cash generating units for the
purpose of impairment testing only. The key assumptions applied in determining the recoverable amounts for the cash generating units
are as follows:
(i) Swalec
The impairment test on the carrying value of goodwill relating to Swalec is based on an assessment of the recoverable amount of
the Swalec business unit, which was acquired in 2001 and is an electricity and gas supply business serving, primarily, South Wales.
In projecting the gross margin for the business, factors such as market demand, market share and forward wholesale energy prices
are considered. Management believes that the assumed margins are reasonably achievable.
(ii) Generation
The impairment tests on the carrying value of goodwill relating to Medway and Fiddler’s Ferry/Ferrybridge is based on an assessment of
the recoverable amount of the Group’s combined Generation assets. The projected cash flows of this cash generating unit have been
assessed solely in order to comply with the requirements of IAS 36. In projecting the gross margin for the combined Generation assets,
factors such as market demand, market share and forward wholesale energy prices have been considered. Management believes
that the assumed margins are reasonably achievable. The specific goodwill balances relate to the following acquired businesses:
(a) Medway, a gas-fired power station, which was acquired after the acquisition of the remaining 62.5% shareholding in the power
station in November 2003, and (b), the Fiddlers Ferry and Ferrybridge coal-fired power stations, which were acquired in August 2004.
(iii) SSE Hornsea Limited
The impairment test on the carrying value of goodwill associated with Hornsea has been carried out based on the recoverable amount of
SSE Hornsea Limited. This is based on projected cash flows which include management estimates of projected demand for gas storage,
injection and withdrawal tariffs and wholesale gas prices. Management believes that the assumed margins are reasonably achievable.
(iv) Neos Networks Limited
The impairment test on the carrying value of goodwill associated with Neos has been carried out based on the recoverable amount of
Neos Networks Limited. This is based on projected cash flows which include management estimates of sales growth in the range of
10 – 20%. Management believes that the assumed margins are reasonably achievable.
(v) Contracting
The impairment test on the carrying value of goodwill related to the acquisitions of Eastern Contracting, Connect South West and
Harrison Smith (Batley) were based on cash flow projections of the acquiring subsidiary entity, Southern Electric Contracting, which
has successfully integrated these businesses into its operations. Management believes that the assumed margins included in the
projections are reasonably achievable. It should be noted that the carrying value of the goodwill associated with Harrison Smith (Batley)
has changed to £0.6m. This is explained at note 14.
In all cases management conclude that the projected future cash flows are sufficient to support the carrying value of the recognised
goodwill and the other cash generating unit assets. Management believe that while cash flow projections are subject to inherent uncertainty,
any reasonably possible changes to the key assumptions utilised in assessing recoverable amounts would not cause the carrying amounts
to exceed the recoverable amounts of the cash generating units identified. Management’s approach to assessing the value in use takes into
account past experience and other relevant external information.
Scotia Gas Networks investment in gas distribution networks
The Group’s share of Scotia Gas Networks’ investment in the gas distribution networks includes an amount of acquired goodwill. In testing
for impairment, management believe that both the fair value less costs to sell of the business and the value in use of the cash generating
unit support the carrying value of goodwill inherent in the Group’s financial statements.
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
for the year ended 31 March 2007
10. INTANGIBLE ASSETS continued
Goodwill is allocated to the following business segments:
Generation and Supply
Other businesses
11. PROPERTY, PLANT AND EQUIPMENT
Consolidated
Cost:
At 1 April 2005
Additions
Acquired (note 14)
Revised decommissioning provision (i)
Reclassification (ii)
Disposals (iii)
Disposal of subsidiary (note 14)
At 31 March 2006
Additions
New decommissioning provision (i)
Disposals (iii)
At 31 March 2007
Depreciation:
At 1 April 2005
Charge for the year
Reclassification (i)
Disposals (iii)
Disposal of subsidiary (note 14)
At 31 March 2006
Charge for the year (iv)
Disposals (iii)
At 31 March 2007
Net book value
At 31 March 2007
At 31 March 2006
At 1 April 2005
Generation and
gas storage assets
£m
Land and
buildings
£m
2,463.2
276.4
–
(14.2)
–
(34.9)
–
2,690.5
343.1
–
(1.1)
3,032.5
724.3
74.7
–
(10.7)
–
788.3
102.0
(0.8)
889.5
2,143.0
1,902.2
1,738.9
80.5
14.8
–
–
–
(0.1)
–
95.2
24.4
–
(0.2)
119.4
19.8
1.8
–
(0.1)
–
21.5
2.7
–
24.2
95.2
73.7
60.7
72
2006
£m
226.9
66.5
293.4
Total
£m
6,912.5
502.1
0.1
(14.2)
(2.5)
(51.0)
(2.4)
7,344.6
630.9
3.3
(19.7)
7,959.1
2,526.4
200.1
(0.6)
(26.2)
(1.7)
2,698.0
237.7
(18.7)
2,917.0
5,042.1
4,646.6
4,386.1
2007
£m
226.9
66.3
293.2
Vehicles and
miscellaneous
equipment
£m
223.3
17.1
0.1
–
–
(15.6)
(2.4)
222.5
21.2
3.3
(13.9)
233.1
178.1
12.5
–
(15.3)
(1.7)
173.6
16.9
(13.6)
176.9
56.2
48.9
45.2
Network
assets
£m
4,145.5
193.8
–
–
(2.5)
(0.4)
–
4,336.4
242.2
–
(4.5)
4,574.1
1,604.2
111.1
(0.6)
(0.1)
–
1,714.6
116.1
(4.3)
1,826.4
2,747.7
2,621.8
2,541.3
(i) The net book value of generation and gas storage assets includes decommissioning costs with a net book value of £20.3m, (2006 – £21.0m).
The value of the decommissioning assets at Fiddler’s Ferry and Ferrybridge was reassessed in the year to 31 March 2006 following the
Group’s decision to invest in flue gas desulphurisation plant at these stations, which is expected to extend the useful lives of the stations
by between 15 and 20 years. This change in the timing of the expected decommissioning expenditure was adjusted out of the carrying
value of the asset. In the year to 31 March 2007, an increase to the net book value of office and computer equipment has been recognised
in relation to decommissioning costs of £3.3m (2006 – nil) arising from the Group’s obligations under the EU Waste Electrical and
Electronic Equipment (WEEE) directive, which passed into law on 2 January 2007.
(ii) The reclassification in the year ended 31 March 2006 relates to telecoms fibre that was transferred to stock in the year.
(iii) Assets disposed includes those assets which have been replaced after damage or obsolescence in the year.
(iv)
Included within the charge for the year are impairment charges against Generation assets of £13.9m (2006 – nil). These impairments
were made following identification of indications of impairment and a subsequent review of the projected cash flows associated with
the assets, which are not part of the Group’s main Generation fleet. In line with Group policy, these charges have been reported in
Cost of Sales.
Land is predominantly heritable or freehold. The net book value of other land and buildings includes freehold £47.0m (2006 – £32.0m)
and short leasehold £nil (2006 – £nil). Generation assets comprise generating stations and related plant and machinery and include all
hydro civil assets.
Scottish and Southern Energy
Annual Report 2007
Cumulative interest capitalised for the Group, included in the cost of tangible fixed assets amounts to £44.7m (2006 – £31.2m).
At the balance sheet date the cumulative amounts capitalised in respect of assets in the course of construction were as follows:
Generation and gas storage assets
Transmission and distribution assets
2007
£m
454.7
56.9
511.6
73
2006
£m
355.2
27.0
382.2
Included within the assets in the course of construction is the Group’s share of expenditure on the Aldbrough gas storage facility and the
Beatrice offshore wind farm project which are managed under joint participation agreements.
Included within property, plant and equipment are the following assets held under finance leases:
Cost
At 31 March 2006 and 31 March 2007
Depreciation
At 1 April 2005
Charge for the year
At 31 March 2006
Charge for the year
At 31 March 2007
Net book value
At 31 March 2007
At 31 March 2006
At 1 April 2005
Network
assets
£m
Vehicles and
miscellaneous
equipment
£m
5.1
4.0
0.3
4.3
0.2
4.5
0.6
0.8
1.1
7.0
5.5
0.3
5.8
0.2
6.0
1.0
1.2
1.5
Total
£m
12.1
9.5
0.6
10.1
0.4
10.5
1.6
2.0
2.6
The Company does not hold any property, plant or equipment.
12. INVESTMENT IN ASSOCIATES AND JOINT VENTURES
Scotia Gas Networks (ii)
Other jointly
controlled entities
Associates
Shareholder
investment
£m
Consolidated
Share of net assets/cost
At 1 April 2005
Initial investment
Increase in equity investment
Change in designation
of investment(i)
Increase in shareholder loans
Repayment of shareholder loans
Dividends received
Share of (loss)/profit after tax
Opening financial derivative
liability (net of tax)
–
213.9
21.1
–
–
–
–
(4.3)
(62.6)
At 31 March 2006
Initial investment
Increase in shareholder loans
Repayment of shareholder loans
Dividends received
Share of (loss)/profit after tax
Share of other reserves adjustments
168.1
–
–
–
–
(15.3)
4.1
At 31 March 2007
156.9
Loans
£m
–
270.0
–
–
16.9
–
–
–
–
286.9
–
18.0
(23.0)
–
–
–
281.9
Shareholder
investment
£m
53.6
–
–
–
–
–
(8.0)
16.8
–
62.4
5.0
–
–
(21.5)
17.3
–
63.2
Loans
£m
115.3
–
0.3
(1.4)
–
(10.8)
–
–
–
103.4
–
5.5
(10.8)
–
–
–
98.1
Shareholder
investment
£m
Loans
£m
Total
£m
35.7
–
14.7
–
–
–
–
31.1
–
81.5
–
–
–
(1.2)
21.9
–
102.2
7.4
–
–
–
0.7
(7.3)
–
–
–
0.8
–
–
(0.8)
–
–
–
–
212.0
483.9
36.1
(1.4)
17.6
(18.1)
(8.0)
43.6
(62.6)
703.1
5.0
23.5
(34.6)
(22.7)
23.9
4.1
702.3
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
for the year ended 31 March 2007
12. INVESTMENT IN ASSOCIATES AND JOINT VENTURES continued
Company
Share of net assets/cost
At 1 April 2005
Scotia Gas Networks plc (ii)
Initial investment
Increase in equity investment
Increase in shareholder loans
At 31 March 2006
Increase in shareholder loans
Repayment of shareholder loans
At 31 March 2007
74
Total
£m
–
483.9
21.1
16.9
521.9
18.0
(23.0)
516.9
Joint Ventures
Shareholder
loans
£m
Investment
£m
–
213.9
21.1
–
235.0
–
–
235.0
–
270.0
–
16.9
286.9
18.0
(23.0)
281.9
(i) The Group’s interest in Renewable Technology Ventures Limited was increased from 50% to 100% on 27 January 2006.
(ii) The investment in Scotia Gas Networks is disclosed separately to aid understanding of the Group’s financial performance.
Prior to the investment in Scotia Gas Networks (note 14), the Company did not have any investments in joint ventures or associates.
Details of the principal jointly controlled entities, operations and associates are as follows:
Country of
incorporation
31 March 2007
Holding %
31 March 2006
Holding %
Principal activity
Jointly controlled entities
PriDE (South East Regional Prime) Limited (ii) England and Wales
England and Wales
Seabank Power Limited (iii)
England and Wales
Scotia Gas Networks plc (iv)
England and Wales
Marchwood Power Limited (i)
50
50
50
50
50
50
50
50
Defence estates contractor
Electricity generation
Investment in gas networks
Electricity generation
Associates
Barking Power Limited (i)
Derwent Co-generation Limited (i)
England and Wales
England and Wales
30
49.5
30
49.5
Electricity generation
Electricity generation
Jointly controlled operations (unincorporated)
Aldbrough
Beatrice
England
Scotland
66.7
50
66.7
50
Development of gas storage facility
Development of offshore wind farm facility
Location of
operations
31 March 2007
Holding %
31 March 2006
Holding %
Principal activity
The above companies’ shares consist of ordinary shares only. All companies operate in Great Britain and Ireland. Seabank Power Limited
and Marchwood Power Limited have an accounting periods ending on 31 December. All other companies have accounting periods ending
on 31 March.
(i) Shares held by SSE Generation Limited
(ii) Shares held by SSE Contracting
(iii) Shares held by SSE Seabank Investments Limited
(iv) Shares held by Scottish and Southern Energy plc
The Group’s investment in Barking Power Limited was increased from 22.05% to 30.4% on 13 January 2006.
At 31 March 2007, the Group had invested £10.5m in Marchwood Power Limited. In addition to this, the Group had provided an interest-bearing
loan of £22.0m to Marchwood Power Limited, which is included within other receivables (note 16).
Scottish and Southern Energy
Annual Report 2007
75
The details of the Group’s share of Scotia Gas Networks plc’s acquisition in the year ended 31 March 2006 of the Scotland and the South of
England gas distribution networks are included in note 14. The material significance of this investment warrants separate disclosure from
other jointly controlled entities. Accordingly, the result from the Group’s share of these businesses is included as a separate segment in the
analysis of Group operating profit (note 2). The results of Scotia Gas Networks plc, of which the Group has a 50% share, can be illustrated
thus:
Operating profit
Finance costs: excluding loan stock
Finance costs: interest on loan stock
(Loss)/profit before tax
Taxation
(Loss)/profit for the year
2007
2006
Before exceptional
items and certain
re-measurements
£m
Exceptional
items and certain
re-measurements
£m
206.3
(141.2)
(71.6)
(6.5)
(31.7)
(38.2)
–
10.9
–
10.9
(3.2)
7.7
Before exceptional
items and certain
re-measurements
£m
Exceptional
items and certain
re-measurements
£m
205.4
(108.2)
(57.6)
39.6
(30.0)
9.6
–
(26.0)
–
(26.0)
7.8
(18.2)
Total
£m
206.3
(130.3)
(71.6)
4.4
(34.9)
(30.5)
Total
£m
205.4
(134.2)
(57.6)
13.6
(22.2)
(8.6)
SSE share of (loss)/profit
(19.1)
3.8
(15.3)
4.8
(9.1)
(4.3)
As an investor, Scottish and Southern Energy plc received £35.8m (2006 – £28.8m) in relation to loan stock interest payable to the Group.
The balance sheet of Scotia Gas Networks plc can be summarised as follows (100%):
Scotia Gas Networks plc
31 March 2007
31 March 2006
Assets
£m
Liabilities
£m
4,576.6
4,564.8
(4,263.1)
(4,228.9)
The financial statements of the Group’s other jointly controlled entities and associates can be summarised as follows (100%):
Jointly controlled entities
31 March 2007
31 March 2006
Associates
31 March 2007
31 March 2006
Assets
£m
471.9
492.4
827.2
779.7
Liabilities
£m
Revenues
£m
(364.0)
(384.8)
(500.8)
(519.6)
211.9
201.1
453.1
364.8
Profit
after tax
£m
34.6
41.0
68.4
83.3
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
76
for the year ended 31 March 2007
13. SUBSIDIARY UNDERTAKINGS
Details of the principal subsidiary undertakings are as follows:
Country of incorporation
2007
Holding
%
2006
Holding
%
Principal activity
SSE Services plc (i)
SSE Energy Supply Limited (i)
SSE Retail Limited (i)
SSE Telecommunications Limited (i)
SSE Generation Limited (i)
SSE Insurance Limited (i)
SSE Stock Limited (i)
Tay Valley Lighting (Stoke on Trent) Limited (i) England and Wales
Tay Valley Lighting
England and Wales
England and Wales
Scotland
Scotland
England and Wales
Isle of Man
Scotland
(Newcastle and North Tyneside) Limited (i)
England and Wales
Tay Valley Lighting
(Leeds City Council) Limited (i)
England and Wales
Medway Power Limited (ii)
SSE Medway Operations Limited (ii)
Keadby Generation Limited (ii)
Renewable Technology Ventures Limited (ii)
England and Wales
England and Wales
England and Wales
Scotland
Scottish Hydro-Electric
Transmission Limited (iii)
Scottish Hydro-Electric Power
Distribution plc (iii)
Southern Electric Power Distribution plc (iii)
S+S Limited (iii)
Scotland
Scotland
England and Wales
Scotland
Southern Electric Contracting Limited (iv)
SSE Utility Services plc (iv)
England and Wales
England and Wales
Southern Electric Gas Limited (v)
SSE Hornsea Limited (v)
SSE Trading Limited (v)
England and Wales
England and Wales
England and Wales
Neos Networks Limited (vi)
England and Wales
100
100
100
100
100
100
100
50
50
50
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
50
50
50
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Finance and IT support services
Electricity supply
Electrical appliance sales and servicing
Telecommunication services
Electricity generation
Insurance services
Holds inventory for Group companies
Contracting services
Contracting services
Contracting services
Electricity generation
Maintenance contractor
Electricity generation
Renewable generation development
Transmission of electricity
Distribution of electricity
Distribution of electricity
Electricity connections
Electrical contractor
Utility contractor
Gas supply
Gas storage
Energy trading
Telecommunication services
The above companies’ shares consist of ordinary shares only. All companies operate in Great Britain and Ireland except for SSE Insurance
Limited which operates in the Isle of Man. All companies have accounting periods ending on 31 March.
A full list of Group companies will be included in the Company’s annual return and the shares are held by:
(i) Scottish and Southern Energy plc
(ii) Shares held by SSE Generation Limited.
(iii) Shares held by SSE Power Distribution Limited.
(iv) Shares held by SSE Contracting Limited.
(v) Shares held by SSE Energy Supply Limited.
(vi) Shares held by SSE Telecommunications Limited.
The Company’s investment in subsidiaries at 31 March 2007 is £777.9m (31 March 2006 – £777.9m).
Service concession arrangements
In 50:50 partnership with Royal Bank Leasing Limited, the Group has established three companies to provide street lighting services to
councils under the Private Finance Initiative (PFI). These services are thereafter sub-contracted to Southern Electric Contracting Limited,
a wholly owned subsidiary. The companies established are as follows:
Company
Council
Tay Valley Lighting (Stoke on Trent) Limited
Tay Valley Lighting (Newcastle and North Tyneside) Limited
Tay Valley Lighting (Leeds City Council) Limited
Stoke-on-Trent
Newcastle and North Tyneside
Leeds City Council
Under SIC-12 Consolidation – Special Purpose Entities, these companies are categorised as subsidiaries and are accounted for accordingly.
The debt associated with these companies is non-recourse to the Group. The arrangements for all three companies are materially similar.
Scottish and Southern Energy
Annual Report 2007
77
Characteristics of the arrangements
Description
The contracts are 25 year arrangements to replace ageing street-lighting stock and to subsequently maintain the new assets throughout
each Councils’ areas.
Significant terms
The cash flows under the PFI arrangements come from the unitary charge for these services paid by the Councils. The unitary charge can
only be adjusted if performance under the contract falls below the required standards. Any significant change to the services proposed by
either party is subject to a formal change procedure and agreement to such a change is required by the other party.
Nature and extent of rights and obligations
The assets are part of the public highway and ownership of the assets remains with the Councils. The Tay Valley Lighting companies are
licenced to replace and maintain the assets for the period of the contract. This obligation is passed down to Southern Electric Contracting
Limited through the operating sub-contract. Any failure to provide the services to the required standards will result in financial penalties
which are taken from the unitary charge.
The companies have 25 year contracts with no extension options. Termination during this period can be initiated through a number
of routes including service provider default, force majeure or the event of a risk becoming uninsurable, authority default, voluntary
authority termination, or termination for a prohibited act or breach of refinancing provisions. In all cases, a formula exists for calculating
compensation payments to the service provider.
Throughout the contract period there are a number of circumstances under which the companies could potentially be required to provide
additional services:
(i) Changes in the law
If circumstances arise where by a change in legislation would mean a change in the way the services are to be provided the companies
would be liable for part of the cost of this change. This liability is capped.
(ii) Final survey
The Councils have the ability to deduct 20% of the unitary charge in the last two years if an independent survey indicates the assets are
unlikely to have a 5-year residual life.
The Group’s exposure to unforeseen obligations is insured.
14. ACQUISITIONS AND DISPOSALS
Acquisitions in the previous financial year
i.
The fair values of the assets and liabilities of the following acquisitions made during the year ended 31 March 2006 and the consideration
paid or due are shown below:
(a) The acquisition of gas distribution networks by Scotia Gas Networks plc
At 1 June 2005, Scotia Gas Networks plc, an entity of which the Group holds 50%, acquired the Scotland and the South of England gas
distribution networks from National Grid Transco plc.
The total value of the acquired businesses after finalisation of the completion process was £3,217.8m. The transaction was initially funded
by a non-recourse borrowing facility with the balance being funded by the shareholders. The Group’s share of the initial transaction cost
at 1 June 2005 was £483.9m which consisted of £270.0m of subordinated loans and £213.9m of equity funding. The non-recourse funding
of this transaction was replaced by the issue of listed debt by the distribution network entities of £2,219.8m on 21 October 2005.
At 31 March 2007, the Group, through Scotia Gas Networks plc, had invested £516.9m (2006 – £521.9m) in the gas distribution networks,
consisting of £247.0m (2006 – £270.0m) of subordinated loans, £235.0m (2006 – £235.0m) of equity funding and £34.9m (2006 – £16.9m)
of accrued interest. The movement in the capital invested in the Scotia Gas Networks group is disclosed in note 12.
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
78
for the year ended 31 March 2007
14. ACQUISITIONS AND DISPOSALS continued
Scotia Gas Networks plc entered into a contingent interest rate swap on 30 August 2004 subject to the acquisition of the gas networks
in Scotland and the South of England being completed. From 1 April 2005, 50% of the fair value of the swap was reflected in the Group’s
accounts being the fair value loss on financing derivatives up to 1 June 2005, when the transaction to acquire the distribution networks was
concluded. Since 1 June 2005, the Group’s share of this loss has been reflected as part of the share of losses on financing derivatives within
the results of Scotia Gas Networks plc. On 21 October 2005, the formerly contingent swap was closed off by the issue of a new ‘mirror’ swap,
both of which are marked to market under IAS 39. The issue of the listed debt at 21 October 2005 was achieved at the same time as entering
a number of new interest rate and currency swaps.
The investment in the jointly controlled entity is accounted for using the equity method.
The acquisition of the Scotland and the South of England gas distribution networks by Scotia Gas Networks plc at 1 June 2005 can be
represented as follows:
Carrying Value of
acquired entities
£m
Fair Value
adjustments
on acquisition
£m
Accounting
policy alignments
£m
Fair Value
of acquired
entities
£m
Property, plant and equipment
Net current liabilities
Retirement benefit obligations
Deferred tax
Other provisions
Net assets
Goodwill
Satisfied by cash:
Bank facility
Equity investment by shareholders
The Group’s share of the equity investment (50%):
Represented by:
Share capital
Loan Stock
3,117.8
(76.6)
(60.9)
(271.0)
(30.3)
2,679.0
401.0
3,080.0
31.9
39.6
5.9
166.4
(15.7)
228.1
(90.3)
137.8
–
–
–
(667.9)
–
(667.9)
667.9
–
3,149.7
(37.0)
(55.0)
(772.5)
(46.0)
2,239.2
978.6
3,217.8
2,250.0
967.8
3,217.8
483.9
213.9
270.0
483.9
Goodwill has been subject to impairment test review (note 10).
It should be noted that following the finalisation of the 31 March 2006 accounts of Scotia Gas Networks plc, the above table has been corrected
from that included in the Group’s 2006 Annual Report to reflect the final agreed opening fair value balances. Following restatement of the
opening deferred taxation balance acquired, the value of goodwill included has been amended by £10.2m in accordance with IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors. This has no impact on the Group’s share of the equity investment and requires no
restatement of the prior year Group accounts.
The fair value adjustments reflect the assessment of fair value based on the regulatory value of the businesses, the fair value of current
liabilities and provisions including the deferred tax liability. The accounting policy adjustments reflect the adoption of Group policies on
deferred taxation. The adjustments have been made effective at the date of acquisition and the subsequent movements in deferred taxation
have been recognised in the current year.
(b) Other acquisitions in the previous financial year
On 27 January 2006, SSE Generation Limited acquired the remaining 50% of the share capital of Renewable Technology Ventures Limited,
a company which was previously a joint venture with The Weir Group plc. On 9 February 2006, Southern Electric Contracting Limited acquired
100% of the equity of Harrison Smith (Batley) Limited.
In aggregate, the fair value of net assets acquired was £0.4m and the combined consideration was £1.0m. Accordingly, goodwill on acquisition
of £0.6m was recognised on these combinations. Consideration was £0.8m cash and £0.2m deferred consideration. The net cash outflow was
£0.6m, being the £0.8m cash consideration less £0.2m of acquired cash. The goodwill recognised has been adjusted in the current financial
year on finalisation of the combined consideration.
Scottish and Southern Energy
Annual Report 2007
79
ii. Disposals in the previous financial year
The Group disposed of its shareholding in Thermal Transfer Limited on 31 March 2006 for a consideration of £21.5m, net of costs of disposal,
resulting in a gain on disposal of £18.6m. The assets and liabilities sold and the consideration received can be stated as follows:
Property, plant and equipment
Stock and work-in-progress
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Deferred tax liabilities
Net assets disposed of
Gain on disposal
Net consideration
£m
0.7
2.6
11.8
2.7
(14.5)
(0.4)
2.9
18.6
21.5
The proceeds of disposal constituted £20.0m cash and £1.5m of deferred consideration, net of disposal costs. The net cash inflow associated
with the disposal in the year was £17.3m (£20.0m consideration received less £2.7m cash and cash equivalents).
15. INVENTORIES
Fuel and consumables
Work in progress
Goods for resale
Less: provisions held
Consolidated
2007
£m
199.9
19.4
2.6
(7.8)
214.1
2006
£m
153.9
15.1
2.6
(7.4)
164.2
The Group has recognised £766.8m as an expense in the year (2006 – £821.1m) and have also recognised £15.3m (2006 – £0.1m) relating to
stock write-downs and increases in provisions held. The Company does not hold any inventories.
16. TRADE AND OTHER RECEIVABLES
Current assets
Amounts owed by subsidiary undertakings
Trade receivables
Other receivables
Prepayments and accrued income
Non-current assets
Amounts owed by subsidiary undertakings
Consolidated
Company
2007
£m
–
1,356.2
76.8
428.4
1,861.4
2006
£m
–
1,254.6
69.2
339.1
1,662.9
–
–
1,861.4
1,662.9
2007
£m
1,726.5
2.3
25.5
–
1,754.3
1,783.5
3,537.8
2006
£m
1,079.8
2.3
1.0
–
1,083.1
1,794.3
2,877.4
Other receivables include £22.3m (including interest) receivable from Marchwood Power Limited (note 12).
80
2006
£m
15.3
10.4
25.7
2006
£m
25.7
–
25.7
2006
£m
1,896.9
–
–
–
3.6
–
1,900.5
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
for the year ended 31 March 2007
17. CASH AND CASH EQUIVALENTS
Bank balances
Call deposits
Cash and cash equivalents
Consolidated
Company
2007
£m
17.5
38.6
56.1
2006
£m
17.6
32.3
49.9
2007
£m
2.5
3.3
5.8
Cash and cash equivalents (which are presented as a single class of assets in the face of the balance sheet) comprise cash at bank and
short term highly liquid investments with a maturity of three months or less.
Consolidated
Company
Cash and cash equivalents (from above)
Bank overdraft (Note 21)
Cash and cash equivalents in the statement of cash flows
18. TRADE AND OTHER PAYABLES
Current liabilities
Amounts due to subsidiary undertakings
Payments received in advance
Trade payables
Taxation and social security
Other creditors
Accruals and deferred income
Non-current liabilities
Accruals and deferred income
19. CURRENT TAX LIABILITIES
Corporation tax
20. CONSTRUCTION CONTRACTS
2007
£m
56.1
(7.7)
48.4
2007
£m
–
24.8
1,412.2
12.9
83.1
402.1
1,935.1
327.7
2,262.8
2007
£m
199.2
Contracts in progress at balance sheet date:
Amounts due from contract customers included in trade and other receivables (note 16)
Amounts due to contract customers included in trade and other payables (note 18)
Contract costs incurred plus recognised profits less recognised losses to date
Less: Progress billings
Company
2007
£m
5.8
–
5.8
2007
£m
2,570.2
–
–
–
3.7
–
2,573.9
2006
£m
49.9
(6.1)
43.8
Consolidated
2006
£m
–
20.3
1,311.2
11.4
74.2
417.5
1,834.6
396.7
2,231.3
–
–
2,573.9
1,900.5
Consolidated
Company
2006
£m
165.4
2007
£m
10.1
2007
£m
28.8
(20.5)
150.3
(152.3)
(2.0)
2006
£m
18.1
2006
£m
27.2
(17.9)
126.1
(130.7)
(4.6)
At 31 March 2007, retentions held by customers for contract work amounted to £1.8m (2006 – £1.4m). Advances received from customers
for contract work amounted to £5.9m (2006 – £5.5m).
At 31 March 2007, amounts of nil (2006 – nil) included in trade and other receivables and arising from construction contracts are due
for settlement after more than 12 months.
The Company does not hold any construction contracts.
Scottish and Southern Energy
Annual Report 2007
21. LOANS AND OTHER BORROWINGS
Current
Bank overdraft
Other short-term loans
Obligations under finance leases
Non current
Loans including convertible debt
Obligations under finance leases
Amounts owed to subsidiary undertakings
i.
Borrowings
Consolidated
Company
2007
£m
7.7
466.6
0.5
474.8
2007
£m
1,803.2
0.6
–
1,803.8
2006
£m
6.1
410.7
0.5
417.3
Consolidated
2006
£m
1,796.5
1.1
–
1,797.6
2007
£m
–
349.5
–
349.5
2007
£m
580.6
–
240.2
820.8
Company
81
2006
£m
–
384.8
–
384.8
2006
£m
576.3
–
240.2
816.5
Borrowing facilities
The Group has an established €1.5bn Euro commercial paper programme (paper can be issued in a range of currencies and swapped into
Sterling). The Group has £650m (2006 – £650.0m) of committed credit facilities in place maturing in 2009. These provide a back-up facility
to the commercial paper programmes and at 31 March 2007 there was no draw down of these facilities.
Analysis of borrowings
Current
Bank Overdrafts (i)
Other short-term loans – amortising (ii)
Other short-term loans – non-amortising (iii)
Non-recourse funding (iv)
7.875% Eurobond repayable on 26 March 2007
US $100m repayable on 1 May 2007 (vi)
Total current
Non-current
Between two and five years
Loans – amortising (ii)
Loans – non-amortising (v)
US $100m repayable on 1 May 2007 (vi)
3.75% Convertible bond repayable 29 October 2009 (vii)
Non-recourse funding (iv)
Over five years
Loans – amortising (ii)
Loans – non-amortising (v)
5.875% Eurobond repayable on 26 September 2022
5.50% Eurobond repayable on 19 June 2032
4.625% Eurobond repayable on 20 February 2037
1.429% Index linked bond repayable on 20 October 2056
Non-recourse funding (iv)
Fair value adjustment (note 28)
Weighted average Weighted average
interest rate (viii)
2006
interest rate (viii)
2007
6.25%
7.70%
5.56%
6.21%
–
7.78%
5.96%
7.43%
5.45%
–
3.75%
6.21%
4.81%
5.88%
5.65%
5.88%
5.50%
4.63%
5.08%
6.42%
5.36%
–
5.36%
5.50%
7.69%
4.52%
6.44%
7.88%
–
5.92%
7.60%
6.25%
7.78%
3.75%
6.44%
5.18%
6.27%
5.12%
5.88%
5.50%
4.63%
–
–
5.28%
–
5.28%
2007
£m
7.7
21.4
374.5
9.2
–
61.5
474.3
64.9
150.0
–
284.9
36.3
536.1
5.5
200.0
295.5
350.3
323.3
100.0
2.9
2006
£m
6.1
19.6
234.7
6.5
149.9
–
416.8
78.0
25.1
61.5
280.8
19.7
465.1
13.7
350.0
295.5
350.3
323.3
–
–
1,277.5
(10.4)
1,267.1
1,332.8
(1.4)
1,331.4
Total non-current
Total
5.19%
5.25%
1,803.2
1,796.5
5.35%
5.38%
2,277.5
2,213.3
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
82
for the year ended 31 March 2007
21. LOANS AND OTHER BORROWINGS continued
(i) Bank overdrafts are repayable on demand.
(ii) Balances under amortising loans are adjusted for capital repayments or drawings in the financial year. These are held with the European
Investment Bank (EIB) in a combination of fixed and floating rates.
(iii) Balances include commercial paper and cash advances.
(iv) The Tay Valley Lighting companies formed under 50:50 partnership with Royal Bank Leasing Limited to provide street-lighting services are
categorised as subsidiaries under SIC-12 (note 13). The debt held by these companies is included on consolidation but is non-recourse
to the Group.
(v) The floating rate European Investment Bank advances are reset quarterly at a rate normally less than three month LIBOR. Other loans
include a mixture of fixed and floating debt repayable between 2007 and 2014.
(vi) The US$100M loan has been swapped into Sterling with £60.0m being fixed at an effective rate of 7.78%.
(vii) The liability component of the convertible bond is presented separately under IAS 32.
(viii) The weighted average interest rates are as noted. The weighted average interest rates for the Group (including swaps) for the year
ended 31 March 2007 was 5.31% (2006 – 5.42%).
Convertible bond
The convertible bond was issued on 26 October 2004 in exchange for £300.0m in cash. The bond entitles holders to convert the bond into
ordinary shares at any time up to 24 October 2009 at the applicable conversion share price of £9.00 per ordinary share at the date of issue.
The conversion price is subject to adjustment in certain circumstances set out in the offering circular including payment of dividends greater
than amounts set out in the circular, capital restructuring and change of control. Conversion is at the option of the bond holder.
The net proceeds received from the issue of the bond have been split between a liability element and an equity component, the liability
element representing the initial fair value of the debt excluding the embedded option to convert the liability into equity of the Group.
Nominal value of issue of convertible bond (i)
Costs of issue (ii)
Net proceeds of convertible bond issued
Equity component
Deferred tax on temporary differences
Interest charged (iii)
Interest paid
Accretion of debt component
Liability component
At
31 March 2007
£m
At
1 April 2006
£m
299.9
(1.4)
298.5
(14.6)
(6.2)
30.3
(23.1)
7.2
284.9
300.0
(2.0)
298.0
(14.6)
(6.2)
15.0
(11.4)
3.6
280.8
(i} On 4 August 2006, nominal debt of £0.1m was converted into equity at the conversion price.
(ii) The costs of issue of the bond are amortised over the term of the bond.
(iii)
Interest is charged by applying an effective interest rate of 5.35% to the liability component for the period from adoption of IAS 32.
For the purpose of diluted Earnings per Share (EPS), convertible bond interest of £15.3m (2006 – £15.0m) is added back to earnings and the
number of potential ordinary shares to be issued includes the following in respect of this bond:
Weighted average number of shares
2007
Number
of shares
2006
Number
of shares
33,322,222
33,333,333
Scottish and Southern Energy
Annual Report 2007
ii. Finance lease liabilities
Future finance lease commitments are as follows:
Amounts payable:
Within one year
Between one and five years
After five years
Less: future finance charge
Present value of lease obligations
83
Minimum
lease payments
Present value of minimum
lease payments
2007
£m
0.5
0.5
0.6
1.6
(0.5)
1.1
2006
£m
0.5
1.0
0.7
2.2
(0.6)
1.6
2007
£m
0.5
0.4
0.2
1.1
2006
£m
0.5
0.8
0.3
1.6
The average lease term is 12 to 13 years. For the year ended 31 March 2007, the average effective borrowing rate was 8% (2006 – 8%).
Interest rates are fixed at the contract date. All leases, held by the Group’s telecoms businesses, are on a fixed repayment basis and no
arrangements have been entered into for contingent rental payments. The fair value of the Group’s lease obligations approximates their
carrying amount. The Group’s obligations under finance leases are secured by the lessors’ rights over the leased assets. The Company
does not have any obligations under finance leases.
22. DEFERRED TAXATION
The following are the deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior
reporting periods:
Accelerated
capital
allowances
£m
Fair value
gains/(losses)
on derivatives
£m
Convertible
bond
£m
Retirement
benefit
obligations
£m
Share
based
payments
£m
Consolidated
At 1 April 2005
Charge/(credit) to
Income Statement (i)
Charge/(credit) to equity
Transfer to Scotia Gas Networks (ii)
At 1 April 2006
Charge/(credit) to
Income Statement
Charge/(credit) to equity
At 31 March 2007
895.9
1.8
–
–
897.7
0.3
–
898.0
9.6
(17.4)
(5.1)
26.9
14.0
15.2
(9.8)
19.4
6.2
(1.1)
–
–
5.1
(1.1)
–
4.0
(68.3)
14.4
(4.2)
–
(58.1)
16.3
14.2
(27.6)
(1.4)
–
–
–
(1.4)
1.5
(4.8)
(4.7)
Company
At 1 April 2005
Charge/(credit) to
Income Statement
Charge/(credit) to equity
At 1 April 2006
Charge/(credit) to
Income Statement
Charge/(credit) to equity
At 31 March 2007
Accelerated
capital
allowances
£m
Fair value
gains/(losses)
on derivatives
£m
Convertible
bond
£m
Retirement
benefit
obligations
£m
Share
based
payments
£m
–
–
–
–
–
–
–
(13.1)
2.7
4.1
(6.3)
(1.2)
(6.1)
(13.6)
6.2
(1.1)
–
5.1
(1.1)
–
4.0
29.7
6.1
(8.7)
27.1
6.0
5.3
38.4
–
–
–
–
–
–
–
Other
£m
(35.8)
11.6
–
–
(24.2)
(7.2)
–
(31.4)
Other
£m
(1.4)
0.4
–
(1.0)
0.1
–
(0.9)
Total
£m
806.2
9.3
(9.3)
26.9
833.1
25.0
(0.4)
857.7
Total
£m
21.4
8.1
(4.6)
24.9
3.8
(0.8)
27.9
Includes movement relating to Scotia Gas Networks swap from 1 April 2005 to 31 May 2005 of £10.4m (note 14).
(i)
(ii) Being transfer of deferred asset relating to financing derivative at 1 June 2005 on completion of acquisition of gas distribution networks.
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
84
for the year ended 31 March 2007
22. DEFERRED TAXATION continued
Certain deferred tax assets and liabilities have been offset. The following is an analysis of the deferred tax balances (after offset) for financial
reporting purposes:
Deferred tax liabilities
Deferred tax assets
Net deferred tax liabilities
Consolidated
Company
2007
£m
923.7
66.0
857.7
2006
£m
919.1
86.0
833.1
2007
£m
27.9
–
27.9
2006
£m
24.9
–
24.9
The deferred tax asset relates to the defined benefit pension scheme liability in a subsidiary company. The parent company defined benefit
scheme has a deferred tax liability in 2007 and 2006.
At the balance sheet date, the Group has unused tax losses of £40.6m (2006 – £40.6m) available for offset against future profits.
At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which
deferred tax liabilities have not been recognised was £2.1m (2006 – £2.3m). No liability has been recognised in respect of these differences
because the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences
will not reverse in the foreseeable future.
Temporary differences arising in connection with interests in associates and jointly controlled entities are recorded as part of the Group’s
share of investment in those entities. The aggregate amount of these is £17.5m (2006 – £11.1m).
23. PROVISIONS
Consolidated
At 1 April 2006
Charged in the year
Utilised during the year
At 31 March 2007
At 31 March 2007
Non-current
Current
At 31 March 2006
Non-current
Current
Onerous
energy contracts
(i)
£m
Decommissioning
(ii)
£m
38.6
25.6
(1.6)
62.6
61.3
1.3
62.6
38.6
–
38.6
24.7
4.5
–
29.2
28.5
0.7
29.2
24.7
–
24.7
Other
(iii)
£m
18.5
5.1
(3.0)
20.6
14.6
6.0
20.6
15.7
2.8
18.5
Total
£m
81.8
35.2
(4.6)
112.4
104.4
8.0
112.4
79.0
2.8
81.8
(i) The onerous energy contracts provision relates to future losses on purchase contracts designated as own use under IAS 39 and future
losses on specific contracts. The purchase contract losses will be incurred over a maximum period to 2011 when the contracts terminate.
The other contract losses will be incurred over a maximum period to 2019.
(ii) Provision has been made for the estimated net present cost of decommissioning certain generation and gas storage assets. The
estimate is based on a forecast of clean-up costs at the time of decommissioning discounted for the time value of money. The timing
of costs provided is dependent on the lives of the facilities. In the year to March 2007, the Group has also recognised a provision of
£3.3m (2006 – nil) in relation to its projected decommissioning obligations under the EU Waste Electrical and Electronic Equipment
(WEEE) directive, which passed into law on 2 January 2007.
(iii) Other provisions include balances held in relation to restructuring, insurance and warranty claims. In addition, the Group has an employer
financed retirement benefit provision for pensions for certain directors and former directors and employees.
The Company does not hold provisions.
Scottish and Southern Energy
Annual Report 2007
24. SHARE CAPITAL
Company
Equity: Ordinary shares of 50p each:
Authorised:
At 31 March 2007
Allotted, called up and fully paid:
At 1 April 2006
Issue of shares (i)
At 31 March 2007
85
Number
(millions)
Number
£m
1,200.0
600.0
860.3
1.6
861.9
430.2
0.8
431.0
(i) The Company issued 1,651,166 (2006 – 1,455,451) shares during the year under the savings-related share option schemes,
and discretionary share option schemes for a consideration of £9.2m (2006 – £9.9m).
During the year, the Company purchased 702,057 shares (2006 – 940,323) for a consideration of £8.2m (2006 – £9.5m) to be held in
trust for the benefit of employee share schemes. At 31 March 2007, the trust held 1,976,506 shares (2006 – 1,530,082) which had a
market value of £30.5m.
The Company has one class of ordinary share which carries no right to fixed income. The holders of ordinary shares are entitled to
receive dividends as declared and are entitled to one vote per share at meetings of the Company.
25. RESERVES
Consolidated
Reconciliation of movement in reserves
At 1 April 2005
Profit for the year
Effective portion of changes in
fair value of cash flow hedges
Premium on issue of shares
Actuarial (losses) on retirement benefit
schemes (net of tax)
Dividends to shareholders
Credit in respect of employee share awards
Investment in own shares
Other movements
At 31 March 2006
Profit for the year
Effective portion of changes in
fair value of cash flow hedges
Premium on issue of shares
Actuarial gains on retirement
benefit schemes (net of tax)
Jointly controlled entities:
Share of change in fair value of
effective cash flow hedges
Share of actuarial losses on retirement
benefit schemes (net of tax)
Dividends to shareholders
Credit in respect of employee share
awards
Current and deferred tax recognised
in equity in respect of employee share
awards (note 7)
Investment in own shares
Share
premium
account
£m
Capital
redemption
reserve
£m
Equity
reserve
£m
Retained
earnings
£m
Hedge
reserve
£m
81.6
–
–
9.1
–
–
–
–
–
90.7
–
–
8.4
–
–
–
–
–
–
–
13.7
–
14.6
–
1,341.9
642.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13.7
–
14.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(9.9)
(378.8)
4.0
(9.5)
(0.4)
1,589.6
830.5
–
–
33.2
–
(1.4)
(411.3)
6.8
8.8
(8.2)
18.3
–
(11.7)
–
–
–
–
–
–
6.6
–
(22.6)
–
–
5.5
–
–
–
–
Total
£m
1,470.1
642.3
(11.7)
9.1
(9.9)
(378.8)
4.0
(9.5)
(0.4)
1,715.2
830.5
(22.6)
8.4
33.2
5.5
(1.4)
(411.3)
6.8
8.8
(8.2)
At 31 March 2007
99.1
13.7
14.6
2,048.0
(10.5)
2,164.9
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
for the year ended 31 March 2007
25. RESERVES continued
Company
Reconciliation of movement in reserves
At 1 April 2005
Profit for the year
Effective portion of changes in fair value
of cash flow hedges
Premium on issue of shares
Actuarial (losses) on retirement benefit
schemes (net of tax)
Dividends to shareholders
At 31 March 2006
Profit for the year
Effective portion of changes in fair value
of cash flow hedges
Premium on issue of shares
Actuarial gains on retirement benefit
schemes (net of tax)
Dividends to shareholders
At 31 March 2007
Share
premium
account
£m
Capital
redemption
reserve
£m
Equity
reserve
£m
Retained
earnings
£m
Hedge
reserve
£m
81.6
–
–
9.1
–
–
90.7
–
–
8.4
–
–
99.1
13.7
–
–
–
–
–
13.7
–
–
–
–
–
14.6
–
–
–
–
–
14.6
–
–
–
–
–
13.7
14.6
501.5
472.7
–
–
(20.3)
(378.8)
575.1
415.8
–
–
12.3
(411.3)
591.9
(6.7)
–
9.8
–
–
–
3.1
–
(14.0)
–
–
–
(10.9)
86
Total
£m
604.7
472.7
9.8
9.1
(20.3)
(378.8)
697.2
415.8
(14.0)
8.4
12.3
(411.3)
708.4
The profit for the year attributable to shareholders dealt with in the financial statements of the Company was £415.8m (2006 – £472.7m).
As allowed by section 230 of the Companies Act 1985, the Company has not presented its own income statement.
The hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedge derivative instruments
related to hedged transactions that have not yet occurred.
The equity reserve comprises the equity component of the Group’s convertible bond (note 21).
26. RETIREMENT BENEFIT OBLIGATIONS
Defined benefit schemes
The Group has two funded final salary pension schemes which provide defined benefits based on final pensionable pay. The schemes are
subject to independent valuations at least every three years. The future benefit obligations are valued by actuarial methods on the basis of
an appropriate assessment of the relevant parameters. The Company operates one of these schemes, being the Scottish Hydro-Electric
scheme.
The Group also has an Employer Financed Retirement Benefit scheme and a Group Personal Pension Plan. The Group Personal Pension
Plan operates on a money purchase basis and has been arranged with Friends Provident. The Company matches employee contributions up
to a specified limit. In most circumstances this is set at 6%. The Company provides additional contributions of 3% after five and ten years’
continuous Company service.
Pension summary:
Scheme type
Scottish Hydro Electric (Company)
Southern Electric (incorporating KGL)
Defined benefit
Defined benefit
Net actuarial
gain/(loss) recognised in
respect of the pension
asset in the SoRIE
Net
pension (liability)
/ asset
2007
£m
17.6
29.8
47.4
2006
£m
(29.0)
14.9
(14.1)
2007
£m
128.1
(220.0)
(91.9)
2006
£m
90.2
(284.0)
(193.8)
Scottish and Southern Energy
Annual Report 2007
87
The individual pension scheme details based on the latest formal actuarial valuations are as follows:
Scottish
Hydro Electric
Southern
Electric
KGL
Latest formal actuarial valuation
Valuation carried out by
Value of assets based on valuation
Value of liabilities based on valuation
Valuation method adopted
Average investment rate of return
Average salary increase
Average pension increase
Value of fund assets/accrued benefits
31 March 2006 31 March 2004 31 March 2004
Hymans Hewitt, Bacon Hewitt, Bacon
& Woodrow
& Woodrow
Robertson
£970.0m
£942.0m
£770.5m
£1,046.0m
£46.4m
£60.1m
Projected Unit Projected Unit Projected Unit
6.5%
3.9%
2.8%
77.2%
4.9%
5.3%
3.0%
103.0%
6.0%
4.9%
3.0%
73.7%
An actuarial valuation of the Southern Electric Pension Scheme (incorporating KGL) as at 31 March 2007 is currently in progress. All schemes
have been updated to 31 March 2007 by qualified independent actuaries. The valuations have been prepared for the purposes of meeting the
requirements of IAS 19. The major assumptions used by the actuaries were:
Rate of increase in pensionable salaries
Rate of increase in pension payments
Discount rate
Inflation rate
At 31 March
2007
At 31 March
2006
4.6%
3.1%
5.4%
3.1%
4.4%
2.9%
4.9%
2.9%
The assumptions relating to longevity underlying the pension liabilities at 31 March 2007 are based on standard actuarial mortality tables,
and include an allowance for future improvements in longevity. The assumptions equivalent to future longevity for members in normal health
at age 65 are as follows:
Currently aged 65
Currently aged 45
Valuation of combined Pension Schemes
At 31 March
2007
Male
At 31 March
2007
Female
At 31 March
2006
Male
At 31 March
2006
Female
21
22
23
24
20
21
23
24
Consolidated
Long-term
rate of return
expected at
31 March 2007
%
Value at
31 March 2007
£m
Long-term
rate of return
expected at
31 March 2006
%
Company
Long-term
rate of return
expected at
31 March 2007
%
Value at
31 March 2007
£m
Long-term
rate of return
expected at
31 March 2006
%
Value at
31 March 2006
£m
Value at
31 March 2006
£m
Equities
Government bonds
Corporate bonds
Other investments
8.0
4.5
5.4
5.7
Total fair value
of plan assets
Present value of
defined benefit
obligation
(Deficit)/surplus
in the scheme
Deferred tax thereon
Net pension (liability)/asset
1,253.6
378.6
221.4
256.8
2,110.4
(2,202.3)
(91.9)
27.6
(64.3)
7.7
4.2
4.9
5.0
1,258.5
321.8
211.4
225.6
2,017.3
(2,211.1)
(193.8)
58.1
(135.7)
8.0
4.5
5.4
5.7
579.3
173.3
98.0
139.6
990.2
(862.1)
128.1
(38.4)
89.7
7.7
4.2
4.9
5.0
645.2
115.7
88.9
106.0
955.8
(865.6)
90.2
(27.1)
63.1
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
for the year ended 31 March 2007
26. RETIREMENT BENEFIT OBLIGATIONS continued
Movements in the defined benefit obligation during the year:
At 1 April
Movements in the year:
Service costs
Member contributions
Benefits paid
Interest on pension scheme liabilities
Losses on curtailments
Actuarial gains/(losses)
At 31 March
Movements in scheme assets during the year:
At 1 April
Movements in the year:
Expected return on pension scheme assets
Assets distributed on settlement
Employer contributions
Member contributions
Actuarial (losses)/gains
At 31 March
Charges/(credits) recognised:
Current service cost (charged to operating profit)
Losses on curtailment (charged to restructuring provision)
Charged/(credited) to finance costs:
Expected return on pension scheme assets
Interest on pension scheme liabilities
History of experience gains and losses
2007
£m
Consolidated
2006
£m
Total actuarial gains and (losses)
in the Statement of Recognised Income and
Expense before adjustment for taxation
Experience gains and losses on scheme liabilities
47.4
(40.0)
(14.1)
(123.3)
88
2006
£m
(686.9)
(8.0)
(2.8)
32.6
(36.5)
(0.2)
(163.8)
(865.6)
2006
£m
785.8
55.8
(32.6)
9.2
2.8
134.8
955.8
2006
£m
8.0
0.2
8.2
(55.8)
36.5
(19.3)
2005
£m
6.2
–
Consolidated
Company
2007
£m
2006
£m
2007
£m
(2,211.1)
(1,878.9)
(865.6)
(30.3)
(7.7)
89.2
(107.2)
–
64.8
(22.9)
(7.7)
86.1
(100.0)
(0.6)
(287.1)
(2,202.3)
(2.211.1)
(12.7)
(2.8)
33.7
(42.0)
–
27.3
862.1
Consolidated
Company
2007
£m
2006
£m
2,017.3
1,651.3
130.1
(89.2)
61.9
7.7
(17.4)
115.7
(86.1)
55.7
7.7
273.0
2,110.4
2,017.3
2007
£m
955.8
63.4
(33.7)
11.6
2.8
(9.7)
990.2
Consolidated
Company
2007
£m
30.3
–
30.3
(130.1)
107.2
(22.9)
2005
£m
(18.3)
(38.0)
2006
£m
22.9
0.6
23.5
(115.7)
100.0
(15.7)
2007
£m
17.6
–
2007
£m
12.7
–
12.7
(63.4)
42.0
(21.4)
Company
2006
£m
(29.0)
–
Defined contribution scheme
The total contribution paid by the Group to defined contribution schemes was £4.0m (2006 – £2.3m).
Employer financed retirement benefit (EFRB) pension costs
The provision made in the year for EFRB was £1.1m (2006 – £2.6m). This is included in other provisions (note 23).
Scottish and Southern Energy
Annual Report 2007
Staff costs analysis
The pension costs in note 5 can be analysed thus:
Service costs
Defined contribution scheme payments
Expected contribution in the year to 31 March 2008
89
2006
£m
22.9
2.3
25.2
2007
£m
30.3
4.0
34.3
The Group expects to make contributions of £13.5m and £51.6m to the Scottish Hydro Electric Pension Scheme and the Southern Electric
Pension Scheme in the year to 31 March 2008, respectively.
27. EMPLOYEE SHARE-BASED PAYMENTS
The Scottish and Southern Energy Group operates a number of share schemes for the benefit of its employees. Details of these schemes,
all of which are equity settled, are as follows:
(i) Discretionary share option scheme
In the past, the Company operated this scheme, under which senior executives and staff were awarded share options. The options granted
to the senior executives from 1996 were subject to the performance criterion of normalised earnings per share over a three year period
showing average compound annual growth rate of at least 2% above the increase in the UK retail price index for that year. This criterion
was met and any remaining discretionary share options are now exercisable. This scheme has now ended and no options have been
granted under this scheme since 1998.
(ii) Savings-related share option schemes (‘Sharesave’)
This scheme gives employees the option to purchase shares in the Company at a discounted market price, subject to the employees
remaining in employment for the term of the agreement. Employees may opt to save between £5 and £250 per month for a period of
3 or 5 years. At the end of this period, the employees have six months to exercise their options by using the cash saved (including a
bonus equivalent to interest). If the option is not exercised, the funds may be withdrawn by the employee and the option expires.
(iii) Share Incentive Plan (SIP)
This scheme allows employees the opportunity to purchase shares in the Company on a monthly basis. Employees may nominate an
amount between £10 and £125 to be deducted from their gross salary. This is then used to purchase shares (‘Partnership’ shares) in
the market on the final business day of each month. These shares are then held in trust for a period of 5 years, at which point they are
transferred at no further cost to the employee. These shares may be withdrawn at any point during the 5 years, but tax and national
insurance would then be payable on any amounts withdrawn.
In addition to the shares purchased on behalf of the employee, the Company will also match the purchase up to a maximum of 5 shares
(‘Matching’ shares) per month. Again these shares are held in trust for the five years until they are transferred to the employee. If an
employee leaves during the first three years, or removes his/her ‘partnership’ shares, these ‘matching’ shares are forfeited.
In addition to the above, at 31 March 2005 the company made a special award of 50 free shares to all employees in employment at both
31 March and 20 August 2005 in recognition of their contribution to the success of the company. Under the arrangements for the award,
the shares will be held in trust for five years, at which point they will be transferred to the employees at no cost to the employee. These
shares may be withdrawn at any point during years four and five, but tax and national insurance would then be payable on any amounts
withdrawn.
(iv) Deferred bonus scheme
This scheme applied to senior managers and executive directors. Those eligible were awarded an amount equal to their cash bonus
for the period which was adjusted by a multiplier of between 0.7 and 1.35 depending on three factors, namely: relative performance in
terms of Total Shareholder Return (TSR) over a three year period compared to the FTSE100; safety; and relative performance in terms
of customer complaints (as recorded by energywatch). This amount was then used to purchase shares in the market which are held in
trust on behalf of the employee for a period of three years, at which point the employee is entitled to exercise the award. In addition to
shares purchased using the adjusted bonus award, additional shares will also be purchased using any dividends received on the shares
held by the trust. If the employee resigns, they lose all outstanding awards.
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
90
for the year ended 31 March 2007
27. EMPLOYEE SHARE-BASED PAYMENTS continued
(v) Performance Share Plan
Following approval at the AGM on 27 July 2006, this new share scheme has been introduced. This scheme applies to executive directors
and senior executives. Those eligible are awarded a maximum value of share awards of 100% of base salary. These awards will vest
after three years to the extent that certain performance conditions are met. These performance conditions are as follows: 50% of the
award is subject to a Total Shareholder Return (TSR) target relative to other FTSE100 companies over the performance period, with full
vesting if the Company is above the 75th percentile and 30% vesting if the Company is at the median, with pro rata vesting between the
median and 75th percentile and subject to the Remuneration Committee being satisfied on the underlying financial performance; the
remaining 50% of the award is subject to an Earnings Per Share (EPS) growth target with full vesting occurring if adjusted EPS is 8%
above RPI per annum and 30% vesting if adjusted EPS is 3% above RPI per annum with pro rata vesting between 3% and 8% above RPI.
There will be no vesting of the relevant portion of the award if the TSR minimum target is not met or the minimum EPS growth target is
not achieved.
As allowed by IFRS 2, only options granted since 7 November 2002, which were unvested at 1 January 2005, have been included.
A charge of £6.8M (2006 – £4.0M) was recognised in the Income Statement in relation to these schemes.
Details used in the calculation of the costs of these schemes are as follows:
(i) Discretionary share option scheme
Date of grant
July 1998
Number at
31 March 2007
140,300
Price (pence)
Date
from which
exercisable
Expiry date
547
July 2001
July 2008
No additional costs were expensed in relation to this scheme as no options have been granted after 7 November 2002.
(ii) Savings-related share option scheme
Grant date
25 July 2003
16 July 2004
14 July 2005
11 July 2006
2007
2006
2007
2006
2007
2006
2007
2006
Consolidated
Outstanding at the start of the year
Shares
Price
Granted
Shares
Price
Forfeited
Shares
Price
Exercised
Shares
Price
1,469,934
562
1,535,702
562
908,043
622
951,823
622
1,631,394
886
–
–
–
–
–
–
(36,183)
562
(628,581)
1,330
–
–
(59,602)
562
(6,166)
998
–
–
(36,652)
622
(13,703)
1,248
–
–
–
–
1,678,450
886
1,107,199
999
(42,932)
622
(85,277)
886
(46,961)
886
(21,202)
999
(848)
986
(8,954)
1,273
(95)
1,001
(10)
1,523
Outstanding at the end of the year
Shares
Price
805,170
562
1,469,934
562
857,688
622
908,043
622
1,537,213
886
1,631,394
886
1,085,987
999
Exercisable at the end of the year
Shares
Price
3,169
562
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Scottish and Southern Energy
Annual Report 2007
91
Grant date
25 July 2003
16 July 2004
14 July 2005
11 July 2006
2007
2006
2007
2006
2007
2006
2007
2006
Company
Outstanding at the start of the year
Shares
Price
Granted
Shares
Price
1,700
562
1,700
562
2,287
622
2,287
622
3,655
886
–
–
–
–
–
–
–
–
–
–
Outstanding at the end of the year
Shares
Price
1,700
562
1,700
562
2,287
622
2,287
622
3,655
886
–
–
3,655
886
3,655
886
–
–
–
–
–
–
–
–
–
–
–
–
No options were forfeited or exercised in the year. Of the outstanding options at the end of the year, none were exercisable.
The fair value of these shares at vesting, calculated using the Black-Scholes model, and the assumptions made in that model are as follows:
Price
Expected volatility
Risk free rate
Expected dividends
Term of the option
Underlying price at grant date
Strike price
July 2003
July 2004
July 2005
July 2006
3 Year
659p
17%
4.7%
4.6%
3 yrs
630p
562p
5 Year
667p
17%
4.8%
4.6%
5 yrs
630p
562p
3 Year
730p
17%
4.7%
4.6%
3 yrs
699p
622p
5 Year
739p
17%
4.8%
4.6%
5 yrs
699p
622p
3 Year
1,012p
15%
4.1%
4.2%
3 yrs
967p
886p
5 Year
1,023p
15%
4.2%
4.2%
5 yrs
967p
886p
3 Year
1,216p
19%
4.7%
4.8%
3 yrs
1,180p
999p
5 Year
1,226p
19%
4.7%
4.8%
5 yrs
1,180p
999p
Expected price volatility was determined by calculating the historical volatility of the Group’s share price over the previous 12 months.
Benefits under other schemes are not subject to valuation using the Black-Scholes model.
In addition to the sharesave schemes detailed above, at 31 March 2007 there were outstanding options under the 2001 sharesave issue.
Since the shares under this scheme were granted prior to 7 November 2002, they have not been included as permitted by the transitional
rules under IFRS 1. However, at 31 March 2007, the outstanding options are as follows:
Date of grant
October 2001
Number
at 31 March 2007
Date from
Price (pence) which exercisable
Expiry date
12,095
566 December 2006
May 2007
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
92
for the year ended 31 March 2007
27. EMPLOYEE SHARE-BASED PAYMENTS continued
(iii) Share Incentive Plan
Outstanding at start of year
Granted during the year
Forfeited during the year
Exercised during the year
Expired during the year
Outstanding at end of year
Exercisable at end of year
Consolidated
2007
Weighted
average price
(pence)
874
1,330
874
1,251
–
1,034
632
Shares
527,237
263,772
(20,413)
(19,625)
–
750,971
117,834
2006
Weighted
average price
(pence)
729
1,028
729
1,066
–
874
–
Shares
290,258
255,993
(13,958)
(5,056)
–
527,237
–
Shares
700
240
–
–
–
940
240
Company
2007
Weighted
average price
(pence)
832
1,332
–
–
–
959
632
2006
Weighted
average price
(pence)
731
1,025
–
–
–
832
–
Shares
460
240
–
–
–
700
–
Shares purchased under this scheme prior to 7 November 2002 have not been included as permitted by the transitional rules under IFRS 1.
Free shares
Outstanding at start of year
Granted during the year
Forfeited during the year
Exercised during the year
Expired during the year
Outstanding at end of year
Consolidated
2007
Weighted
average price
(pence)
965
–
965
1,218
–
965
Shares
477,450
–
(22,300)
(21,850)
–
433,300
2006
Weighted
average price
(pence)
–
965
965
1,073
–
965
Shares
–
502,550
(20,000)
(5,100)
–
477,450
Shares
200
–
–
–
–
200
Company
2007
Weighted
average price
(pence)
965
–
–
–
–
965
Shares
–
200
–
–
–
200
Of the outstanding shares at the end of the year, none were realisable.
(iv) Deferred bonus scheme
Outstanding at start of year
Granted during the year
Forfeited during the year
Exercised during the year
Expired during the year
Outstanding at end of year
Exercisable at end of year
(v) Performance Share Plan
Outstanding at start of year
Granted during the year
Forfeited during the year
Exercised during the year
Expired during the year
Outstanding at end of year
Consolidated
Company
2007
2006
2007
2006
Shares
525,395
244,423
–
(169,788)
–
600,030
33,727
Shares
–
256,554
–
–
–
256,554
Price
(pence)
860
1,146
–
1,180
–
976
626
Shares
406,219
181,780
(3,816)
(58,788)
–
525,395
–
Consolidated
Price
(pence)
660
1,009
1,061
988
–
860
–
2007
Price
(pence)
–
1,220
–
–
–
1,220
2006
Price
(pence)
Shares
–
–
–
–
–
–
–
–
–
–
–
–
Shares
266,135
126,149
–
(67,137)
–
325,147
19,116
Shares
–
151,351
–
–
–
151,351
Price
(pence)
784
1,146
–
1,142
–
924
626
Shares
207,185
95,958
–
(37,008)
–
266,135
–
Company
2007
Price
(pence)
–
1,220
–
–
–
1,220
2006
Price
(pence)
Shares
–
–
–
–
–
–
–
–
–
–
–
–
Of the outstanding options at the end of the year, none were exercisable.
2006
Weighted
average price
(pence)
–
965
–
–
–
965
Price
(pence)
657
1,009
–
989
–
784
–
Scottish and Southern Energy
Annual Report 2007
28. FINANCIAL INSTRUMENTS
93
The Group and Company adopted IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition
and Measurement from 1 April 2005.
Exposure to commodity price and volume risk, counterparty credit risk, interest rate risk, currency risk and liquidity risk arises in the normal
course of the Group’s business. Derivative financial instruments are entered into to hedge exposure to risk. The objectives and policies for
holding or issuing financial instruments and similar contracts, and the strategies for achieving those objectives that have been followed during
the year are explained below. The Risk Committee, a standing committee of the Board comprising three executive directors and senior
managers from the Generation and Supply and Finance functions, oversees the control of these activities. This committee is discussed
further in the Directors Report.
The Group’s Treasury function is responsible for managing the banking and liquidity requirements of the Group, risk management relating to
interest rate and foreign exchange exposures, and for managing the credit risk relating to the banking counterparties with which it transacts.
The department’s operations are governed by policies determined by the Board and any breaches of these policies are reported to the Risk
Committee and Audit Committee.
(i) Risk
Counterparty credit risk and liquidity risk
Credit risk arising from the Group’s normal commercial operations is controlled by individual business units operating in accordance with
group policies and procedures. Generally, individual business units enter into contracts or agreements with counterparties having investment
grade credit ratings only, or where suitable collateral or other security has been provided. Counterparty credit validation is undertaken prior
to contractual commitment.
Credit risk management for the Group’s regulated businesses is performed in accordance with industry standards as set out by the Regulator
and is controlled by the individual business units. The Group’s greatest credit risks lie with the non-regulated operations of the Generation
and Supply business and the activities carried out by the Group’s Treasury function, for which specific credit risk controls that match the
risk profile of those activities, are applied.
Liquidity risk, the risk that the Group will have insufficient funds to meet liabilities, is managed by the Group’s Treasury function.
Generation and Supply
Exposure to credit risk in the supply of electricity and gas arises from the potential of a customer defaulting on their invoiced payables.
The financial strength and creditworthiness of business customers is assessed before commencing, and during, their contract of supply.
Domestic customers’ creditworthiness is reviewed from a variety of internal and external information.
Exposure to credit risk in the procurement of wholesale energy and fuel is managed by reference to agreed transaction credit limits
which are determined by whether the counterparty:
holds an investment grade credit rating; or
i)
can be assessed as adequately credit worthy in accordance with internal credit rules using information from other external credit
ii)
agencies; or
iii) can provide a guarantee from an investment grade rated entity or post suitable collateral or provide other acceptable assurances
in accordance with group procedures where they have failed to meet the above conditions; or
iv) can be allocated a non-standard credit limit approved by the Risk Committee within its authorised limits as delegated by the
Group Board.
Credit support clauses or side agreements are typically included or entered into to protect the Group against counterparty failure or
non-delivery. Within the Generation and Supply business, increasing volumes of commodity derivative products are now traded through
cleared exchanges to further mitigate credit risk. Such exchanges are subject to strict regulation by the UK Financial Services Authority
(FSA) and participants in these exchanges are obliged to meet rigorous capital adequacy requirements.
Individual counterparty credit exposures are monitored by category of credit risk and are subject to approved limits. At 31 March 2007,
the Group had pledged £90m (2006 – £100m) of cash collateral and letters of credit and had received £696m (2006 – £660m) of cash
collateral and letters of credit principally to reduce exposures on commodity price risk.
Treasury
In relation to the Group’s liquidity risk, the Group’s relationship banks (defined as those banks who support the company’s financing
activities through their ongoing participation in the committed lending facilities that are maintained by the Group), are each allocated
financial limits, subject to the maintenance of a minimum credit rating of “A” or equivalent allocated by a recognised major ratings
group. In respect of short-term cash management, counterparties are subject to review and approval according to defined criteria.
Bank credit exposures, which are monitored and reported on daily, are calculated on a mark-to-market basis and are adjusted for
future volatility and probability of default. Any issues relating to these credit exposures are presented for discussion and review by
the Risk Committee.
The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers.
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
94
for the year ended 31 March 2007
28. FINANCIAL INSTRUMENTS continued
Energy commodity price risk
The Group’s Generation and Supply business faces exposure to energy commodity price movements as part of its normal course of
business. This arises from the Group’s requirement to source gas or electricity to supply customers, or to procure fuel to produce
electricity from its generation assets.
The Group’s strategy is to mitigate the economic risks associated with this exposure through a selection of term contracts and the
flexibility of its portfolio of generation assets. Within these parameters, the Group procures gas, electricity and fuel through longer term
contracts (including forwards, futures contracts and financial instruments) which will reduce the volume required to be procured in the
short-term market. Short-term demand management is commented upon in Energy Volume Risk, below. In addition to the procurement
of commodities, the Group can choose to manage this exposure through strategic decision making in the retail market or through
managing the output of its generation plant beyond the level currently committed to cover customer demand. Commodity contracts
entered into are done so primarily for own use or hedging purposes. A number of contracts do not qualify for own use or hedge
accounting under IAS 39 and are therefore subject to fair value measurement through the income statement.
The resulting energy commodity price risk is quantified by the use of a Value at Risk (VaR) model which considers exposures in all
commodities and provides an estimate of the potential change to the Groups forecast profits over a given period and to a given confidence
level. The calculated financial risk is controlled through the imposition of a number of risk limits approved by the Risk Committee.
Energy volume risk
Inherently linked to the Group’s energy commodity price risk is the Group’s energy volume risk. This risk, which is predominately
short term, arises from the requirement to match volumes of procured gas, electricity and power station fuel with demand for gas
and electricity by its customers, which can vary from expectations and result in a requirement to close the resulting positions at
unfavourable prices. This risk is managed through the ability to increase or decrease energy production either in the form of flexible
purchase contracts (which are marked-to-market) or assets such as pumped storage generating plant, flexible hydro generating plant,
standby oil plant and gas storage.
Again, the Group has assessed its portfolio of sources of production and supply and has been able to identify contracts which are held
for own use (which are not accounted for as financial derivatives) and those which are held to manage commodity price and volume risk.
Certain physical contracts are treated as the hedging instrument in documented cash flow hedging relationships where the hedged item
is the forecast future purchase requirement to meet production or customer demand.
Currency risk
In addition to spot purchases of foreign currency, the Group uses forward contracts, swaps and options to manage its exposures
to foreign exchange risk. All such exposures are transactional in nature, and relate primarily to procurement contracts, commodity
purchasing and related freight requirements, commodity hedging, long term plant servicing and maintenance agreements, and the
purchase and sale of carbon emission certificates. Significant exposures are reported to, and discussed by, the Risk Committee on
an ongoing basis and additionally form part of the bi-annual Treasury report to the Audit Committee.
At the balance sheet date, the total nominal value of outstanding forward foreign exchange contracts that the Group has committed to is:
Forward foreign exchange contracts
2007
£m
677.7
2006
£m
777.1
The Group has no subsidiaries outside the UK and therefore has minimal exposure to currency translation risk arising from operations
outside the UK.
Interest rate risk
Interest rate risk derives from the Group’s exposure to changes in value of an asset or liability or future cash flows through changes
in interest rates.
The Group’s policy is to manage this risk by stipulating that a minimum of 50% of Group borrowings be subject to fixed rates of interest,
either directly through the debt instruments themselves or through the use of derivative financial instruments. Such instruments
include interest rate swaps and options, forward rate agreements and, in the case of debt raised in currencies other than sterling,
cross currency swaps.
Although interest rate derivatives are primarily used to hedge risk relating to current borrowings, under certain circumstances they may
also be used to hedge future borrowings. Any such pre-hedging is unwound at the time of pricing the underlying debt, either through cash
settlement on a net present value basis or by transacting offsetting trades. The floating rate borrowings mainly comprise commercial
paper issued at interest rates less than LIBOR and cash advances from the European Investment Bank (EIB).
Scottish and Southern Energy
Annual Report 2007
(i) Risk continued
95
Effective interest rate analysis
In respect of income earning financial assets and interest bearing financial liabilities, the following table indicates their effective interest
rates as at the balance sheet date and the periods in which they re-price or mature:
At 31 March 2007
Cash and cash equivalents
Bank overdrafts
Long term bonds
Other bank loans – fixed
Other bank loans – floating
Interest rate swaps – fixed
Interest rate swaps – floating
Convertible debt
Finance lease obligations
Non-recourse borrowings
(ii) Fair values
Effective
interest rate
%
4.98
6.25
5.44
6.24
5.46
5.97
4.59
3.75
8.00
6.19
Total
£m
Within 1 year
£m
1-2 years
£m
2-5 years
£m
(36.6)
7.7
1,136.5
316.7
501.0
310.0
200.0
300.0
1.1
48.4
(36.6)
7.7
61.5
46.4
351.0
–
200.0
–
0.5
9.2
–
–
–
23.3
–
25.0
–
–
0.2
9.2
–
–
–
91.4
100.0
50.0
–
300.0
0.2
27.1
More than
5 years
£m
–
–
1,075.0
155.6
50.0
235.0
–
–
0.2
2.9
The fair values of the Group’s financial assets and financial derivatives and the carrying amounts in the Group’s consolidated balance
sheet are analysed below. Balances included in the analysis of primary financial assets and liabilities include cash and cash equivalents,
loans and borrowings, trade and other receivables, trade and other payables and provisions, all of which are disclosed separately.
Own use commodity contracts are not considered to be financial instruments.
Summary fair values
The fair values of the primary financial assets and liabilities together with their carrying values are as follows:
Financial assets
Trade and other receivables
Cash and cash equivalents
Other financial assets (i)
Financial liabilities
Trade and other payables
Provisions
Bank loans and overdrafts (ii)
Long-term bonds (iii)
Convertible bond (iii)
Non-recourse borrowings
Obligations under Finance Leases
2007
Carrying value
£m
2007
Fair value
£m
2006
Carrying value
£m
1,861.4
17.5
38.6
(2,261.0)
(112.4)
(824.0)
(1,120.2)
(284.9)
(48.4)
(1.1)
1,861.4
17.5
38.6
(2,261.0)
(112.4)
(827.8)
(1,106.7)
(515.0)
(48.4)
(1.1)
1,662.9
17.6
15.3
(2,231.3)
(81.8)
(726.8)
(1,180.5)
(280.8)
(26.2)
(1.6)
2006
Fair value
£m
1,662.9
17.6
15.3
(2,231.3)
(81.8)
(747.7)
(1,232.0)
(389.4)
(26.2)
(1.6)
The fair values of the primary financial assets and liabilities of the Company together with their carrying values are as follows:
Financial assets
Trade and other receivables
Cash and cash equivalents
Other financial assets (i)
Financial liabilities
Trade and other payables
Bank loans and overdrafts (ii)
Long-term bonds (iii)
Convertible bond (iii)
2007
Carrying value
£m
2007
Fair value
£m
2006
Carrying value
£m
2006
Fair value
£m
28.8
2.5
3.3
(3.7)
(349.5)
(295.7)
(284.9)
28.8
2.5
3.3
(3.7)
(349.5)
(307.0)
(515.0)
3.3
15.3
10.4
(3.6)
(234.9)
(441.3)
(280.8)
3.3
15.3
10.4
(3.6)
(234.9)
(479.6)
(389.4)
(i) Represents carrying value of equity in unlisted investments.
(ii) Fair value of bank loans and overdrafts is equivalent to carrying value due to short-term maturity.
(iii) Fair values have been determined with reference to closing market prices.
Unless otherwise stated, carrying value approximates fair value.
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
96
for the year ended 31 March 2007
28. FINANCIAL INSTRUMENTS continued
Financial derivative instruments – disclosure
For financial reporting purposes, the Group has classified derivative financial instruments into two categories, operating derivatives and
financing derivatives. Operating derivatives include all qualifying commodity contracts including those for electricity, gas, oil, coal and
carbon. Financing derivatives include all fair value and cash flow interest rate hedges, non-hedge accounted (mark-to-market), interest
rate derivatives, cash flow foreign exchange hedges and non-hedge accounted (MTM) foreign exchange contracts. Non-hedge accounted
contracts are treated as held for trading.
The net movement reflected in the Income Statement can be summarised thus:
Operating derivatives
Total result on operating derivatives (i)
Less: amounts settled (ii)
Movement in unrealised derivatives
Financing derivatives (and hedged items)
Total result on operating derivatives (i)
Less: amounts settled (ii)
Movement in unrealised derivatives
Total
2007
£m
(134.5)
195.8
61.3
(117.7)
107.1
(10.6)
50.7
2006
£m
176.1
(190.5)
(14.4)
(47.3)
3.8
(43.5)
(57.9)
(i) Total result on derivatives in the income statement represents the total amounts (charged) or credited to the income statement in
respect of operating and financial derivatives.
(ii) Amounts settled in the year represent the result on derivatives transacted which have matured or been delivered and have been
included within the total result on derivatives.
The net financial assets/(Iiabilities) have been offset in this note. The following is an analysis of these items for financial reporting purposes.
Financial assets
Non-current
Current
Financial liabilities
Non-current
Current
Loans (note 21)
Consolidated
Company
2007
£m
54.5
452.9
507.4
(120.9)
(351.9)
(472.8)
10.4
45.0
2006
restated
£m
34.4
287.2
321.6
(71.3)
(205.2)
(276.5)
1.4
46.5
2007
£m
–
–
–
(44.9)
–
(44.9)
–
(44.9)
2006
£m
–
–
–
(20.9)
–
(20.9)
–
(20.9)
Basis of determining fair value
Closing rate market values have been used to determine the fair values of the interest rate and foreign currency contracts and denominated
long-term fixed rate debt. Commodity contracts fair values are based on published price quotations where liquid markets exist and on future
price forecasts where markets are illiquid. The estimates applied reflect the management’s best estimates of these factors.
Scottish and Southern Energy
Annual Report 2007
97
29. RELATED PARTY TRANSACTIONS
The following transactions took place during the year between the Group and entities which are related to the Group but which are not
members of the Group. Related parties are defined as those in which the Group has control, joint control or significant influence over.
Sale of goods
and services
2007
£m
Purchase
of goods
and services
2007
£m
Other
transactions
2007
£m
Sale of goods
and services
2006
£m
Purchase
of goods
and services
2006
£m
Other
transactions
2006
£m
Jointly controlled entities:
Seabank Power Limited
PriDE (South East Regional Prime) Limited
Scotia Gas Networks plc
Marchwood Power Limited
Associates:
Scottish Electricity Settlements Limited
Barking Power Limited
Derwent Co-generation Limited
8.9
26.2
68.7
–
–
11.6
45.7
(113.4)
–
(80.3)
–
–
(139.6)
(68.2)
29.8
–
9.6
2.1
–
–
–
19.9
19.2
52.3
–
0.1
–
32.5
(70.9)
–
(62.1)
–
(0.2)
(125.9)
(68.5)
17.9
0.1
30.3
–
0.5
–
–
The transactions with Seabank Power Limited, Barking Power Limited and Derwent Co-generation Limited relate to the contracts for the
provision of energy or the tolling of energy under power purchase arrangements. PriDE (South East Regional Prime) Limited operates
a long-term contract with Defence Estates for management of MoD facilities in the South East of England. All operational activities are
sub-contracted to the ventures partners including Southern Electric Contracting Limited. Scotia Gas Networks plc has operated the gas
distribution networks in Scotland and the South of England from 1 June 2005. The Group’s gas supply activity incurs gas distribution charges
while the Group also provides services to Scotia Gas Networks in the form of a management service agreement for corporate services,
stock procurement services and the provision of the capital expenditure on the development of front office management information systems.
Scottish Electricity Settlements Limited previously operated the settlement systems for the Scottish electricity market prior to the opening
of BETTA and the other transactions represent the interest paid on the loans provided to the company. Sales of goods to related parties were
made at an arms length price. The transactions with Marchwood Power Limited relate to fees and loan interest.
The balances outstanding with related parties at 31 March were as follows:
Consolidated
Jointly controlled entities:
Seabank Power Limited
PriDE (South East Regional Prime) Limited
Scotia Gas Networks plc
Marchwood Power Limited
Associates:
Barking Power Limited
Derwent Co-generation Limited
Amounts owed
by related parties
Amounts owed
to related parties
2007
£m
93.7
3.8
305.0
22.3
–
2.0
2006
£m
133.8
6.5
299.8
–
3.8
0.6
2007
£m
32.5
–
0.6
–
6.7
6.9
2006
£m
36.2
–
0.3
–
13.2
8.0
The amounts outstanding are trading balances, are unsecured and will be settled in cash. No guarantees have been given or received.
No provisions have been made for doubtful debts in respect of the amounts owed by related parties. Aggregate capital loans to jointly
controlled entities and associates are shown in note 12.
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
for the year ended 31 March 2007
29. RELATED PARTY TRANSACTIONS continued
During the year, the Company entered into the following transactions with its subsidiaries (note 14):
Company
Loans granted to subsidiaries
Loans repaid by subsidiaries
Interest charged to subsidiaries
Sale of goods
Purchase of goods
Balances outstanding at 31 March:
Loan balances outstanding at the year end
Remuneration of key management personnel
98
2006
£m
–
425.0
86.6
–
–
2007
£m
–
–
64.7
–
–
858.1
858.1
The remuneration of the executive directors, who are the key management personnel of the Group, is set out below in aggregate.
Short-term employment benefits
2007
£m
3.4
2006
£m
2.9
In addition, the key management personnel receive share based remuneration, details of which are found at note 27. Further information
about the remuneration of individual directors is provided in the audited part of the Directors’ Remuneration Report. The key management
personnel are employed by the Company.
Information regarding transactions with post-retirement benefit plans is included in note 26.
30. COMMITMENTS AND CONTINGENCIES
i.
Capital commitments
Capital expenditure:
Contracted for but not provided
ii. Operating lease commitments
a) Leases as lessee:
Minimum lease payments
Other Power Purchase Agreement capacity charges
Other lease payments
2007
£m
2006
£m
450.8
637.1
2007
£m
169.2
61.2
5.4
235.8
2006
£m
166.7
14.4
4.7
185.8
Scottish and Southern Energy
Annual Report 2007
99
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating
leases, which fall due as follows:
Power purchase agreements
Within one year
In second to fifth years inclusive
After five years
Other leases
Within one year
In second to fifth years inclusive
After five years
Total
Within one year
In second to fifth years inclusive
After five years
The average lease is over 12 years.
2007
£m
159.5
345.9
30.0
535.4
13.8
21.9
26.2
61.9
173.3
367.8
56.2
597.3
2006
£m
158.4
479.6
67.8
705.8
8.3
16.5
28.5
53.3
166.7
496.1
96.3
759.1
Included in the above operating leases are obligations under power purchase agreements with various power generating companies including
certain related parties (note 29). Each arrangement was assessed in accordance with IFRIC 4 Determining whether an Arrangement contains
a Lease and IAS 17 Leases and while all were deemed to meet the definition of a lease, none were deemed to qualify as finance leases.
b) Leases as lessor:
The Group leases out a number of combined heat and power plants under operating leases. The leases typically run for a period of 15 years,
with an average of 10 years to run, with an option to renew the lease after that date. None of the leases include contingent rentals.
The Group leases out certain plant, property and equipment under leases, which have been reassessed as finance leases. The future
minimum lease payments under non-cancellable leases are as follows:
Within one year
In second to fifth years inclusive
After five years
2007
£m
0.3
1.0
1.0
2.3
2006
£m
0.3
1.0
1.2
2.5
During the year ended 31 March 2007 £0.3m was recognised as rental income in the income statement (2006 – £0.3m). Lease payments are
straight line over the term of the lease.
The Company has no operating lease commitments as either a lessee or a lessor.
Scottish and Southern Energy
Annual Report 2007
Notes on the Financial Statements continued
100
for the year ended 31 March 2007
30. COMMITMENTS AND CONTINGENCIES continued
iii. Guarantees and indemnities
Scottish and Southern Energy plc has provided guarantees on behalf of subsidiary and associated undertakings as follows:
Bank borrowing
Performance of contracts
Purchase of gas
2007
£m
50.0
379.9
120.5
2006
£m
63.6
370.6
120.5
In addition, unlimited guarantees have been provided on behalf of subsidiary undertakings in relation to four contracts in respect of
performance of work and any liabilities arising. Southern Electric Power Distribution plc and the Company have provided guarantees
to the Southern Group of the ESPS in respect of the funding required by the scheme.
The Company has not adopted amendments to IAS 39 and IFRS 4 in relation to financial guarantee contracts. Where the Company enters
into financial guarantee contracts to guarantee the indebtedness of other companies within its group, the Company considers these to be
insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability
until such time as it becomes probable that the Company will be required to make a payment under the guarantee. The Company does not
expect the amendments to have any impact on the financial statements.
31. ANALYSIS OF NET DEBT
Cash and cash equivalents (note 17)
Bank overdraft (i)
Loans and borrowings (ii)
Finance lease creditors (note 21)
Bank overdrafts (i)
At
1 April 2006
£m
Decrease
in cash and
cash equivalents
£m
(Increase)/
decrease in debt
£m
At
31 March 2007
£m
49.9
(6.1)
43.8
(2,214.7)
(1.6)
6.1
(2,210.2)
6.2
(1.6)
4.6
–
–
–
–
–
–
–
(73.2)
0.5
1.6
(71.1)
56.1
(7.7)
48.4
(2,287.9)
(1.1)
7.7
(2,281.3)
Net debt
(2,166.4)
4.6
(71.1)
(2,232.9)
(i) Bank overdrafts are reported on the balance sheet as part of current loans and borrowings. For cash flow purposes, these have been
included as cash and cash equivalents.
(ii) Loans and borrowings are adjusted for £10.4m (2006 – £1.4m) of fair value adjustments to borrowings (note 21).
32. POST BALANCE SHEET EVENTS
It has been announced that the corporation tax rate applicable to the Group companies is expected to change from 30% to 28% from 1 April
2008. The deferred tax asset and liability have been calculated at 30% in accordance with IAS 12. Any temporary differences which reverse
before before 1 April 2008 will be (charged) or relieved at 30% and any temporary differences which exist at 1 April 2008 will reverse at 28%.
The Group expects that there will be a credit to the income statement in the subsequent financial year in the region of £60.0m.
Scottish and Southern Energy
Annual Report 2007
Notice of Meeting
NOTICE IS HEREBY GIVEN that the
EIGHTEENTH ANNUAL GENERAL MEETING
of Scottish and Southern Energy plc will be
held at the Perth Concert Hall, Mill Street,
Perth, PH1 5HZ on Thursday, 26 July 2007
at 12 noon for the following purposes:
To consider and, if thought fit, pass the
following resolutions, of which resolutions
1 to 10 and 13-14 will be proposed as
ordinary resolutions, and resolutions 11 and
12 will be proposed as special resolutions:
Resolution 1
to receive the Financial Statements and the
Reports of the Directors and the auditors
for the financial year ended 31 March 2007.
Resolution 2
to approve the Remuneration Report
of the Board for the financial year ended
31 March 2007.
Resolution 3
to declare a final dividend for the year
ended 31 March 2007 of 39.9 pence per
ordinary share.
Resolution 4
to elect Nick Baldwin as a Director of the
company.
Resolution 5
to elect Richard Gillingwater as a Director
of the company.
101
varied or revoked by the company in general
meeting save that the company may before
such expiry make an offer or agreement
which would or might require relevant
securities to be allotted after such expiry
and the Directors may allot relevant
securities in pursuance of such offer or
agreement notwithstanding that the
authority conferred hereby has expired.
Resolution 11
that subject to the passing of resolution 10
above the Directors be and they are hereby
empowered pursuant to section 95 of the
Companies Act 1985 (the ‘Act’) to allot
‘equity securities’ (as defined in section 94
of the Act) wholly for cash pursuant to the
authority conferred by resolution 10 above
as if section 89(1) of the Act did not apply to
any such allotment, provided that this power
shall be limited to the allotment of equity
securities:
Stock Exchange of ordinary shares of 50p
each in the capital of the company provided
that:
(i)
the maximum number of ordinary shares
authorised to be purchased is 86,201,192
representing 10% of the company’s
issued ordinary share capital;
(ii) the minimum price which may be paid
for such shares is 50p per share which
amount shall be exclusive of expenses;
(iii) the maximum price which may be paid
for an ordinary share shall not be more
than 5% above the average of the middle
market quotations for an ordinary share
as derived from the London Stock
Exchange Daily Official List for the five
business days immediately preceding
the date on which the ordinary share is
purchased;
(a) in connection with an offer of such
(iv) unless previously renewed, varied or
securities by way of rights to holders of
ordinary shares in proportion (as nearly
as may be practicable) to their respective
holdings of such shares, but subject to
such exclusions or other arrangements
as the Directors may deem necessary
or expedient in relation to fractional
entitlements or any legal or practical
problems under the laws of any territory,
or the requirements of any regulatory
body or stock exchange; and
revoked, the authority hereby conferred
shall expire on the conclusion of the
company’s next Annual General Meeting
or 15 months from the date of passing
of this resolution, if earlier; and
(v) the company may make a contract or
contracts to purchase ordinary shares
under the authority hereby conferred
prior to the expiry of such authority
which will or may be executed wholly
or partly after the expiry of such
authority and may make a purchase
of ordinary shares in pursuance of
any such contract or contracts.
Resolution 13
that the company may send or supply
documents or information to members
by making them available on a website.
Resolution 14
that the limit on the maximum potential
value of awards which may be granted in
any financial year to an executive under rule
3.5 of the Scottish and Southern Energy plc
Performance Share Plan be increased from
100% of base salary to 150% of base salary.
By order of the Board
Vincent Donnelly
Company Secretary
30 May 2007
Registered Office:
Inveralmond House
200 Dunkeld Road
Perth
PH1 3AQ
Resolution 6
to re-elect Alistair Phillips-Davies as a
Director of the company.
(b) otherwise than pursuant to sub-
paragraph (a) above up to an aggregate
nominal amount of £21,550,298;
Resolution 7
to re-elect Sir Kevin Smith as a Director
of the company.
Resolution 8
that KPMG Audit Plc be appointed auditor
of the company to hold office from the
conclusion of this meeting until the
conclusion of the next general meeting
at which Financial Statements are laid
before the company.
Resolution 9
that the Directors be authorised to
determine the auditor’s remuneration.
Resolution 10
that the Directors be and they are hereby
generally and unconditionally authorised for
the purposes of section 80 of the Companies
Act 1985 to exercise the powers of the
company to allot relevant securities
(as defined within that section) up to an
aggregate nominal amount of £143,668,653
provided that this authority shall expire on
the conclusion of the next Annual General
Meeting of the company after the passing
of this resolution unless previously renewed,
and shall expire on the conclusion of the
next Annual General Meeting of the company
after the passing of this resolution save that
the company may before such expiry make
an offer or agreement which would or might
require equity securities to be allotted after
such expiry and the Directors may allot
equity securities in pursuance of any such
offer or agreement notwithstanding that
the power conferred hereby has expired.
This power applies in relation to a sale
of shares which is an allotment of equity
securities by virtue of section 94(3A) of
the Act as if in the first paragraph of this
resolution the words ‘subject to the passing
of resolution 10 above’ and ‘pursuant to the
authority conferred by resolution 10 above’
were omitted.
Resolution 12
that, pursuant to Article 12 of the Articles of
Association, the company be and is generally
and unconditionally authorised for the
purposes of section 166 of the Companies
Act 1985 (the ‘Act’) to make one or more
market purchases (within the meaning of
section 163(3) of the Act) on the London
Scottish and Southern Energy
Annual Report 2007
Notice of Meeting continued
102
Notes and Information on Resolutions
1. Only holders of ordinary shares on the
3.
Information on resolutions 1 to 9 is
detailed below.
5. Disapplication of Pre-emption Rights –
Special Resolution 11.
register at 11.00pm on 24 July 2007 may
attend and vote in respect of the number
of shares registered in their name at that
time. A shareholder of the company is
entitled to appoint one or more proxies
to attend and, on a poll, vote instead
of him or her. A proxy need not be a
shareholder. A Proxy Form is enclosed
with this Notice. The Proxy Form, duly
completed and signed, together with any
power of attorney or other authority
under which it is signed or a notarially
certified copy thereof, must reach the
registrar of the company, Computershare
Investor Services PLC, The Pavilions,
Bridgwater Road, Bristol BS13 8FB,
not later than 12 noon on 24 July 2007.
Resolution 1
The Audited Accounts are set out on pages
51 to 99.
Resolution 2
The Remuneration Report is set out on
pages 44 to 49.
Resolution 3
Details of the total dividend for the year are
set out in the Directors’ Report on pages 36
and 37.
Resolutions 4, 5, 6 and 7
Directors’ biographical details are set out on
pages 42 and 43; information on the Directors
seeking re-election is set out on page 36.
Alternatively, you can submit your proxy
vote electronically. Further information
can be found in the Guidance Notes on
the reverse of the Proxy Form.
Resolution 8
Details of the audit and non-audit fees
charged by KPMG Audit Plc are set out
in note 3 to the Audited Accounts.
2. The following documents will be
available for inspection at the registered
office of the company during normal
business hours on any weekday (public
holidays excepted) from the date of this
Notice until the date of the Meeting and
thereafter at the place of the Meeting
from 11.45am until the conclusion of the
Meeting;
(i)
the register of Directors’ share interests
kept pursuant to section 325 of the
Companies Act 1985;
(ii) copies of Directors’ service contracts and
non-Executive Directors’ appointment
letters; and
(iii) The Performance Share Plan Rules
Resolution 9
The resolution seeks authority for the
Directors to fix the auditor’s remuneration.
4. Authority to Allot Shares – Resolution 10.
This resolution renews the Directors’
authority, under section 80 of the
Companies Act 1985, to allot shares.
The authority to allot is limited to shares
with a nominal value of £143,668,653
representing one-third of the issued
share capital as at 30 May 2007, the
latest practicable date before the printing
of the Notice of Meeting. This authority
was last renewed at the Annual General
Meeting in 2006. The authority, if
renewed, will terminate at the conclusion
of the 2008 Annual General Meeting.
The Directors have no present intention
of issuing any shares other than pursuant
to existing rights under employee share
schemes. Any allotment of shares would
be offered to existing shareholders first,
subject to the limited pre-emption
disapplication contained in resolution 11.
The authority is in line with current
institutional shareholder guidelines.
Resolution 11 proposes as a special
resolution to renew the Directors’
authority, under section 89 of the
Companies Act 1985, to allot shares for
cash in certain circumstances otherwise
than pro rata to all the shareholders.
This authority, which was last renewed
at the Annual General Meeting in 2006,
gives the company greater flexibility in
its financing arrangements.
This resolution deals with the allotment
of shares for cash under a rights issue,
power to make adjustments to deal
with overseas shareholders, fractions
of shares and other such matters.
It also permits the Directors to make
additional issues of shares for cash up
to £21,550,298 nominal share capital,
representing five per cent of the issued
share capital. This limit is in line with
current institutional shareholder
guidelines. There is no present intention
of exercising this authority.
For the purposes of this resolution,
allotment of shares includes the sale
of treasury shares – see the note to
resolution 12 for further details.
6. Purchase of Own Shares and Treasury
Shares – Special Resolution 12.
In certain circumstances it may be
advantageous for the company to
purchase its own ordinary shares, and
resolution 12 will, if approved, renew the
company’s authority from shareholders
to make such purchases until the Annual
General Meeting in 2008 or 24 October
2008 whichever is the earlier. Purchases
will only be made if the Directors believe
that to do so would result in an increase
in the Group’s earnings per share and
would be in the best interests of
shareholders generally.
The resolution (which will be proposed
as a special resolution) specifies the
maximum number of shares which
may be acquired (10% of the company’s
issued share capital) and minimum and
maximum prices at which they may be
bought. There are options outstanding
at the date of this report over 5.3 million
ordinary shares, representing 0.61% of
the issued share capital; if the authority
given by resolution 12 were to be fully
used, these options would represent
0.68% of the share capital in issue on
that date.
Scottish and Southern Energy
Annual Report 2007
103
Any shares purchased in this way will
either be cancelled (and the number of
shares in issue reduced accordingly)
or held in treasury. Shares held in
treasury may subsequently be sold for
cash (within the limit of the shareholder
pre-emption disapplication contained in
resolution 11), cancelled, or used for the
purposes of employee share schemes.
Holding its own shares as treasury
shares would give the company the
ability to re-issue them quickly and
cost effectively, and would provide the
company with additional flexibility in
the management of its capital base.
The Directors believe that it is desirable
for the company to have this flexibility.
No dividends will be paid on shares whilst
held in treasury and no voting rights will
be exercisable in respect of treasury
shares. Treasury shares transferred for
the purposes of the company’s employee
share schemes will count towards the
limits in those schemes on the number
of new shares which may be issued.
During the year no ordinary shares were
purchased by the company. The company
does not currently hold any treasury
shares.
the request. Shareholders may revoke their
consent (or deemed consent) to website
communication at any time.
In connection with the amendment
described above, the Remuneration
Committee considers it appropriate to:
In the event that Resolution 13 is passed
and the company decides to progress
this initiative, shareholders will be
contacted in writing, and invited
individually to agree to website
communication. The invitation will set
out the options for shareholders and the
procedures involved. Shareholders who
sign up for electronic communications
can help the environment and will
in future be notified by email that a
document has been posted for viewing
on the company’s website. Shareholders
who do not provide an electronic address
will need to be notified in paper form.
The company intends to undertake a
full review of its Articles of Association
next year to take account of all new
changes under the 2006 Act. However,
the passing of this resolution would
allow the company to take advantage
of the significant early environmental
and administrative benefits that have
so far been implemented by the 2006
Act provisions.
(i) reduce the threshold vesting level in
respect of both the TSR (for median
performance) and EPS (for compound
annual growth in EPS equivalent to 3%
per annum above the UK retail price
index) elements of awards under the
PSP from 30% to 25% of the shares
under each part of the award; and
(ii) amend the vesting schedule for the
EPS element of awards under the PSP
so that that element would only vest in
full if the company’s compound annual
growth in EPS were equivalent to 9% per
annum above the UK retail price index
(as opposed to 8%). It is not considered
necessary to make any further
amendments to the TSR element.
These two changes do not require
shareholder approval.
7. Electronic Communications –
Resolution 13.
8. Proposed amendment to the Scottish
and Southern Energy plc Performance
Share Plan (PSP) – Resolution 14.
Resolution 13 will, if passed, give approval
for the company to communicate with
shareholders via the company’s website.
The Companies Act 2006 “the 2006 Act”
contains new provisions facilitating
communications between companies
and their shareholders in electronic form
and by means of a website. To implement
the powers granted under the resolution,
the company must write to shareholders
asking them individually if they would
prefer information in printed format
or via the company’s website. If a
shareholder fails to respond within
28 days, the company can assume
that the shareholder agrees to website
communications. This default position
goes beyond the previous legislation,
under which a shareholder had to opt
positively for communication in electronic
form. The introduction of the new
provisions has no effect on shareholders
who have opted for electronic
communication under the previous
legislation. Shareholders who have
agreed, or been deemed to have agreed,
to website communication will be notified
by e-mail or hard copy that a document
has been posted for viewing on the
company’s website. If a shareholder
fails to respond, and is taken to agree
to website communications, he or she
can ask for a hard copy of any document
from the company at any time. The
Company will then send the document
free of charge within 21 days of receiving
Following the introduction of the PSP
last year, the Remuneration Committee
reviewed the scope and operation of the
plan. The outcome of this review was
that the performance based element
of senior management’s remuneration
be increased, but only if more stringent
performance conditions are met. Further
details of the background to this review
are set out in the Remuneration Report
on page pages 45 to 46.
The PSP, which was approved by
shareholders at the AGM in 2006,
provides for the grant of performance
related share awards to executive
directors and other senior executives.
The vesting of these awards is subject to
the company’s performance over a three
year period, by reference to two separate
performance measures. The vesting of
one half of the award is dependent on
the company’s relative total shareholder
return (TSR). The vesting of the
remaining half of the award is dependent
on the real compound growth of the
company’s earnings per share (EPS).
In light of further advice the
Remuneration Committee wishes to
increase the potential maximum value of
share awards which may be made under
the PSP in any financial year from 100%
to 150% of base salary. This amendment
requires shareholder approval.
104
Benefits of eCommunication
k You will receive email notification of the
availability of the interim results and
have access to all annual reports and
company announcements.
k You can lodge your proxy appointment
securely over the internet.
k You will save paper, help reforest areas
of the UK and the tree planted may help
reduce global warming gases.
Keep us Informed
Where delivery of an email fails, the
company is required to recommence sending
you paper copies of documents. You can help
to avoid this by:
k Keeping the company informed of
changes to your email address by
visiting scottish-southern.co.uk>
investor centre>shareholder
services>eCommunications Programme
and clicking on ‘Click here’ following the
instructions under ‘How to register’; and
k Regularly clearing out your in-box.
Duplicate Share Accounts
If you receive more than one annual report
mailing, this may be due to you having
more than one share account due to minor
differences in your name and address
details. You can merge duplicate share
accounts by completing a Duplicate Share
Account form. For a form call 0845 143 4005.
If you choose to merge duplicate share
accounts, the company will plant a native
species tree in one of the Scottish and
Southern Energy Woodlands.
Electronic Communications with
Shareholders
In early 2007 the first provisions of the
Companies Act 2006 were brought into
force. The key change allows companies
to use electronic communications with
its shareholders as a default position.
Shareholders that do not respond to a letter
from the company advising of the position
will going forward receive notification
through the post of the availability of
the Annual Report and Accounts on the
company’s website. Shareholders will at
any time be able to elect to recommence
receiving paper copies of the Annual Report
and Accounts
eCommunications Programme
Millions of annual reports are posted to
shareholders each year, but now there is
another way to receive this information,
which is better for the environment.
k Elect to receive your AGM documentation
via an email advising of its availability on
the company’s website. You will need an
internet enabled computer with Internet
Explorer 5 or Netscape 4.
k In return, we will plant a tree in one
of the Scottish and Southern Energy
Woodlands.
Registering for the Programme
k Register your email address
by visiting our website scottish-
southern.co.uk>investor
centre>shareholder services
(you will need your Shareholder
Reference Number)
k You will receive a confirmation
email to which you must respond
to complete the process.
Scottish and Southern Energy
Annual Report 2007
Shareholder Information
Website
Shareholder Information
The company’s website at www.scottish-
southern.co.uk has a dedicated Investor
Centre section where shareholders can
find more information about the services
available to them, download forms, view and
update their shareholding online, manage
their portfolio and view share price and
dividend histories and trading graphs.
Voting Electronically
The website and the Guidance Notes
on the reverse of the Proxy Form contain
information on how shareholders can
appoint their proxy electronically. Your
on-line proxy can be checked and updated
up until 12 noon on 24 July 2007.
Shareholder Enquiries
You can contact the registrar,
Computershare Investor Services PLC
(‘Computershare’), by phoning the dedicated
shareholder helpline on 0845 143 4005,
or writing to them at: The Pavilions,
Bridgwater Road, Bristol BS13 8FB.
Computershare deal with the following:
k Shareholding details
k Transferring shares
k Dividends
k Death of a shareholder
k Lost share certificates
k Merging duplicate share accounts
k eCommunication
Shareholder Services
Scottish and Southern Energy has a number
of services including:
k Elect for eCommunications and have
a tree planted
k Telephone and Internet share dealing
services with ShareGift option
k Merge duplicate share accounts
and have a tree planted
k Dividend reinvestment plan
You can find further information on these
services on the company’s website at
www.scottish-southern.co.uk>investor
centre>shareholder services.
Copy Reports
Copies of the following documents can be
obtained, free of charge, from the Company
Secretary, Scottish and Southern Energy plc,
Inveralmond House, 200 Dunkeld Road,
Perth PH1 3AQ or by accessing the
company’s website at www.scottish-
southern.co.uk:
k Annual Report and Accounts 2007
k Annual Review 2007
k Corporate Responsibility Report 2007
k Corporate Profile 2007
Scottish and Southern Energy
Annual Report 2007
Dividend Reinvestment Plan (DRP)
The DRP is a simple and cost effective way
to build your shareholding in the company
by using cash dividends to buy additional
shares. To join the DRP either download a
Dividend Reinvestment Plan Mandate form
and Terms and Conditions from scottish-
southern.co.uk>investor centre>shareholder
service>reinvestment or, telephone the
Shareholder Helpline on 0845 143 4005 to
request a form.
Investor Centre
The free online service, provided by the
registrar, allows shareholders to manage
their share portfolios. Shareholders can:
k View, update and calculate the market
value of their shareholdings;
k Change address details and dividend
payment instructions online; and
k View share price histories and trading
graphs for listed companies.
To register, go to www.scottish-
southern.co.uk, click on ‘Investor Centre’
in the left hand menu and follow the links
to ‘shareholder services’.
Share Dealing Service
A Telephone Share Dealing service has been
arranged with Stocktrade which provides a
simple way of buying or selling Scottish and
Southern Energy plc Ordinary Shares. Full
details can be obtained by telephoning 0845
601 0995 and quoting reference ‘Low Co 33’.
Also, Computershare Investor Services PLC
offer Telephone and Internet Share Dealing
services to buy or sell SSE plc Ordinary
Shares. Further details can be obtained
from www.computershare.com/dealing/uk
or by telephoning 0870 703 0084.
Please note that the value of shares can
fall and you may get back less than you
invest. If you are in any doubt about the
suitability of an investment, please consult
a professional adviser.
Share Price Information
The share price of Scottish and
Southern Energy appears on www.scottish-
southern.co.uk. It also appears in the
financial columns of the national press and
on various broadcast interactive services.
Financial Calendar
Annual General Meeting
26 July 2007
Ex dividend date
22 August 2007
Record date
24 August 2007
Final dividend payable
21 September 2007
Interim announcement
14 November 2007*
The Group’s half-year results will be
published on the company’s website
at www.scottish-southern.co.uk on
14 November 2007* and in the Independent
newspaper on 15 November 2007*, and will
detail ex dividend and record dates for the
interim dividend payable in March 2008.
Paper copies of the half-year results are
not distributed to individual shareholders,
although shareholders who have elected
for eCommunications do receive notification
of the half-year results on the company’s
website.
* Provisional dates
Designed and produced by Tayburn Corporate
Scottish and Southern Energy
Annual Report 2007
Glossary of Terms
BETTA
The British Electricity Trading
and Transmission Arrangements –
arrangements relating to the trading
and transmission of electricity in
Great Britain.
Distribution network
The network of high and low voltage
overhead lines and underground cables
distributing electricity to end users
(customers), owned by the Distribution
Network Operators (DNOs).
Biomass
Biomass is anything derived from
plant or animal matter and includes
agricultural and forestry wastes or
residues and energy crops. It can be
used for fuel directly by burning or
by extraction of combustible oils.
Distribution price controls
The regulatory mechanism set by Ofgem
which determines the level of capital
expenditure the electricity and gas
distribution businesses are allowed
to invest in their networks, and the
revenue recoverable from customers.
energywatch
The independent gas and electricity
watchdog set up in November 2000
through the Utility Act to protect and
promote the interests of all gas and
electricity consumers.
Energy Efficiency Commitment (EEC)
Domestic energy suppliers are given
energy saving targets related to the
size of their customer base. Energy
Efficiency Commitment funding provides
for energy efficiency improvements for
householders. Half of all energy savings
are to be achieved in properties occupied
by members of a priority group –
households in receipt of means-tested
or disability-related benefits.
Energy Systems
The term used to cover the transmission
and distribution of electricity and gas.
European Union Energy Trading Scheme
(EU ETS)
A mechanism whereby the amount
of emissions from installations such
as power stations are capped. Savings
on this cap can be sold, or excess
emissions covered by purchasing surplus
allowances from other installations.
Ethernet
A frame-based technology for Local
Area Letworks (LANs) and Wide Area
Networks (WANs) connecting computer
systems to form a network.
Flue Gas Desulphurisation (FGD)
In FGD processes, waste gases are
treated with a chemical absorbent such
as limestone to remove sulphur dioxide.
The resulting slurry is then oxidised to
calcium sulphate (gypsum) which can
then be used in the building trade.
BLX
A strong high voltage overhead
conductor system designed to withstand
harsh weather conditions and improve
the reliability of electricity supply.
Careline
A dedicated helpline staffed by advisers
who give elderly customers, and those
with disabilities extra help with their
energy bills, advice on saving energy
and other matters to do with gas and
electricity, including security issues.
Carbon dioxide (CO2)
One of the so-called ‘greenhouse
gasses’ believed to contribute to
global warming.
Charitable donations
Cash contributions made to UK-based
charities and community organisations
(excluding gifts in kind and community
funds established for specific generation
projects).
Combined Cycle Gas Turbine (CCGT)
The waste heat from a gas turbine-
powered electricity generator is used
to make steam to generate additional
electricity via a steam turbine; this
last step enhances the efficiency of
electricity generation
Combined Heat and Power (CHP)
The heat created as a byproduct of
electricity generation is captured and
distributed through pipe to provide
heating for industrial processes or
to heat houses.
Contracting
SSE’s business that offers mechanical
and electrical engineering services.
Customer Minutes Lost (CMLs)
A measurement of the reliability of the
electricity transmission and distribution
networks calculated as the total of the
number of minutes of each power
interruption times the number of
customers affected by each incident,
divided by the total number of customers.
Gas storage
SSE’s gas storage facilities consist
of underground caverns created by
dissolving large subterranean salt
deposits. Gas is pumped into the
caverns under pressure and released
into the gas network as required.
Gigawatt (GW)
1,000 megawatts (1,000,000,000 watts).
Gigawatt/hour (GWh)
1,000 megawatt/hours.
Integrated Pollution Control (IPC) and
Integrated Pollution Prevention and
Control (IPPC)
Systems to control pollution from
industry, enforced by the Environment
Agency and Scottish Environmental
Protection Agency.
Into Action Grant
Employees can apply for fundraising
of up to £1,000 to match funds raised
or time spent volunteering for their
chosen charity.
JD Power
JD Power and Associates, a business
unit of McGraw-Hill, is a global
marketing information firm that
conducts independent surveys of
customer satisfaction, product quality
and buyer behaviour.
Kilovolt (kV)
1,000 volts.
Kilowatt (kW)
1,000 watts.
Kilowatt/hour (kWh)
One unit of electricity.
Large Combustion Plant Directive
(LCPD)
The Large Combustion Plant Directive
applies to combustion plants with a
thermal output of greater than 50 MW.
It aims to reduce acidification, ground
level ozone, and particles throughout
Europe by controlling emissions of
sulphur dioxide, nitrogen oxides, and
dust (particulate matter) from large
combustion plants such as power
stations, petroleum refineries,
steelworks, and other industrial
processes running on solid, liquid,
or gaseous fuel.
Megawatt (MW)
1,000 kilowatts, (1,000,000 watts).
Megawatt/hour (MWh)
1,000 units of electricity.
e
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Terawatt/hour (TWh)
1,000 gigawatt/hours.
Thermal efficiency
A measurement of the effectiveness of
converting primary fuels to electrical
energy in power stations.
Transmission price controls
The regulatory mechanism set by Ofgem
which determines the level of capital
expenditure the electricity transmission
business is allowed to invest in its
network, and the revenue recoverable
from customers.
Transmission network
The system on which electricity is
transmitted at voltages of 132,000 volts
and above in Scotland and 275,000 volts
and above in England and Wales.
Unit of electricity
One unit of electricity equals one
kilowatt/ hour(kWh) i.e. 1,000 watts
of electricity used continuously for
one hour.
uSwitch.com
A free, impartial online and phone-based
comparison and switching service that
helps customers compare prices on
a range of services including gas and
electricity providers. Its aim is to help
customers take advantage of the best
prices and services on offer from
suppliers.
Scottish and Southern Energy
Annual Report 2007
Glossary of Terms
Micro generation
Small-scale generation supplying
energy to a few or single premises,
usually with the capability to export
to the Grid surplus generation.
Technologies include roof-top wind
turbines and photovoltaic cells.
Nitrogen oxides (NOx)
Toxic gasses produced by the
combustion of carbon-based
primary fuels by transport and
in power stations (see also SO2).
Office of Gas and Electricity Markets
(Ofgem)
Ofgem is the regulator for Britain’s
gas and electricity industries. Its role
is to promote choice and value for
all customers.
PRiDE
A joint venture between Interserve
Defence Limited (IDL) and Southern
Electric Contracting (SEC), responsible,
as the Prime Contractor, for the
provision of estate management and
construction services at over 100 MOD
sites throughout the south east England.
Private Finance Initiative (PFI)
A system for providing capital assets for
the provision of public services. Typically,
the private sector designs, builds and
maintains infrastructure and other
capital assets and then operates those
assets and contracts for a fee to the
public sector.
Quality of Service Incentive Scheme
(QSIS)
Schemes introduced by Ofgem
to encourage electricity distribution
businesses to deliver benefits to
customers by identifying innovative
ideas to improve efficiency and
customer service.
Quids In
Employee payroll giving scheme with
funds raised for charity matched by SSE.
Regulated Asset Value (RAV)
The value placed by Ofgem on the
assets of the regulated. businesses
(transmission, distribution and metering)
which is used as the basis for calculating
the income that is recoverable from
customers.
Renewables Obligation Certificates
(ROCs)
A system which encourages the
development of renewable energy
projects. An obligation is placed on
suppliers to buy an increasing proportion
of energy from renewable sources.
If the suppliers do not meet this
obligation, they are ‘fined’ and the
proceeds distributed to the operators
of renewable generation.
Run of river
A type of hydro electric generation
whereby the natural flow of water
is used to generate electricity.
Run off
Water draining from hills within
catchment areas into reservoirs
supplying hydro electric schemes.
Scotia Gas Networks plc
The holding company, in which SSE
has a 50% equity stake, for the two
gas distribution networks acquired
from National Grid Transco in 2005,
Southern Gas Networks and Scotland
Gas Networks.
Solar photovoltaic cell
A device that converts light into
electrical energy.
Standard Bundled Units (SBU)
Gas storage capacity at Hornsea is
offered in Standard Bundled Units
(SBU) of capacity. Each SBU provides
the capability to inject gas into store),
store gas and then withdraw it from
store when required. The total number of
SBU available at Hornsea is 195 million.
Sulphur dioxide (SO2)
Toxic gasses produced by the combustion
of carbon-based primary fuels by
transport and in power stations
(see also NOx).
Substation
Part of an electricity distribution or
transmission system, where electricity
is redirected and transformed from one
voltage to another.
A36346-SSE Report cover.QXP 7/6/07 2:45 pm Page 2
Scottish and Southern Energy
Annual Report 2007
Glossary of Terms
Micro generation
Small-scale generation supplying
energy to a few or single premises,
usually with the capability to export
to the Grid surplus generation.
Technologies include roof-top wind
turbines and photovoltaic cells.
Nitrogen oxides (NOx)
Toxic gasses produced by the
combustion of carbon-based
primary fuels by transport and
in power stations (see also SO2).
Office of Gas and Electricity Markets
(Ofgem)
Ofgem is the regulator for Britain’s
gas and electricity industries. Its role
is to promote choice and value for
all customers.
PRiDE
A joint venture between Interserve
Defence Limited (IDL) and Southern
Electric Contracting (SEC), responsible,
as the Prime Contractor, for the
provision of estate management and
construction services at over 100 MOD
sites throughout the south east England.
Private Finance Initiative (PFI)
A system for providing capital assets for
the provision of public services. Typically,
the private sector designs, builds and
maintains infrastructure and other
capital assets and then operates those
assets and contracts for a fee to the
public sector.
Quality of Service Incentive Scheme
(QSIS)
Schemes introduced by Ofgem
to encourage electricity distribution
businesses to deliver benefits to
customers by identifying innovative
ideas to improve efficiency and
customer service.
Quids In
Employee payroll giving scheme with
funds raised for charity matched by SSE.
Regulated Asset Value (RAV)
The value placed by Ofgem on the
assets of the regulated. businesses
(transmission, distribution and metering)
which is used as the basis for calculating
the income that is recoverable from
customers.
Renewables Obligation Certificates
(ROCs)
A system which encourages the
development of renewable energy
projects. An obligation is placed on
suppliers to buy an increasing proportion
of energy from renewable sources.
If the suppliers do not meet this
obligation, they are ‘fined’ and the
proceeds distributed to the operators
of renewable generation.
Run of river
A type of hydro electric generation
whereby the natural flow of water
is used to generate electricity.
Run off
Water draining from hills within
catchment areas into reservoirs
supplying hydro electric schemes.
Scotia Gas Networks plc
The holding company, in which SSE
has a 50% equity stake, for the two
gas distribution networks acquired
from National Grid Transco in 2005,
Southern Gas Networks and Scotland
Gas Networks.
Solar photovoltaic cell
A device that converts light into
electrical energy.
Standard Bundled Units (SBU)
Gas storage capacity at Hornsea is
offered in Standard Bundled Units
(SBU) of capacity. Each SBU provides
the capability to inject gas into store),
store gas and then withdraw it from
store when required. The total number of
SBU available at Hornsea is 195 million.
Sulphur dioxide (SO2)
Toxic gasses produced by the combustion
of carbon-based primary fuels by
transport and in power stations
(see also NOx).
Substation
Part of an electricity distribution or
transmission system, where electricity
is redirected and transformed from one
voltage to another.
e
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e
r
g
y
m
a
d
e
b
e
t
t
e
r
Terawatt/hour (TWh)
1,000 gigawatt/hours.
Thermal efficiency
A measurement of the effectiveness of
converting primary fuels to electrical
energy in power stations.
Transmission price controls
The regulatory mechanism set by Ofgem
which determines the level of capital
expenditure the electricity transmission
business is allowed to invest in its
network, and the revenue recoverable
from customers.
Transmission network
The system on which electricity is
transmitted at voltages of 132,000 volts
and above in Scotland and 275,000 volts
and above in England and Wales.
Unit of electricity
One unit of electricity equals one
kilowatt/ hour(kWh) i.e. 1,000 watts
of electricity used continuously for
one hour.
uSwitch.com
A free, impartial online and phone-based
comparison and switching service that
helps customers compare prices on
a range of services including gas and
electricity providers. Its aim is to help
customers take advantage of the best
prices and services on offer from
suppliers.
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Annual Report 2007
The management of SSE is governed
by six key financial principles:
delivery of sustained real dividend
growth; effective management of
core businesses; rigorous analysis to
ensure investments are well-founded
and, where appropriate, innovative;
maintenance of a strong balance
sheet; deployment of a selective and
disciplined approach to acquisitions;
and use of purchase in the market
of the company’s own shares as the
benchmark against which financial
decisions are taken.
Annual Review 2007
Through its Southern Electric,
Scottish Hydro Electric, SWALEC and
Atlantic brands, SSE now supplies
over 7.75 million electricity and
gas customers, a net gain of over
one million in 2006/07. It has over
10,000MW of generation capacity
including almost 4,400MW of gas-
fired capacity, 4,000MW of coal-fired
capacity (with biomass co-firing
capability) and over 1,500MW of
hydro and wind capacity. It manages
one electricity transmission, two
electricity distribution networks and
two gas distribution networks, in all
totalling over 200,000 kilometres.
Corporate Responsibility Report 2007
Business in the Community’s
Corporate Responsibility Index
provides an authoritative benchmark
for companies to evaluate their
management practice in four key
areas of corporate responsibility
(community, environment,
marketplace and workplace). The
results of the Index for 2006 were
published in May 2007. SSE’s score
was 98.5%, compared with 97.5%
in the previous year, putting the
company in the highest possible
performance band of ‘Platinum’.
Corporate Profile
SSE is one of the largest energy
companies in the UK. It is involved
in the generation, transmission,
distribution and supply of electricity;
the storage, distribution and supply
of gas; electrical and utility
contracting; energy services; and
telecoms. In 2006/07 SSE reported
adjusted profit before tax* in excess
of £1 billion for the first time.
For further information about
Scottish and Southern Energy please contact:
Scottish and Southern Energy plc
Corporate Communications
Inveralmond House
200 Dunkeld Road
Perth PH1 3AQ
01738 456000
T:
E:
info@scottish-southern.co.uk
W: www.scottish-southern.co.uk
Registered in Scotland No. 117119
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energy made better
Scottish and Southern Energy plc
Annual Report 2007